Australia's proposed changes to the taxation of discretionary trusts are raising concerns across the small business community, with industry groups calling for businesses earning less than $10 million annually to be protected from the reforms.
For many Australian business owners, a discretionary trust is more than just a tax structure. It's an important part of how they protect assets, manage family businesses and plan for the future.
However, proposed federal government reforms could change the way these trusts are taxed, potentially creating additional costs and complexity for thousands of small businesses.
With industry groups pushing for exemptions and a parliamentary inquiry examining the proposal, here's what business owners need to know.
What's Being Proposed?
As part of the May 2026 Federal Budget, the Australian Government announced plans to introduce a 30% minimum tax on discretionary trusts, with the proposed changes intended to commence from 1 July 2028.
The government says the reforms are designed to address concerns about income splitting and the use of discretionary trusts to reduce tax liabilities.
Discretionary trusts allow trustees to determine how income is distributed among eligible beneficiaries, subject to the trust deed and applicable tax rules.
While these structures can offer flexibility, the government argues that some arrangements allow income to be distributed in ways that result in lower overall tax payments.
The proposed reforms aim to address this issue, but small business representatives are concerned that legitimate family-operated businesses could also be affected.
Why Are Small Businesses Concerned?
Discretionary trusts have long been used by Australian small businesses for reasons that extend beyond tax planning.
For many owners, these structures form part of their broader approach to asset protection, succession planning and managing business risks.
The concern is that changes to trust taxation could leave businesses facing difficult financial decisions, even when their structures were established legally and for genuine commercial reasons.
Depending on their circumstances and the final legislation, affected businesses may need to consider whether to:
Continue operating through their existing trust and potentially face a higher tax liability.
Restructure their business into a different entity, which may involve professional fees, administrative expenses and other tax implications.
Consider alternative distribution arrangements, where permitted, that could reduce flexibility in managing business and family finances.
For smaller businesses already managing rising operating costs and cash flow pressures, these additional expenses could be significant.
Calls for a $10 Million Small Business Exemption
The Council of Small Business Organisations Australia (COSBOA) is calling for businesses with annual turnover below $10 million to be grandfathered from the proposed changes.
Grandfathering would allow qualifying existing arrangements to continue under previous rules, rather than automatically becoming subject to the new requirements.
COSBOA argues that many small businesses established their trust structures in good faith, following professional advice and complying with the legislation in place at the time.
The organisation is concerned that applying the new tax rules broadly could unfairly affect businesses that use trusts for legitimate commercial purposes.
It has also recommended that businesses required to restructure should be able to claim associated restructuring costs as tax deductions.
The proposed $10 million exemption is an industry recommendation, not an exemption that has been adopted into law.
What Could the Changes Mean for Your Business?
If your business operates through a discretionary trust, the potential impact will depend on your existing structure, how income is distributed and the final form of any legislation.
There are several areas worth considering.
1. Your Business Structure
A trust structure that has worked well for your business may need to be reviewed if the proposed changes proceed.
However, restructuring is not necessarily the right solution for every business. Changing entities can create additional costs and may have implications for asset ownership, contracts and future tax obligations.
2. Cash Flow and Tax Planning
A change in the way trust income is taxed could affect the amount of money available for reinvestment, operating expenses and distributions.
Understanding the potential financial impact will be important when preparing future budgets and cash flow forecasts.
3. Succession and Long-Term Planning
Many family businesses use discretionary trusts to support succession planning and the transfer of wealth between generations.
Changes to distribution flexibility could affect these arrangements, making it important to consider how any reforms align with longer-term business and family objectives.
4. The Cost of Restructuring
Moving from a trust to another business structure isn't always straightforward.
Depending on the assets involved, businesses may face accounting and legal fees, administrative costs, and potentially capital gains tax or stamp duty implications.
Any decision to restructure should be based on a careful assessment of the overall financial and commercial consequences.
What Should Business Owners Do Now?
With the reforms still under consideration, there is no need to make rushed changes to your business structure.
However, this is a useful opportunity to review your current arrangements and understand how potential changes could affect your business.
A good starting point is to:
Review your existing structure: Understand why your trust was established and whether it continues to meet your business needs.
Discuss potential tax implications: Speak with your accountant about how the proposed reforms could affect future distributions and tax planning.
Consider long-term objectives: Think about how your current structure supports business growth, asset protection and succession planning.
Stay informed: Follow developments as the parliamentary inquiry progresses and further details become available.
Importantly, any decisions should be based on confirmed legislation rather than speculation about what may happen.
What Happens Next?
A parliamentary inquiry is examining the proposed trust tax reforms, including concerns raised by small business representatives and industry organisations.
The inquiry is scheduled to report its recommendations on 13 November 2026.
Until the legislative process is complete, the final rules, available exemptions and potential transitional arrangements remain uncertain.
For business owners, the most practical approach is to remain informed and seek professional advice before making significant changes.
Planning Ahead With Confidence
Tax legislation is constantly evolving, and changes to business structures can have implications well beyond the annual tax return.
For small business owners, understanding how proposed reforms may affect their financial position is an important part of planning for the future.
At Innovate Services, we work with business owners to understand their financial circumstances, review existing arrangements and plan for sustainable growth.
If you operate through a discretionary trust and have questions about the proposed reforms, get in touch with the Innovate Services team. We're here to help you understand your options and make informed decisions for your business.
SOURCES & INTERESTING READS: Smart Company | ATO