Treasury’s guidance on the Albanese government’s $4.5 billion trust tax package flags a minimum 30% rate on discretionary trust distributions and a hidden penalty for franked dividends.
Investors and advisers warn the shift hits classic family wealth structures that rely on fully franked payouts. It turns a once-favoured tax planning tool into a potential liability.
Under the proposal, discretionary trust distributions will be taxed at a flat 30%, regardless of the beneficiary’s personal tax rate. Treasury’s guidance indicates that, on top of that floor, discretionary trusts would no longer be able to access refundable franking credits attached to dividends.
That change effectively caps the value investors can extract from company tax already paid on profits. It targets family investment trusts and small business owners who use trusts to hold operating companies and portfolio shares.
Advisers say the sting lies in how franking works today compared with the new settings. At present, franked dividends flowing through a discretionary trust can carry credits that beneficiaries use to offset tax and in some cases generate refunds.
Removing refunds means any franking credits that exceed the 30% minimum become trapped value, reducing the overall after-tax return. The change narrows the gap between holding shares personally and holding them in a trust and reduces flexibility in distributing income across family members.
For many established family-owned structures, it undermines strategies built around combining trust distributions with franking refunds.
Specialist tax firms argue the measure is a broad structural rewrite, not just a tightening of loopholes. The overhaul shifts the trust system closer to a company-style tax outcome, especially for investment trusts receiving franked dividends.
It also pushes wealthier households and closely held businesses toward simpler ownership models or forces them to absorb a higher tax cost to keep existing structures. A key question is how many family groups and private investors will wear the hit versus re-engineering their arrangements before the changes bite.
