The government has now introduced two separate 30% minimum taxes. However, only one of them is law.
Division 119 is already law and applies a minimum 30% rate of tax to capital gains after 1 July 2027, including capital gains distributed by a family trust.
The second measure, taxing trust distributions at a flat rate of 30%, is not yet law.
It is this potential tax that we would like to explore today.
Two separate 30% taxes is the problem!
Division 119 applies when an individual makes a capital gain, either directly from an asset they own personally or through a capital gain distributed to them by a trust. It imposes a minimum tax rate of 30% on that capital gain.
Importantly, Division 119 operates as a top-up tax and is calculated separately from an individual’s ordinary income tax liability. Unlike the standard income tax calculation, it does not take any tax credits and offsets into account when determining the top-up tax payable. I will return shortly to why this distinction matters.
A second measure, taxing trust distributions at a flat rate of 30%, has progressed from a Treasury consultation paper in July 2026 to full exposure draft legislation released on 3 September 2026. Actual draft clauses now exist, not just a policy outline, but the bill has not yet been introduced into Parliament, and there is still no guarantee it will become law in its current form.
How two 30% taxes could produce a 60% tax rate
The surprising potential interaction between these two taxes is that a beneficiary who receives a capital gain through a family trust could pay an effective tax rate of up to 60%, particularly if they have little other taxable income or the capital gain is relatively modest.
This is because the two taxes appear to operate separately. For example, assume a beneficiary receives a $10,000 capital gain from a trust. The trustee would pay $3,000 in tax, leaving the beneficiary with a net distribution of $7,000 and a non-refundable tax credit of $3,000.
Ordinarily, an individual with taxable income of only $10,000 would pay no personal income tax. However, because the trust tax credit is non-refundable, they would not receive the $3,000 back as a refund.
To make matters worse, Division 119 is calculated independently and imposes a further minimum tax of 30% on the capital gain. Its calculation formula does not recognise tax credits or offsets, so the $3,000 already paid by the trustee is disregarded.
Therefore, in this example, the individual’s ordinary income tax liability would be nil, but they would incur an additional Division 119 liability of $3,000. Combined with the $3,000 paid by the trustee, the total tax would be $6,000 on a $10,000 capital gain, an effective tax rate of 60%!
Did the government intend to create a 60% tax rate?
The proposed tax on trust distributions consultation paper does not mention Division 119 at all, which suggests the interaction was not modelled through before release. A measure that can produce a possible 60% tax rate, hopefully, is more likely to be redesigned than legislated. Treasury allowed only 3 weeks for consultation, a fraction of the usual 3 months given to comparable reforms in the past, and submissions from bodies including the Tax Institute and others have raised this and other design gaps.
If Treasury allows the trust tax credit to reduce the Division 119 liability directly, the stacking effect will disappear, and the group’s total tax would remain close to the intended 30%.
The more immediate concern may be investment income
Of course, capital gains are only one part of the equation. For investors who are still accumulating wealth, any material capital gains may be decades away. The more immediate issue, and one we must not overlook, is the tax payable on investment income each year.
One of the benefits of using a family trust has traditionally been the flexibility to distribute investment income to family members with lower taxable incomes. For example, if a beneficiary’s total taxable income was less than $45,000, that income could be taxed at a rate below 30% – either nil if their income is below $20,000 or 17% if it’s between $20,000 and $45,000.
If the proposed trust tax is implemented, that opportunity will effectively disappear because trust distributions will be subject to a minimum tax rate of 30%.
Consequently, if an individual’s total taxable income, including the income generated by their investment, is expected to remain below $45,000, it may be more tax-effective to hold the investment in personal name rather than through a family trust.
But will the proposed rules survive until 2028?
When deciding how to navigate these proposed changes, we also need to consider the political landscape.
On the one hand, you do not want to incur the cost of establishing a family trust today if you may need to restructure your investments in a few years. On the other hand, these measures are not yet law, so we should not jump at shadows. If we make decisions today on the assumption that the proposals will become law, but they ultimately do not, we may look back in a few years and regret reacting prematurely.
The proposed rules are not intended to commence until 1 July 2028, and Australia will hold a federal election before then. The government has already received substantial negative backlash over its changes to negative gearing and capital gains tax, so it may be politically difficult to push further tax increases through Parliament.
Even if these proposals become law, a change of government in the first half of 2028 could result in them being repealed before, or shortly after, they commence.
Of course, none of us has a crystal ball. Predicting what governments will do, or the outcome of a future election, is inherently difficult. Nevertheless, the political landscape remains relevant. To the best of our ability, we need to assess the probabilities and play the percentages.
Be careful to not underestimate future tax liabilities
The goal of tax planning is to identify the ownership structure that is likely to produce the best after-tax outcome over your lifetime. However, due to the time value of money, it is reasonable to place more weight on the outcomes you expect over the next 5 to 10 years, while still considering what may happen over 20 or 30 years.
This means the best long-term ownership structure may initially produce more costs than benefits. You would only accept that short-term disadvantage if you were reasonably confident that the structure would leave you substantially better off in the future.
The other consideration is that life rarely unfolds exactly as expected. Circumstances will inevitably change in ways that are difficult to predict, so it is generally preferable to choose an ownership structure that preserves as much flexibility as possible.
As a general guide, if we expect an investment portfolio to exceed somewhere between $800,000 and $1 million within the next decade, and remain above that level for the foreseeable future, we would typically prefer the portfolio to be held in a family trust.
The challenge is forecasting a portfolio’s future tax liabilities. This requires assumptions about investment returns, capital contributions, income, capital gains and future tax rates. In my experience, it is very easy to underestimate the power of compounding and, consequently, the tax liabilities a portfolio may eventually generate.
For example, a client began investing $10,000 per month in his wife’s name approximately 10 years ago. The portfolio is now worth around $3 million, including approximately $1 million of unrealised capital gains. Last year alone, it generated around $73,000 of investment income.
With the benefit of hindsight, I regret not initially establishing the portfolio in a family trust. At the time, my preference was to keep things relatively simple and low cost. The client’s 3 children were very young and many years away from turning 18, so even if we had used a trust at that time, all the investment income and capital gains would still have been distributed to his wife.
However, I now think I placed too much emphasis on keeping the structure simple and avoiding upfront and ongoing costs. I have tempered that approach over the past 5 years or so, and it is an important lesson that I want to share.
Even a relatively modest portfolio can become substantial over time. For example, a $250,000 portfolio earning a 4.5% p.a. capital return and 3.5% p.a. income could comfortably exceed $800,000 within 20 years, assuming the income is reinvested, even without another dollar of capital contributions.
This demonstrates how quickly investment portfolios can compound and accumulate material tax liabilities, both through the income generated each year, and reinvested and the unrealised capital gains embedded in the portfolio.
What will we do if this becomes law?
The proposed rules include a 3-year restructuring window from 1 July 2027 to 30 June 2030 for investors who hold assets through non-fixed entitlement structures, such as family trusts. During this period, investors would be able to transfer assets into fixed ownership structures, such as personal names, a company, or a fixed (unit) trust, without triggering capital gains tax.
However, the proposed federal CGT relief does not necessarily remove any state-based stamp duty liability. The federal government has not yet reached an agreement with the states about providing equivalent stamp duty relief when ownership changes. This could be particularly relevant to property and, in some states, certain business assets.
There is a provision that allows you to avoid a restructure. A trust could instead elect into a new regime where the trustee nominates fixed beneficiaries and fixed percentages of income and capital, avoiding the minimum tax without moving any assets, triggering CGT, or crystallising stamp duty liabilities. This could suit a trust where a stamp duty waiver simply cannot be negotiated with the relevant state. The trade-off is that the trustee loses the ability to vary distributions year to year, since the nominated split must be paid out in full every year. At this stage, it is our feeling that we would probably prefer a restructure over being locked into this election.
If these proposals become law, our expectation is that we will most likely transfer investment assets from family trust into company (because it can retain profits), though personal names or a fixed unit trust may suit some clients better depending on their circumstances. The shares in those companies could then be owned either directly by individuals or through a family trust.
One potential advantage of using a company is that it may avoid the minimum 30% capital gains tax imposed by Division 119. For example, assume a company makes a $10,000 capital gain. The company would pay $3,000 in tax and could then pay out the remaining $7,000 to a shareholder as a fully franked dividend, with a $3,000 franking credit attached.
Importantly, the nature of the income has changed – the shareholder receives dividend income, not a capital gain. Therefore, Division 119 would not apply. If the shareholder has no other taxable income, their personal tax liability would be nil and they should receive a full refund of the $3,000 franking credit. In effect, no tax would ultimately be paid on the original $10,000 capital gain.
However, the outcome would be different if the shares in the company were owned through a family trust and the dividend was distributed to an individual beneficiary. Under the proposed rules, the $3,000 tax credit would be non-refundable. Consequently, the benefit of the refund would be lost, and the capital gain would effectively remain taxed at 30%.
If the company shares are owned by a family trust, our likely strategy would therefore be to retain profits within the company and pay dividends only in financial years when the intended beneficiaries already have sufficient taxable income to use the tax credit, typically where their taxable income exceeds $45,000 and their marginal tax rate is at least 30%.
It is worth acknowledging that companies do not get the CGT discount or indexation that individuals and trusts receive. Based on the numbers I have modelled, once an asset’s growth is likely to exceed roughly 6% p.a. longer term, paying 30% on the nominal gain typically beats paying up to 47% on an indexed gain. So, whether a company would give rise to a higher rate of tax depends on the asset growth rate and the individuals’ future taxable positions.
A few practical points worth mentioning: The rollover generally requires the trustee to transfer all of the trust’s assets, not just a selection, so a partial restructure will not qualify. There is also a continuity requirement, meaning only people who were already beneficiaries of the family trust can end up holding an interest in the new structure, whether directly or through another trust. And a trustee cannot use both the election and the rollover for the same trust, so this is a genuine either/or decision made once, not something to combine or change later.
Already have a family trust? Do nothing for now
If you already hold assets in a family trust, our default advice is to do nothing and continue investing through that trust for the time being.
You should wait to see whether:
- The proposed rules are legislated in their current form; and
- There is a change of policy, or a change of government, before the proposed commencement date of 1 July 2028.
If the rules remain in place on 1 July 2028, you can then use the proposed restructuring window to transfer the assets into a company, as explained above, or into personal names. There is no need to restructure prematurely based on proposals that may change or never become law.
Should new investors still start with a family trust?
We considered 3 possible approaches for new investments that, under the existing tax rules, we would ordinarily recommend holding through a family trust:
- Begin investing in personal names and decide later. We rejected this option. Structuring an investment around legislation that is not yet law, and has a genuine prospect of being redesigned, delayed or abandoned, would be jumping at shadows.
- Establish a company immediately, with a family trust as the shareholder. We also rejected this option, for essentially the opposite reason. There is little benefit in accepting the additional complexity today when the proposed rollover relief should allow us to restructure from a family trust into a company later at a similarly modest cost.
- Begin investing through a family trust. This remains our default approach. Because the proposed rollover relief should keep the cost of changing course relatively low, the main sunk cost is establishing the trust itself. Given the genuine possibility that these measures will be redesigned, delayed or abandoned before 1 July 2028, we do not consider that cost significant. One practical refinement is to establish the trust with individual trustees initially, rather than a corporate trustee, which reduces the upfront cost.
Therefore, our approach has not changed. A portfolio that is likely to generate substantial tax liabilities should generally be held in the structure that provides the greatest flexibility, the lowest cost of changing course and the least potential regret if the legislation develops differently from what anyone currently expects.
Flexibility matters more than today’s setup cost
Keeping an ownership structure simple and cost-effective makes sense only if you are reasonably confident the portfolio will remain small enough that these tax consequences will never become material.
If there is any meaningful uncertainty, the more conservative approach is to maximise flexibility from the outset. The real cost of getting the structure wrong is not the establishment fee. It is having a decade of compounded income and capital gains trapped in an ownership structure that no longer suits you.
Simplicity may be cheaper today but very expensive later. Flexibility is what is worth paying for upfront.
