Rumours suggest Labor budget to introduce minimum tax rate on discretionary family trusts
The move follows data showing a surge in trust usage and significant revenue losses, though estimates on the financial yield of the policy vary widely
Rumours circulating ahead of the upcoming Labor budget indicate a potential introduction of a 30% minimum tax rate on income generated within discretionary family trusts. This proposal seeks to address tax inequality by preventing wealthy individuals from splitting income among multiple beneficiaries to lower their overall tax liability under Australia's progressive system.
While the abolition of the 50% capital gains tax discount remains a prominent expectation, curbing the use of trusts to split income is identified as a key move to ensure the rich pay their fair share. The strategy relies on the premise that discretionary trusts allow people to divide income among beneficiaries in any way they like, which can significantly reduce the tax bill compared to standard progressive taxation.
Data indicates a substantial increase in the use of these vehicles over recent decades. Records show discretionary trust usage rose from 328,725 in 1990-91 to 1.02 million in 2023-24. This surge correlates with the introduction of the capital gains tax discount, during which the ratio of discretionary trusts per 100 taxpayers grew from 3.3 to 5.1.
The financial implications of this structure are significant. Estimates suggest that around 63% of income generated through trusts flows to the richest 10% of Australians. Furthermore, the average trust income for millionaires is estimated to be 50 times greater than their average salary, compared to 10 times the average salary for high-income earners without trusts.
The Australian Taxation Office has previously estimated that the manipulation of trust and tax laws was costing the government between $672m and $1.2bn a year in lost revenue. However, a former Howard government adviser has dismissed the proposal as overly complex and estimates revenue gains of only $100m–$200m, a figure contrasting sharply with the ATO's projections.
Despite these criticisms, proponents argue that introducing a minimum tax rate would greatly reduce the benefit of using trusts to avoid tax. If implemented, the measure aims to bring equity to the system, ensuring that the tax treatment of high-income earners generated through capital gains and trusts is not so different from that of standard wage earners.