Senate scrutiny tests 30% tax on discretionary trusts

By Nathan Brooks

Australia’s proposed 30% minimum tax on discretionary trusts would take effect on July 1, 2028, if enacted, with a Senate economics committee scheduled to table its fast-tracked report on November 13.

The two-day hearing focused on a relatively simple question for many small businesses: whether family members working in the business should continue receiving trust distributions rather than wages. Small-business and accounting witnesses warned of major advisory, paperwork and compliance costs. They also said the one-year election window was too short for informed decisions.

What does this change for small-business owners?

Greens Senator Nick McKim asked how the reforms would change the way small businesses using discretionary trusts pay staff. Matthew Addison, until recently chair of the Council of Small Business Organisations Australia (COSBOA), said payments to directly employed staff would remain unchanged because they are not beneficiaries of the trust. Skye Cappuccio, CEO of COSBOA, said businesses of that kind likely have few actual employees and often compensate family members with distributions rather than wages.

McKim asked whether more owners would take their earnings as salaries if the reforms passed. Addison said no, because steady wage structures can be difficult for small businesses with highly variable revenue.

The federal government argues discretionary trusts can provide tax benefits not readily available to ordinary wage earners, so the 30% baseline is designed to balance the scales. Its election carveout would let a discretionary trust avoid the new minimum tax if it fixes its distributions, trading flexibility for that outcome.

McKim asked whether a trust could simply elect to become a fixed trust, incur little or no restructuring cost and let beneficiaries take income as salary. Cappuccio said no. Converting a discretionary trust into a fixed trust carries the same advisory costs and paperwork demands as restructuring it into a company.

Cappuccio said: “It’s considered the same entity change; you’re just changing into a fixed trust as the entity.” Business advocates and accounting-sector leaders argued that the reforms would still constrain flexibility and impose large compliance and accounting costs.

Earlier in the hearing, Liberal Senator Jane Hume asked Susan Franks, leader of tax, superannuation, and financial advice for Chartered Accountants Australia and New Zealand, why owners might avoid becoming formal employees of their own businesses. Franks said the decision extends beyond salary and wages to super, workers compensation and other insurance. She also cautioned that employee status does not by itself prove a business is viable or successful.

Hume challenged government analysis putting professional restructuring advice at $91.54 per hour, a figure accounting leaders said dramatically undercuts actual market rates. She said: “I was blown away by the idea that the government’s modelling for professional restructuring advice would cost around $91 an hour… I can’t get a plumber for $91 an hour.”

Why witnesses want more time

If enacted, the minimum tax would start on July 1, 2028, and trusts would have one year to decide whether to take the permanent election carveout. Industry witnesses told the inquiry that the window was too short for businesses to make informed decisions.

Jenny Wong, tax lead at CPA Australia, said a delay would help provide certainty around complex rules. Cappuccio said it would also give businesses and their advisers time to prepare and clarify instruments that had not yet been settled.

Cappuccio warned that delay would only postpone a flawed measure, whether it began on July 1, 2028 or July 1, 2029. Addison said a one-year delay without substantial changes to the legislation’s underlying concept and philosophy would be a waste of time.

If the government keeps July 1, 2028, small businesses will have one year to decide whether the election saves tax at the cost of flexibility. Cappuccio and Addison warned that delay alone would not fix what they called a bad bill.