About the Author Stephen Harvey Commercial Law & Legal Structures Specialist Over 20 years’ experience in commercial law and legal structures. A proven track record in the documentation legal department including trusts, corporate and SMSFs. Providing Constitute with support, as well as advising accountants, financial planners, SMSF administrators, lawyers and high net worth individuals.

 

The key points for us from the Budget papers are: The minimum tax for discretionary trusts of 30% Changes to the CGT discount Removal of the CGT exemption for pre-1985 assets Changes to negative gearing Keep in mind that these are only announcements at this stage. As always, we need to wait and see what the final legislation contains and, of course, the devil will be in the detail. While the Budget has outlined the Government’s intended direction the legislation has not yet been settled, debated or passed. There are also important details still to come. Negotiations are ongoing involving a multitude of vested interests, professional bodies, lobby groups, tax specialists and industry advisers among them to clarify how the rules will operate in practice. Also expect some carve outs to be legislated for specific industries. Whatever your views are on these measures, one thing is certain – these changes will create new groups of winners and losers.

 

The minimum tax for discretionary trusts of 30%

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The Budget continues the war on discretionary trusts. In recent years, we have had to contend with the weaponisation of Div 7A and section 100A. All in an effort to deter the use of discretionary trusts.

This new step seems to continue the assault. This and earlier measures seem to proceed on the assumption that discretionary trusts have only one use – to reduce tax. All of them ignore the real benefits to be derived in asset protection, estate planning and family succession planning.

The Government will now introduce a minimum 30% tax on discretionary trust income. This new measure commences on 1 July 2028.

At this stage we expect as announced:

• 30% tax on trust income will be paid by the trustee.
• Beneficiaries who receive trust distributions must declare their trust income in their tax returns.
• A non-refundable credit may be claimed by non-corporate beneficiaries for the tax paid by the trustee.
• Corporate beneficiaries will not receive a credit for the tax payable by the trustee.

Expected result:

• The pool of potential beneficiaries effectively shrinks removing some tax planning opportunities. Distributions will be unlikely in favour of beneficiaries on a marginal rate of less than 30%. A beneficiary who is on a tax rate of less than 30% receiving a distribution may claim the credit but cannot claim a refund of the excess tax over their normal tax liability. Therefore, it becomes more likely that the trust income will be retained or paid out to beneficiaries on marginal rates of at least 30%. We await greater detail on what is suggested by “tax of a minimum of 30%” and how that is intended to operate where a trust retains earnings.
• Bucket companies are even less attractive than previously where the ATO applied Div 7A to unpaid entitlements.

The minimum 30% tax will not apply to other types of trusts such as fixed and widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts. Some types of income will also be excluded (e.g. primary production income)

As a result of the carve out for fixed trusts, we are expecting to see more restructuring out of discretionary trusts into fixed trusts or companies. The Government has announced that rollover relief will be available to assist small businesses and others that wish to restructure.

Once again, the devil will be in the detail, but we don’t expect any new rollover relief to be overly generous. And the relief for restructuring is only available for 3 years from 1 July 2027.

 

	Food for Thought
		A great many SME’s will not be able to pay the 30% tax.
		A great many SME’s will not be able to afford to restructure (with or without rollover relief).
		Income splitting using trusts will be more limited.
		It will be interesting to see if the definition of “small business” will be amended to increase the thresholds for eligible businesses given the multiple, and in some cases outdated, turnover and asset values currently in play.
		It will also be interesting to see what definition of “fixed trust” the Government chooses given the different meanings in tax legislation.
	Finally, on a lighter note, the Government has suggested, without a hint of irony, that small businesses will be able to reduce the impact of the minimum tax by employing beneficiaries, rather than paying them a trust distribution.

 

Changes to the CGT discount

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These changes will remove the 50% general CGT discount for assets held for more than 12 months. The new rules also re-introduce capital gains tax cost base indexation and introduce a 30 per cent minimum tax on capital gains.

As was the case before 1999, indexation will be calculated using changes in CPI. This change will apply to all CGT assets (including property and shares) held for at least 12 months.

A minimum tax rate of 30 per cent will apply to capital gains accruing from 1 July 2027. As is currently the case, any capital gain is taxed only when it crystalises.

Taxpayers investing in new housing may still access the 50% general discount for CGT. They also have the choice of choosing the indexation model and minimum tax when they sell the relevant property. Taxpayers will need to take advice about what is considered to be a new build and that the relevant property otherwise meets the relevant tests when legislated.

For CGT assets other than new residential properties, assets purchased after 1 July 2027 will be treated wholly under the new arrangements. Assets owned prior to 1 July 2027 and sold after 1 July 2027 will be tax on gains made prior to 1 July 2027 (i.e. the 50% discount will apply to gains before that date) and under the new arrangements for gains made after that date.

 

	Food for Thought
		We expect to see a greater focus on an assessment of investment options for property and shares against other forms.
		We expect to see capital re-directed away from property speculation (particularly in residential property) and into more income producing asset classes.
		We expect to see capital re-directed away from share market speculation and into more income producing asset classes.

 

Removal of the CGT exemption for pre-1985 assets

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One notable announcement was the proposed removal of CGT exemption for assets acquired before 1985.

Many trusts hold pre-1985 assets, probably no more obvious than primary production land and businesses and multi-generational SME’s where control of family assets is passed along using a trust structure.

Gains on pre-1985 assets accrued before 1 July 2027 will continue to be exempt. Otherwise, the above rules apply after that date.

CGT rollover relief will be available to eligible taxpayers and assets.

 

	Food for Thought
		Many SME’s will not be able to pay the 30% tax.
		Many SME’s will not be able to afford to restructure (with or without rollover relief).
		Again, it will be interesting to see if the definition of “small business” will be amended to increase the thresholds for eligible businesses given the multiple, and in some cases outdated, turnover and asset values currently in play.

 

Changes to negative gearing

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These changes limit the available negative gearing options to new residential properties. As such we expect:

• Costs associated with the investment will remain deductible but only to the extent of the income that is derived from new build residential property investments.
• Any costs in excess of the income derived will effectively cease to be deductible and cannot be offset against other income in the relevant tax year. We expect that excess losses may be able to be carried forward to offset future income.
• Negative gearing to continue to be available to other asset classes (e.g. shares).

From 1 July 2027, negative gearing for other than new build residential property investments will be scrapped. Investors in new residential property will still be able to use negative gearing for those properties that qualify.

Residential properties held before Budget night 2026 will be exempt from the negative gearing changes.

 

	Food for Thought
		We expect to see a greater focus on positively geared residential investments.
		We expect to see capital re-directed away from property speculation (particularly in residential property) and into more income producing asset classes.

 

And finally, some other thoughts

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Most of the above changes were well telegraphed prior to Budget night, so there were no major surprises, apart from the fact the Government actually did what it said it would do. That said, we wait with anticipation to see which groups go from the loser’s side of the ledger to the winner’s side once the usual carve-outs and grandfathering are agreed. Of some interest:

• The Budget in some ways appears to be a targeted attack on SME’s although we think this was largely unintended.
• The Budget in some ways appears to be a targeted attack on older Australians who hold assets outside super – we think this was largely intended.
• We expect to see an acceleration of SME’s being sold or closing where the owners are close to retirement.
• SMSFs went largely unscathed. However, expect to see an increased focus on SMSFs as the investment vehicle of choice.
• The speculation around the termination of LRBAs did not materialise.
• Tax on super including CGT is untouched.

 

How we can help

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At Castle Corporate, we can work with you to help ensure legal documents and structures remain compliant, consistent, and ready to adapt as regulatory requirements evolve. We can assist with:

• Preparing and updating company, trust and SMSF documentation.
• Identifying any inconsistencies or risks in existing deeds and records.
• Assisting with structure updates.
• Supporting advisers with efficient document preparation and implementation for their clients.

Please feel free to reach out if you’d like to discuss how we can support your firm and clients.

Email info@docscentre.com.au or phone 1800 799 666.

Disclaimer: This article is for general information purposes only and does not constitute legal, accounting or financial advice in any context or application. It is also not intended as financial advice. You should seek independent professional advice relevant to your specific situation before acting or relying on any of the information contained herein.

Written by: Stephen Harvey, Head of Legal & Administration Services at Docscentre Legal