If you have a discretionary trust, you may have heard about the proposed changes to the taxation of trust distributions from 1 July 2028.

The Government is proposing that trustees of certain discretionary trusts will need to pay a minimum tax of 30% on income distributions, even when paid to beneficiaries on lower tax rates.

These changes could affect tax planning opportunities for you and your family, so it's worth understanding what the changes might mean for you.

But it’s just as important to keep in mind that the legislation is still in draft form. The Government is still refining key details and the rules could change further before becoming law.

What's changing?

Under the current rules, beneficiaries receive gross trust distributions and generally pay tax at their own tax rate. For individuals, this could be as low as 0% or 15% and, for companies, it’s generally 25% or 30%.

From 1 July 2028, trustees will generally need to withhold 30% of each distribution and pay that amount to the Australian Taxation Office. Individuals will receive the net trust distribution and a tax offset for the 30% tax the trustees have withheld.

How may this impact individual beneficiaries?

If your tax rate is higher than 30%, you may need to pay some additional tax after allowing for the amount the trustee has already withheld. If your tax rate is lower than 30%, you won't receive a refund for the difference, but you also won't need to pay any additional tax when completing your income tax return.

How may this impact distributions paid to companies?

Companies will not receive the tax offset. This could lead to the same income being taxed twice: first when the trustee withholds 30%, and again when the company pays tax on the distribution (because it cannot claim the offset).

Will every trust be affected?

No. A number of trusts are expected to remain outside the proposed rules. These include fixed trusts, charitable trusts, deceased estates, special disability trusts and complying superannuation funds.

Certain testamentary trusts created as part of estate planning are also expected to remain outside the new rules, provided they meet specific conditions.

Some types of income and beneficiaries may also be excluded, including primary production income, certain vulnerable minors and some distributions to non-residents.

A new option for existing trusts

One of the most significant recent developments is a proposed election for existing discretionary trusts.

If you have an eligible discretionary trust, you may be able to make an election that keeps your trust outside the proposed 30% minimum tax regime. But you would need to operate it more like a fixed trust, with the beneficiaries and their proportion of entitlements locked in each year. This may be a simpler alternative to restructuring the trust into a company or fixed trust where appropriate.

Should you do anything now?

Probably not. The Government is still refining the legislation and is likely to provide further details. The draft legislation also gives some trustees three years to move to another structure, such as a fixed trust, without triggering immediate income tax or capital gains tax consequences.

For now, there is no need to rush into any decisions. If you have a discretionary trust, talk to your Financial Planner, accountant and legal adviser about how the proposed changes could affect your plans. They can help you understand your options and decide whether any changes might be appropriate if the legislation becomes law.