Family trusts get a 30 cent floor in 2028. The draft law out today adds a way around it

If you take your profit out of a family trust, read this one. From 1 July 2028 money that runs through a discretionary trust is taxed at a minimum of 30 cents in the dollar, no matter who you distribute it to. The draft law landed this morning, and tucked inside it is a new option that lets you keep the trust and still avoid the tax. Submissions close on 18 September. Below: whether it hits you at all, what each of your four options costs, and why the sale of your business is the part you can stop worrying about.

Two questions and you are done

Answer both before reading further.

One. Is your business run through a discretionary trust? Most are not. Treasury counted around 350,000 active small businesses using a discretionary trust structure in 2022-23, which is less than 15% of all active small businesses. If you trade as a sole trader, a partnership, or a plain company, none of this touches you. Close the tab and go and do something useful.

Two. Does any of the trust income end up with someone taxed at less than 30 cents in the dollar? The partner who does not work in the business. The adult child at university. The year you had a quiet six months and pushed more of the profit their way.

Both yes, and there is a real number in this for you. Treasury expects around 40% of those 350,000 businesses, about 140,000 of them, not to pay additional tax or need to restructure in any given year, and the Treasurer puts the whole reform at "less than 10 per cent of Australia's 2.7 million active small businesses" affected in any given year. Small share, big absolute count, and owner-operated salons, cafes, gyms and clinics on a family trust sit right in it.

What the 30 per cent actually does to you

From 1 July 2028 a 30 per cent minimum tax applies to discretionary trusts at the trustee level. Treasury's own explainer sets out the mechanics in three lines:

• The trustee pays the tax. Treasury's stated reason is that the trustee is the one who controls the distributions.
• The beneficiary still declares the income on their own return.
• The credit for the trustee's tax is non-refundable. Beneficiaries other than corporate beneficiaries get a credit for what the trustee already paid, but if their own tax on that money would have come to less, the difference stays with the ATO.

That third line is the entire reform. Splitting income across a household only saves money because the second and third person are taxed at lower rates than the first. Put a 30 per cent floor underneath, and the gap you were harvesting closes.

Here is the arithmetic on round numbers. A trust that nets $140,000 carries a floor of $42,000 in tax from 1 July 2028, whoever ends up with it. Go and find what your household actually paid on the equivalent profit last year. The difference between that and $42,000 is your annual cost of changing nothing, and it is the only figure on this page that belongs to you specifically.

Worth a comparison, because it explains why Treasury keeps mentioning companies. The small business company rate is 25 per cent. That same $140,000 inside a company is taxed $35,000, and dividend imputation means the credits follow the cash when you eventually pay yourself. The trust floor sits five points above the company rate.

One caution before you act on any of that. Treasury says the credit goes to beneficiaries "other than corporate beneficiaries", which raises an obvious question if you distribute to a bucket company. That is exactly the sort of detail today's draft is meant to pin down. Ask your accountant what it does to your structure rather than guessing from a summary.

The option that appeared this morning

The news in today's release is not the tax. The tax has been public since Budget night. The news is a second escape hatch.

A discretionary trust can now elect to make fixed distributions to pre-nominated beneficiaries and be exempt from the minimum tax. The Treasurer's release says this election would not require a restructure and is not expected to result in state and territory stamp duties.

Read that carefully, because it is genuinely useful and genuinely a trade. You keep the trust, the deed, the asset protection and the bank facilities sitting behind it. You give up the thing a discretionary trust exists to do, which is decide each June who gets what.

For an owner-operated business, that trade is usually easier than it sounds. Most family trusts in our trades are not running a clever annual optimisation. They distribute to the same two or three people every year and the accountant nudges the split at year end. If that is you, nominating the split in advance costs you very little and saves you a restructure.

It is harder if your split genuinely moves: children finishing study and starting work, a partner going back to full-time hours, a business with lumpy profits. Fixed means fixed.

The draft also settles some things that were bothering advisers. There is a new definition of fixed trusts so that commercial structures without material discretionary elements are not caught, covering widely held trusts, managed investment trusts, bare trusts and employee share trusts. Franking credits relating to income that has borne the minimum tax become refundable once the trustee has offset its own income tax liabilities. And the exclusions are now spelled out: charitable trusts, special disability trusts, superannuation funds, primary production income, certain income relating to vulnerable minors, deceased estates and all discretionary testamentary trusts set up for genuine testamentary purposes. Distributions to registered charities and deductible gift recipients are exempt outright; distributions to other income tax exempt entities such as sporting clubs are exempt up to a cap still to be settled.

Your four options, and the real price of each

Elect fixed distributions. No restructure, no expected stamp duty, and you keep the trust. Cost: the flexibility, permanently. Best fit if your split has been stable for years.

Pay the family who actually work in the business. Treasury states plainly that normal wages and salaries do not attract the minimum trust tax. If your partner does the books, the rosters and the ordering, and they are currently taking a trust distribution rather than a wage, that is a payroll job, not a tax scheme. It also has to be real: real hours, real duties, a defensible rate. Do this one first, because it fixes your bookkeeping at the same time.

Restructure out. Rollover relief runs for three years from 1 July 2027, so to 30 June 2030, and covers moving into a company or a fixed trust without triggering income tax or CGT on the restructure itself. From January 2027 the Australian Small Business and Family Enterprise Ombudsman will help owners understand the options, and ASIC is putting arrangements in place for those incorporating. Cost: accounting and legal fees now, plus the loss of flow-through treatment if you go to a company.

Do nothing and pay. Sometimes correct. If everyone receiving trust income is already taxed above 30 cents in the dollar, the floor never bites, and Treasury reckons that describes a good share of the 350,000. Confirm it from your returns, do not assume it.

Selling is not the part that hurts

Most of the coverage has bundled the trust tax together with the changes to capital gains tax, and owners have come away thinking their exit just got dearer. For a business like yours, that is mostly backwards.

Yes, from 1 July 2027 the flat 50 per cent CGT discount is replaced by a discount for inflation plus a 30 per cent minimum tax on real gains. But three things sit alongside it:

• The change is entirely prospective. Value you have already built keeps the old 50 per cent discount rule, whenever you eventually sell.
• All four small business CGT concessions stay: the 15-year exemption, the 50 per cent active asset reduction, the retirement exemption and the active asset rollover.
• The turnover threshold for the 50 per cent active asset reduction rises from $2 million to $10 million from 1 July 2027, which Treasury says brings all 2.7 million active small businesses inside it.

Treasury's own worked example in the explainer is a barber. Joe sells the shop he has owned for 15 years, applies the 15-year exemption, and pays nothing. Effective tax rate zero, unaffected by the Budget. That is the position most retiring owner-operators are in, and it did not change.

So keep the two apart in your head. The annual tax on how you pay yourself is the thing that moved. The tax on the day you sell, for a business of this size, largely did not.

What a buyer sees once the split stops

Here is the quieter consequence, and it is the one worth thinking about now rather than in 2028.

A buyer does not care how you distribute your profit. They care what the business earns. That is why seller's discretionary earnings exists as a measure: it strips out how the owner chose to take the money and shows what the trading actually produced.

Plenty of owners have never separated the two. The household works because the trust split makes it work, and the business's own after-tax number has never been looked at on its own. When the split stops paying, that gap turns up in the worst possible place, which is the middle of a sale, when a buyer's accountant recasts your numbers and asks why the profit needs a structure to be attractive.

There is a cheap fix and you have almost two years to do it. Rebuild last year's profit and loss with the family split removed and any working family member on a market wage. Whatever comes out the bottom is the number a buyer will underwrite. If it is thinner than you expected, you have found a pricing or a cost problem that was always there, just hidden behind a tax arrangement. Fixing that lifts your valuation multiple far more than any structure ever did. Our exit options guide covers what buyers do with the recast number.

The date to put in the diary

Submissions on the draft close 18 September 2026. Treasury is asking for feedback on implementation, not on whether the tax happens, and it says further tranches of legislation will follow, so treat today's mechanics as close to final rather than final.

If your trust is a genuine income-splitting arrangement, book time with your accountant this month while the design is still moving and while everybody in the profession is reading the same draft you are. Waiting until 2028 leaves you choosing under time pressure, and the rollover window closes on 30 June 2030 whether you have decided or not.