It was flexible, it offered some asset protection, and it let you decide each year who received income and capital gains. For a founder whose company might be worth nothing or might be worth nine figures, that optionality was hard to beat.
That default is no more. In line with its May Budget announcement, the Federal Government has released draft legislation for a 30% minimum tax on discretionary trusts. Whilst it is not yet law, there is enough detail to start thinking properly about your structure.
Whilst the idea of receiving dividends from their shares seems like a distant fantasy to many founders, remember that using a family trust is a decision with long-term consequences. Beyond the baseline scenario of having their company acquired, if it is at all possible that the founder receives dividends from their profitable tech company down the track, then the 30% minimum tax is a relevant issue.
Also, founders who hold income-generating consultancy and services businesses through their family trust will be directly affected.
Four main things sit in the proposed tax changes:
A 30% minimum tax at the trustee level. From income years starting on or after 1 July 2028, the trustee of an affected discretionary trust pays a minimum of 30% tax on the trust’s “minimum tax income”, which is broadly its taxable income with some carve outs.
A beneficiary tax offset that mostly works, until it doesn’t. Individuals who receive the income still get assessed on it, but they receive a non-refundable tax offset equal to 30% of their share. If the beneficiary’s taxable income is well north of $200,000, this might be O.K. Otherwise, the 30% may be a real issue, because the excess offset is not refundable and cannot be applied against the Medicare levy.
Corporate beneficiaries are no longer a thing. A company that receives a distribution from a family trust is still taxed on it and gets no tax offset. On Treasury’s own example, $100 of trust income ends up taxed at roughly 60% by the time it reaches the company, and closer to 70% once it is paid out to a shareholder on the top tax rate. In practice, the “bucket company” strategy will disappear.
“Streaming” of franked dividends is no more. Franked dividends forming part of minimum tax income will no longer flow through to beneficiaries in the usual way. The trustee uses the franking credits against its own liability and the beneficiary receives the minimum tax offset instead. “Streaming” of franked dividends goes away. Capital gain streaming appears to survive, at least at this stage.
All this sits alongside the separate CGT changes, which from 1 July 2027 replace the 50% discount with indexation of cost bases and introduce a 30% minimum tax on capital gains. These CGT changes are already law.
The Government is drip-feeding extensive tax changes via incremental packages. It has released draft tax law on the “Innovative Business CGT concession” (IBCC) aimed at founders, employee shareholders and early-stage investors – also known as the CGT carve-out for startups. Based on current proposals, gains eligible for the IBCC are carved out of the 30% minimum tax on capital gains.
Not evenly, and this is where founders differ from the classic family businesses.
If your company is pre-profit and paying no dividends, your trust probably has little or no income right now, so the minimum tax is theoretical.
The risk is at exit or when the company achieves profitability and is paying dividends. A share sale inside the trust produces a capital gain that forms part of the trust’s income, and the 30% minimum tax applies at the trustee level before anything reaches you. This 30% minimum tax could even apply to capital gains relating to the period prior to 1 July 2027. This means that even if a founder’s CGT liability is partially eligible for the 50% CGT discount, they may still pay a minimum 30% tax through the family trust.
In summary, the below scenarios are what could hurt tech founders the most:
- Capital gains could be subject to 30% minimum tax when it would otherwise have been taxed at a lower rate due to 50% CGT discount on pre-1 July 2027 gains.
- Without making a relevant election (see below), founders are unable to spread income across a spouse, adult children or other beneficiaries on lower rates
- Founders using a corporate beneficiary in the group
- Founders wanting to stream franked dividends to specific family members
Where it may barely register is a single founder who was always going to be on the top marginal rate anyway. In that case the trustee tax is used by the founder as a tax offset.
There are three broad options to deal with the proposed changes as they currently stand.
Option 1: stay put and pay the minimum tax. Keep the trust structure and accept a 30% minimum tax on trust income. For a founder who will be at the top rate anyway, this may be the right option.
Option 2: make an “Excluded Election Trust” (EET) election. This proposes to let the trust keep its legal form and step outside the minimum tax. The price is that you nominate, once and for all, which beneficiaries get income and capital, and in what fixed percentages. Income and capital percentages must match, so you cannot allocate income one way and capital gains another.
Extreme care needs to be taken before making this election:
- The nomination is made once, in the first year, and cannot be changed later.
- Beneficiaries generally must have been capable of benefiting at 1 July 2028, so children born after that date and companies incorporated subsequently cannot be added.
- Changes are permitted only on death or a qualifying relationship breakdown.
- If you breach the percentages, the election is automatically revoked and the trust’s net income for that year is taxed at 47%.
For a founder, this inflexibility could be problematic. Locking in fixed distribution percentages years before an exit, when your cap table, family and plans may all move, is a serious commitment. It is also currently unclear whether the election triggers State duties, family law or trust law resettlement issues.
Option 3: restructure out of the trust. A transitional tax roll-over is proposed for transfers of trust assets between 1 July 2027 and 30 June 2030, allowing assets to move to a company, individual, partnership or non-discretionary trust without immediate income tax.
Once again, complexities abound with this proposed approach:
- Everything must go to one transferee
- Effectively all relevant assets must transfer by 30 June 2030 or tax relief is lost for the whole restructure
- Moving shares into a company will restrict how future income and capital gains are taxed (which is the Government’s whole intention)
- Stamp duties and State taxes, GST, financing, commercial and legal factors all need to be considered.
Even if you don’t access the transitional tax roll-over to undertake a restructure, a restructure may still be the appropriate approach for founders. However, this may come with a range of significant tax and non-tax implications that need to be appropriately worked through based on your personal circumstances.
For founders about to establish new startups, the question is whether family trusts are even worth using.
Family trusts may still deliver benefits from a commercial and asset protection standpoint. However, if the proposed tax changes become law, we expect some founders to forgo their use altogether. In the future, we expect a diverse mix of strategies split between holding new shares via the founder’s personal name, holding companies and family trusts.
There will no longer be a default answer, and the best choice will depend on a multitude of factors including the amount and type of income and capital gains, when they are expected to be received, and the founder’s personal circumstances. Decisions are likely to have significant, irreversible implications for decades.
Based on the proposed changes as they currently stand, the key dates are as follows:
| Date | Relevance |
| 1 July 2027 | Transitional restructure roll-over window opens |
| 1 July 2028 | 30% minimum tax and the new election regime start |
| Lodgement of the FY2029 trust tax return | Deadline to make the EET election |
| 30 June 2030 | Roll-over window closes. All transfers must be done |
- Disclaimer: The above offers general observations, not tax advice.
* Jack Qi is an accountant and advisor to the tech sector at William Buck.
