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Two tax changes could materially alter how Australians own investments and use family trusts.
The first is Division 119, which has already been legislated and will impose a minimum 30% tax on capital gains made after 1 July 2027. The second is a proposed minimum 30% tax on distributions from discretionary family trusts, including both income and capital gains, from 1 July 2028.
The interaction between these measures creates a serious problem. Under the draft legislation, a capital gain distributed through a family trust could effectively be taxed twice. In the most extreme example, a beneficiary with no other taxable income could pay $6,000 of tax on a $10,000 capital gain—an effective tax rate of 60%. While this may be an unintended consequence, the government has not addressed it in the draft legislation.
In this episode, I explain how the proposed rules work, why they reduce the tax benefits of distributing income to adult children or lower-income spouses, and whether family trusts remain worthwhile.
The answer is that tax is only one consideration. Family trusts can also provide valuable flexibility, asset protection, estate-planning benefits and an effective structure for transferring wealth between generations. That flexibility becomes increasingly valuable as an investment portfolio compounds and life circumstances change.
I also share a real client example where a portfolio established in a spouse’s personal name grew to $3 million within 10 years. With the benefit of hindsight, a family trust would have produced a better long-term outcome. It is a useful reminder that focusing too heavily on simplicity and short-term costs can sometimes work against you.
If you already have a family trust, our default position is to do nothing for now. The proposed rules are not yet law, will not commence until July 2028 and could be redesigned, delayed or repealed before then. A proposed 3-year restructuring window may also allow assets to be moved into personal names, a company or a fixed trust without triggering capital gains tax, although stamp duty remains an important unresolved issue.
For investors establishing a substantial portfolio - particularly one likely to exceed approximately $800,000 to $1 million - we remain inclined to use a family trust where that would otherwise have been the appropriate structure. If the rules eventually take effect, restructuring into a company may provide an attractive alternative.
The central message is simple: don’t make permanent investment decisions in response to legislation that is neither final nor certain to survive. Preserve flexibility, take a long-term view and avoid jumping at shadows.
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Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
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