Small family-owned businesses – including those in the fashion sector – that operate through discretionary trusts face a potential 47 per cent tax hit if their circumstances change, the Council of Small Business Organisations Australia (COSBOA) claimed, as the Government presses ahead with a new minimum tax on discretionary trusts.
The Government announced in the 2026–27 Federal Budget, handed down on May 12, 2026, that it will introduce a 30 per cent minimum tax on discretionary trusts from 1 July 2028. The measure is not yet law. Under the Australian Taxation Office's outline of the reform, the tax will apply at the trustee level, with non-corporate beneficiaries who are presently entitled to a share of the trust's net income able to claim a non-refundable income tax credit for tax already paid by the trustee.
The Government will also introduce a time-limited, three-year restructure rollover from July 1, 2027, allowing businesses to transfer assets out of discretionary trusts and into other entity structures. An exposure draft of the legislation is currently open for consultation, running from September 3 to 18, 2026.
COSBOA's concern centres on an alternative pathway in the exposure draft that some small businesses could elect into instead of the 30 per cent minimum tax. Under the draft rules, a trust that elects into this arrangement but later needs to exit it would be taxed at the highest marginal rate in the year it leaves. Family members who receive a distribution in that year would also pay the Medicare levy on top.
The 47 per cent figure COSBOA cites is not a new penalty rate created by the reform — it is the existing top individual marginal tax rate combined with the Medicare levy, applied to the trust's entire net income in the year an election breaks down.
COSBOA CEO Skye Cappuccio said the Government had provided a pathway that may be a “least-worst option” for some small businesses, but argued family businesses should not be punished when circumstances change.
"Family businesses evolve. A son or daughter might come home and start working in the business. The next generation might take on a bigger role. A family may need to change who receives distributions. These are normal decisions for a family business," Cappuccio said.
"If making one of those changes means losing access to the elected arrangement, why should that business then be taxed at the highest marginal rate for that year?"
Cappuccio said there was a simpler option: allowing a business that leaves the elected pathway to move onto the Government's 30 per cent minimum tax, rather than facing the higher rate.
"The Government's underlying 30 per cent minimum tax remains bad policy," she said. "But if it intends to proceed, it should not make a bad policy worse by punishing small family businesses simply because their circumstances change."