Small business owners across Australia are raising the alarm on the Federal Government’s proposed trust tax changes.
According to the Council of Small Business Organisations Australia (COSBOA), many of its members are worried these tax changes could leave them paying thousands of dollars more in tax each year, placing additional pressure on businesses already facing rising costs and challenging trading conditions.
On May 12 earlier this year, as part of the 2026–27 Federal Budget, the Government announced it will introduce a 30 per cent minimum tax on discretionary trusts from July 1, 2028. This is not yet law.
A trust is a structure where a trustee carries out the business on behalf of the trust's members.
COSBOA CEO Skye Cappuccio said the public debate had largely overlooked the genuine small businesses likely to be impacted. This will include a raft of retailers and brands.
“There has been very little attention on the 350,000 to 400,000 small businesses operating through trust structures, many of whom now expect a significant hike in their tax bill and a direct impact on their business and their livelihood,” Cappuccio said.
“These are small businesses using trusts for legitimate commercial reasons. Most have annual turnover below $2 million and include trades, retailers, hospitality venues, professional services firms and family-run enterprises in communities right across Australia.
“The proposed changes risk putting additional pressure on small businesses at a time when many are already facing rising costs, workforce challenges and difficult trading conditions.”
According to COSBOA, one of its members told the organisation these changes could significantly impact their business.
The husband-and-wife team both work full time in the business. They don’t pay themselves a wage through the business but rely on trust distributions from another business, of around $200,000 between them each year. They estimate they currently pay around $45,000 in tax each year.
The owners say they do not see themselves as wealthy investors but as small business owners focused on supporting their family and the people they employ.
Based on estimated calculations, the proposed changes could increase their annual tax bill by around $15,000, taking their total tax liability to approximately $60,000 a year. Over five years, that would amount to around $75,000 in additional tax – money, they say, that could otherwise be invested in equipment, productivity and future growth.
In a tax explainer document, the government declared that the growing use of discretionary trusts is increasingly unsustainable.
The document shows that since 2001-02, the number of discretionary trusts in Australia has doubled, exceeding the growth in companies – which have grown by 70 per cent.
Australia now has over one million trusts, of which around 840,000 (80 per cent) are discretionary trusts.
In 2022–23, discretionary trusts distributed $142.4 billion in income to other entities, with average annual growth in income of 7.8 per cent since 2011–12.
“Trusts, including discretionary trusts, can assist with asset protection and succession planning,” the tax explainer document shared. “However, discretionary trusts also allow lower tax rates to be achieved through ‘income splitting’, where trustees of discretionary trusts allocate all or part of their income to others who have a lower marginal tax rate, while often retaining the income.
According to Treasury analysis, families with discretionary trusts faced an average tax rate of around 4 percentage points lower in 2022-23, on average, compared with families and similar incomes who do not use a trust.
This flexibility, according to the document, is not available to individuals without a trust, including workers who pay tax on wages at marginal rates.
“Numerous reviews of the tax system over the past 50-years have raised concerns that different structures used to hold assets or earn an income can result in different tax outcomes for people with similar levels of income,” the document read.
“Introducing a 30 per cent minimum tax brings the tax outcome on income earned in a discretionary trust closer to that of wage and salary earners who pay a 30 per cent marginal rate on incomes between $45,001 and $135,000.
“This improves the fairness and sustainability of the tax system.”
Cappuccio said many small businesses were alarmed the changes could increase their tax burden simply because of the business structure they use.
“Many small business owners operate their business through a family trust because it is the structure that makes the most sense for their business,” she said. “These are not businesses using aggressive tax avoidance strategies. Trusts provide a legitimate structure to support succession planning, asset protection and business continuity.
“Small business owners spend years prioritising the needs of their business ahead of their own financial circumstances. Rather than paying themselves more, they often leave money in the business to purchase equipment, manage cash flow, employ staff and prepare for future challenges and opportunities.
“They make those decisions because they believe in building something that supports their family, creates jobs and contributes to their local community.”
As part of its Fair Go for Small Business campaign, COSBOA is collecting stories from business owners concerned about the impact of proposed tax changes on investment, succession planning, retirement planning and long-term business confidence.
COSBOA acknowledged the Government has indicated further consultation on trust taxation will occur in the coming weeks and is aiming to engage constructively in that process.
The organisation added it is critical that the concerns of genuine small businesses operating through trusts are properly understood and considered as part of any consultation and before legislation is introduced.
COSBOA is urging the Government to reconsider the proposed trust tax measures and work with the small business sector to ensure any reforms do not penalise genuine small businesses using trust structures for legitimate commercial reasons.