Wealthy use trusts to pay less tax, but does budget change go too far?

Lead

The Australian federal budget has introduced a new minimum tax rate on discretionary trusts, a move aimed at curbing tax avoidance by wealthy families. The proposal, which takes effect from July 1, 2028, imposes a 30 per cent tax on income generated within discretionary trusts before it is distributed to beneficiaries. The government expects the measure to raise $4.47 billion in revenue, according to budget papers cited by ABC Australia.

However, the policy has sparked debate over its fairness and effectiveness. Economists warn that changing trust taxation is complicated and may not deliver the expected revenue, while the Coalition has labelled aspects of the plan a "death tax" — a charge the government rejects.

Coverage Comparison

Detailed reporting from ABC Australia provides multiple angles on the proposed changes. One article focuses on the technical details, including the tax's application from 2028 and the mechanism where the trustee pays the tax and beneficiaries receive a non-refundable credit. Another piece highlights political criticism, particularly the Coalition's characterization of the measure as a "death tax" for trusts established via wills. A third report discusses economist concerns and the complexity of reform, while a fourth notes the government's openness to exemptions after consultation.

Across these reports, no major factual disagreements emerge on the core elements of the policy: a 30 per cent minimum tax on discretionary trust income, an effective date of July 2028, and projected revenue of $4.47 billion. Differences appear in framing — some emphasize revenue potential, others the political battle or unintended consequences.

Key Claims

The government argues that discretionary trusts allow the wealthiest Australians to pay less tax than comparably earning families who do not use them. Treasury analysis, as cited in budget papers, shows that in 2022–23, families with discretionary trusts faced an average tax rate about 4 percentage points lower than similar-income families without trusts.

According to the budget papers, there are nearly one million trusts in Australia, with their number doubling in the past 20 years. In the 2023 tax year alone, they distributed $142.4 billion in income to beneficiaries. The government stated that most trust income flows to the top 10 per cent of families by income.

Discretionary testamentary trusts — established through a will — are a subset of these, with about 10,000 in use, or roughly 1 per cent of all trusts. These trusts allow flexible distribution of inheritance after death. The Coalition argues that subjecting future such trusts to the minimum tax would be a "death tax by stealth," though no tax is levied on the assets at the time of death; only income distributed later would be taxed.

Treasurer Jim Chalmers has rejected the "death tax" characterisation, stating there are no changes to inheritance taxation. The government has also noted that existing discretionary testamentary trusts are exempt, but future ones would face the new tax.

Perspectives

Government perspective: The changes aim to level the playing field and ensure that wealthy individuals using trusts pay a fairer share of tax, based on Treasury analysis showing significantly lower effective rates for trust users. The design mirrors the company tax system with credits for beneficiaries. The government emphasizes that trusts are not being banned, just taxed at a minimum rate.

Economist perspective: Experts like Kristen Sobeck of the University of Canberra describe trusts as a "tax breakfast buffet" that creates unfair disparities between similarly earning people. However, economists also caution that the policy is complex, may have unintended consequences, and might not raise as much revenue as hoped, given the ease with which users could restructure their affairs.

Opposition perspective: The Coalition criticises the measure as an attack on family wealth, particularly the inclusion of future discretionary testamentary trusts. They argue that taxing disbursements from inheritance trusts is effectively a "death tax by stealth," despite the government's denials. They also express concern for small businesses that rely on trusts for income splitting.

Stakeholder perspective: Accounting and legal professionals point out that trusts are not solely used by the ultra-wealthy; they serve legitimate purposes for family businesses and asset protection. They warn the changes could hit many small business owners.

Context and Possible Revisions

The government has indicated it will consult on the trust changes. Prime Minister Anthony Albanese has not ruled out exempting future discretionary testamentary trusts, saying the legislation will be introduced after consulting. This follows initial advice from the Treasurer that families could opt for fixed testamentary trusts to avoid the minimum tax. The consultation may lead to adjustments, potentially narrowing the measure's impact.