Trust tax reform will reach further than the wealthy, FAAA warns

The government is selling the proposed minimum tax on discretionary trusts as a measure aimed at high earners. The Financial Advice Association Australia says the reality is different. Advisers should pay attention on two fronts: for their clients, and for their own practices.

The FAAA lodged a submission to Treasury on 31 July. It backed the government’s stated aim of curbing tax minimisation through income splitting, but warned that the measure as drafted will produce consequences well beyond that target.

“It is our view that this will actually have a greater impact on lower and middle income beneficiaries in particular circumstances,” the association wrote, pointing to stay-at-home parents, retirees, university students, younger workers and people temporarily out of work through illness or caring duties.

The mechanism is a minimum tax rate of 30 per cent on certain trust distributions. The FAAA notes that the accompanying tax offset cannot reduce the Medicare levy. That means the effective floor for many beneficiaries will be closer to 32 per cent.

For distributions to corporate beneficiaries the picture is starker: the consultation paper’s own worked example shows an effective rate of 60 per cent. That, the submission argues, will simply end distributions to corporate beneficiaries once the reform starts.

Who the reform actually catches

Treasury’s own figures suggest the reach of the discretionary trust tax reform is wide. Around 350,000 active small business entities will have to decide whether to keep their discretionary trust or move to another structure. That figure comes from the Budget 2026/27 tax explainer, which the FAAA reviewed alongside the consultation paper.

Only about 15 per cent of active small businesses use a trust structure. But that minority represents a large number of firms facing a costly decision.

For many, the choice is close to forced. The 30 per cent minimum trust rate sits well above the 25 per cent small business company rate, which pushes owners toward incorporating. But a trust is not only a tax structure. That is the heart of the FAAA’s case.

Business owners use discretionary trusts for asset protection, succession planning, family ownership and business continuity. “A discretionary trust is not simply a tax management structure,” the submission says.

Converting discretionary interests into fixed company shares can permanently alter who controls a business and who is entitled to its income. Those changes are hard and expensive to undo.

“A discretionary trust is not simply a tax management structure.”

Many advisers run their own practices through discretionary trusts. Owners frequently pass advice businesses from one generation to the next.

The FAAA has asked the government to extend the exemption already flagged for farming businesses to other businesses with the same characteristics.

A trust, it argues, often handles intergenerational transfer in those businesses best. It names financial advice firms as an example. The submission notes that owners commonly hand a practice to a son or daughter.

The transition is the fight

The strongest member feedback on discretionary trust tax reform, the FAAA says, is about the transition. The government proposes rollover relief for three years from 1 July 2027. But only the first of those years falls before the minimum tax begins.

The new tax could therefore hit a business midway through a complex restructure before it has finished. The association wants the government to extend the relief to at least five years, running to 1 July 2032. It also wants protection for restructures that are demonstrably underway but not yet complete.

There are gaps in the relief as well. It covers income tax and capital gains tax but not stamp duty. That gap could be a heavy cost for some businesses, so the FAAA has asked Canberra to coordinate stamp duty relief with the states.

The relief is also, in the association’s view, too rigid. A family running two businesses through one trust cannot split them into two companies under the current design. The consultation paper concedes that in some circumstances, the government would deny relief outright.

That, the submission warns, “would be a disastrous outcome for a family business that had spent many months and thousands of dollars developing a restructure plan, only to have it denied and the time and effort wasted.”

Reform, but not this reform

The FAAA stops short of opposing change outright. It accepts there are real tax gaps worth closing. It also welcomes the exemptions the government has already granted for testamentary trusts, farmers, vulnerable minors and foreign residents.

Its argument is that the minimum tax is the wrong instrument, one the government applied without enough consultation on the alternatives. It also argues that existing rules, such as the penalty rates on unearned income of minors, already do much of the work.

Seven recommendations follow, from softer treatment of corporate beneficiaries to broader exemptions and a longer runway.

Chief executive Sarah Abood signed the submission. It closes on the long tail. The reform, it says, carries “long running unintended consequences that will likely emerge for many thousands of businesses in the future.”

For advisers, the message is that this is a client conversation. For many of them, it is also a question about their own practice.