Tax specialists have raised a fresh alarm over the Albanese government’s proposed overhaul of discretionary trusts, warning that a new concession designed to soften the impact of a 30 per cent minimum tax could instead lock some families into financial arrangements made years before their future children are born.
The criticism centres on draft legislation released by Treasurer Jim Chalmers on 3 September as part of the government’s plan to introduce a minimum 30 per cent tax on income from many discretionary trusts from 1 July 2028.
Under the draft rules, an existing discretionary trust could potentially escape the minimum tax without restructuring by making a one-off election to become what Treasury calls an Excluded Election Trust, or EET.
The catch is that the trustee would have to nominate in advance who can receive the trust’s income and capital and specify the percentage each beneficiary is entitled to receive. Those proportions would effectively be fixed rather than being reconsidered from year to year in the way many family trusts operate today.
It is that requirement that has triggered warnings about what critics have labelled a “birth tax”.
Tax advisers reviewing the exposure draft say a child who does not exist when the relevant beneficiaries are locked in could later create serious problems for a family wanting to include that child in its trust arrangements.
The phrase “birth tax” is political and industry shorthand rather than the name of an actual tax contained in the legislation. But the underlying issue identified by advisers is real: the proposed concession achieves its tax advantage by removing much of the future discretion that makes a discretionary family trust attractive in the first place.
How the proposed trust tax would work
The government announced in the 2026–27 Budget that trustees of affected discretionary trusts would face a minimum tax rate of 30 per cent from the 2028–29 financial year.
The policy is intended to reduce the ability to distribute trust income in ways that result in tax being paid at rates below those faced by many wage earners.
The government argues that discretionary trusts can provide legitimate benefits, including asset protection and succession planning, but also give some taxpayers opportunities to arrange their affairs in ways unavailable to ordinary employees.
Treasury has said that families using discretionary trusts had an average tax rate about four percentage points lower in 2022–23 than families on similar incomes without such trusts. It has also said more than 90 per cent of private trust wealth is held by the wealthiest 10 per cent of households.
Under the proposed system, the trustee would generally be required to ensure tax on the relevant trust income reaches at least 30 per cent. Individual beneficiaries would continue to deal with trust distributions through their own tax affairs, with credits applying in accordance with the proposed regime.
However, the government has repeatedly stressed that the changes are not intended to capture every trust in Australia.
Fixed trusts, charitable trusts, special disability trusts, complying superannuation entities and deceased estates are among structures excluded or intended to be excluded. Certain primary production income, income relating to vulnerable minors and genuine discretionary testamentary trusts are also being given special treatment.
The government says fewer than 10 per cent of Australia’s 2.7 million active small businesses will be affected by the reforms in any given year.
Its own small-business material says about 350,000 active small businesses operated through discretionary trusts in 2022–23, with about 140,000 of those businesses not expected to pay additional tax or need to restructure in a typical year.
The government’s new workaround
One of the biggest concerns after the original policy was announced involved the cost of restructuring.
A business that moved assets out of a discretionary trust and into another structure could potentially face legal and accounting expenses as well as state or territory stamp duty consequences, depending on the assets involved and the jurisdiction.
The government responded by proposing expanded income-tax rollover relief for three years from 1 July 2027, allowing eligible taxpayers to restructure without triggering some of the immediate federal tax consequences that would normally arise.
The September exposure draft introduced another option.
Instead of moving assets out of the trust, an eligible existing discretionary trust could make a one-off EET election during the 2028–29 income year.
The trustee would nominate the beneficiaries it intends to make presently entitled to the trust’s income and capital, together with each beneficiary’s fixed percentage share.
Those percentages must cover 100 per cent of the relevant income and capital. A beneficiary’s proportion of income and capital must also correspond under the proposed rules.
If the conditions continue to be satisfied, the trust would remain outside the new minimum-tax regime.
For families with very simple and predictable arrangements, the option could be useful. A family that has historically distributed trust income in the same proportions to the same people might prefer to lock those arrangements in rather than restructure the entire business or investment structure.
But professional advisers are warning that family life is rarely that predictable.
Why newborn children have become the flashpoint
The central concern is that the proposed EET concession relies on beneficiaries being nominated at the time the election is made and then keeping those distribution arrangements substantially fixed.
Tax specialists examining the draft say the rules provide only limited opportunities to change nominated beneficiaries later.
Events such as a death or relationship breakdown are contemplated within the proposed framework, but advisers say the birth of a new child does not receive an equivalent straightforward pathway.
That creates a practical problem for a couple who makes an EET election and then has another child years later.
A discretionary family trust would traditionally provide trustees with flexibility to respond to changes in family circumstances. Over time, children may be born, marry, enter a family business or become part of a succession plan. Trustees can ordinarily take those circumstances into account when deciding how income or capital should be distributed, subject to the trust deed and tax law.
An EET would trade much of that flexibility for an exemption from the proposed 30 per cent minimum tax.
Tax experts have therefore warned that parents could find themselves effectively making decisions about the economic interests of children who have not yet been born.
If a family subsequently departs from the nominated arrangements, advisers say it could lose the benefit of the EET concession and face significantly less favourable tax treatment.
Reports on the draft legislation have warned that distributing outside the nominated structure could expose trust income to the top marginal rate in the relevant circumstances, while abandoning the EET arrangement could leave the trust subject to the new 30 per cent minimum-tax regime in future years.
That is the basis for the “birth tax” description now being used by critics of the proposal.
It does not mean the government is proposing to send parents a tax bill simply because a baby is born. Rather, the argument is that the arrival of a new child could force a family to choose between preserving an existing favourable trust election and changing the arrangement to include that child, potentially creating additional tax consequences.
Families may have to choose years in advance
The criticism goes to the broader purpose of family trusts.
For many business owners, a discretionary trust is not used solely to reduce tax. It can also form part of a long-term structure for holding business interests, protecting assets and transferring wealth between generations.
That can make a permanent or near-permanent nomination of beneficiaries difficult.
A couple making an election in 2028 or 2029 may not know how many children they will eventually have, which children will participate in the family business, whether relationships will change or what the family’s financial circumstances will look like decades later.
Professional services firms analysing the draft have consequently cautioned that the EET option may be most useful for relatively simple trusts where distributions already follow a predictable pattern.
For more complex family groups, advisers say trustees may need to compare three broad options: accept the minimum 30 per cent regime, make the EET election and surrender substantial flexibility, or use the temporary rollover provisions to move into another structure.
None of those decisions should be regarded as purely administrative.
Restructuring can involve accounting, legal and potentially state tax consequences. Staying within the minimum-tax system may increase the effective tax burden. Making an EET election may preserve existing tax treatment but constrain future decisions about beneficiaries and succession.
That is why advisers are urging affected families and business owners not to make long-term structural decisions until the legislation has been finalised and their individual circumstances have been professionally assessed.
The law is not final
One of the most important points in the current debate is that the controversial provisions are still draft legislation.
Treasury opened consultation on the exposure draft on 3 September and submissions remain open until 18 September.
That gives accountants, lawyers, businesses and industry organisations an opportunity to argue for changes to the EET rules, including the treatment of children born after an election has been made.
The government has already modified elements of the original trust-tax proposal following earlier consultation, including expanding rollover relief and introducing the EET option itself.
Further changes are therefore possible before legislation reaches its final form.
Chalmers has defended the broader reform as an issue of tax fairness, arguing that the system should more closely align tax paid on discretionary trust income with tax rates paid by workers.
The government also says the measure sits alongside more than $3.8 billion in measures designed to lower taxes and support investment by businesses, including a permanent $20,000 instant asset write-off and the return of loss carry-back arrangements.
Critics, however, say the latest controversy demonstrates the difficulty of redesigning the tax treatment of trusts without creating unintended consequences.
What began as an attempt to establish a minimum tax rate has already required additional rules dealing with restructuring, fixed distributions, charitable beneficiaries, testamentary trusts, franking credits and transitional arrangements.
The emerging dispute over future children adds another layer.
For families considering an EET election, the crucial question may no longer be simply how their trust operates today. They may have to consider who could be part of the family — and the family business — decades into the future.
Whether that problem survives into the final legislation will now depend in part on what Treasury does with the warnings being raised during the remaining consultation period.
