The government wants trusts to pay a minimum 30% tax. What’s behind the changes?

Sarinyapinngam/Getty Images This week, the federal government introduced into parliament proposed changes to discretionary trusts, imposing a new minimum 30% tax rate on income from trusts.

While these trusts can have legitimate uses, particularly for small businesses, they can also be used as a tax minimisation strategy for wealthy individuals.

Treasurer Jim Chalmers told parliament more than 95% of taxpayers do not receive income from trusts, and most trust income flows to the top 10% of households.

He said: This is all about better aligning the tax treatment of income from assets and income from work.

To consider whether these changes are warranted, we need to understand why discretionary trusts are used.

So, how do trusts work, and who benefits? The basic set-up A trust is a structure where trustees look after assets for beneficiaries.

Discretionary trusts are the most popular type of trust and are the object of the government’s reforms, but why? There are three reasons: Asset protection : Trust property is protected from legal action against trustees and beneficiaries.

If a sole trader goes bankrupt, property held in a trust cannot be sold to pay creditors.

Estate planning : Control of the trust property can be passed to future generations because trustees and beneficiaries can effectively replace each other upon death.

Company trustees can live forever! Tax minimisation : In a discretionary trust, the trustee can split income as they see fit.

Tax is paid at the beneficiary’s tax rate.

To reduce tax, income is allocated to beneficiaries on the lowest marginal tax rates first.

Whether a discretionary trust is effective in reducing tax bills depends on how many beneficiaries there are and how much they earn.

Children under 18 who are not working full time are subject to very high tax rates on income they did not earn above $416 per year.