Opinion: The Government’s Trust Tax Reforms Could Hurt Australian Small Business Owners

For decades, discretionary trusts have formed part of the financial backbone of Australian small business.

From family-run construction firms and independent retailers to farming operations and professional consultancies, trusts have long been used not only for tax planning, but to protect family assets, manage risk and create flexibility for future generations.

That is why the Federal Government’s proposed discretionary trust reforms deserve far closer scrutiny than they are currently receiving.

At the centre of the reforms is the proposed introduction of a 30% minimum tax on discretionary trust distributions from July 1, 2028, alongside a transitional “rollover relief” period beginning in 2027.

Presented as a “measure designed to improve tax fairness among high-wealth individuals,” the 2026–27 Federal Budget reforms may instead place a disproportionate financial burden on everyday Australian small business owners — many of whom are already under pressure from inflation, rising interest rates and slowing consumer demand.

 

How Australian SMEs Operate: A Reality Check

Discretionary trusts are widely used across Australia because they offer flexibility and asset protection for business owners operating in inherently risky environments. A retailer protecting personal assets from trading risks, for example, or a farming family planning succession across generations.

These are not unusual or aggressive tax arrangements. They are standard business structures used by hundreds of thousands of Australians.

In fact, more than 840,000 Australian entities currently operate through discretionary trusts, the majority of them small and medium-sized businesses.

What often gets overlooked is that these same businesses also carry a substantial administrative burden on behalf of government — collecting GST, managing PAYG withholding and navigating increasingly complex compliance obligations.

Yet under the proposed reforms, many of these businesses may face a higher effective tax burden purely because of the structure they use to operate safely and efficiently.

 

The 30% Tax Floor Changes the Entire Equation

Historically, discretionary trusts have operated as “flow-through” structures, where income is distributed to beneficiaries and taxed at their individual marginal tax rates.

The proposed reforms fundamentally change that principle.

 

The Loss of the Tax-Free Threshold

Under the new framework, trustees will effectively pay a flat 30% tax upfront on distributions. While beneficiaries receive corresponding tax credits, those credits are non-refundable.

For high-income earners already paying tax above 30%, the practical impact may be limited.

But for everyday SMEs relying on discretionary trusts for flexibility, succession planning and asset protection, the reforms could materially increase the overall tax burden despite no change in underlying business profitability.

Because excess tax credits are non-refundable, many families could lose the practical benefit of those lower tax thresholds altogether.

 

Why the “Mum and Dad Business” May Be Hit Hardest

Consider a fairly typical Australian small business structure: a husband-and-wife business operating through a discretionary family trust generating $200,000 in annual profit.

Under current rules, distributing profits evenly may result in an effective family tax rate of approximately 22%. Under the proposed 30% trust tax floor, however, the family’s tax burden may increase substantially because excess tax credits cannot be refunded.

This results in a direct reduction in household cash flow.

For many SMEs already managing rising wages, supply chain costs, insurance increases and interest rate pressure, losing an additional $10,000–$20,000 in annual liquidity can materially affect hiring decisions, reinvestment plans and long-term business stability.

That is why many business owners are increasingly viewing the reforms not as a tax fairness measure, but as a structural reset for the SME sector.

 

Asset Protection Is Not Tax Avoidance

One of the most misunderstood aspects of discretionary trusts is the assumption that they exist primarily to minimise tax.

In reality, for many business owners, the primary driver is risk management.

Operating through a trust structure can help protect family assets from litigation, insolvency or commercial disputes. In industries like construction, hospitality and professional services, that protection is critical.

The problem with the proposed reforms is that they effectively introduce a permanent financial penalty for maintaining that protection. Business owners may now be forced to choose between higher ongoing tax costs or restructuring entirely into corporate entities.

However, that transition is not so simple.

Moving out of a trust structure can trigger legal, accounting and valuation complexities. Companies also lack some of the flexibility trusts provide around succession planning, capital gains treatment and intergenerational ownership structures.

For many SMEs, restructuring will not simply be a paperwork exercise. It could fundamentally change how their business operates long term.

 

The 2027 Window: A Critical Turning Point

The Government’s proposed rollover relief period beginning in July 2027 may become one of the most important planning windows Australian SMEs have faced in years.

Business owners should not assume they can leave these decisions until the final moment. Structural modelling, tax forecasting and business valuations take time. Owners need to understand how their business is likely to perform not just next year, but across the next decade.

For some businesses — particularly those planning to retain profits for growth — a corporate structure taxed at the small business company rate may eventually prove more efficient. For others, preserving the flexibility and protection of a trust may still outweigh the additional cost.

But these are strategic decisions that require careful analysis, not reactive restructuring.

 

A Broader Question About the Future of Small Business

At a broader level, these reforms raise an important policy question: how should Australia balance tax integrity with the realities of running a small business?

SMEs already operate in an environment of rising compliance costs, labour shortages, economic volatility and increasingly complex regulation. Many owners are not large-scale tax minimisers. They are simply trying to build sustainable businesses, employ staff and protect their families from commercial risk.

Policies that materially reduce SME cash flow inevitably have broader economic consequences.

When small businesses lose liquidity, investment slows. Hiring slows. Growth slows.

And because SMEs collectively underpin large parts of the Australian economy, those pressures eventually extend well beyond the business sector itself.

 

The Need for Early Planning

Whether these reforms ultimately proceed in their current form or evolve through consultation, one thing is already clear: business owners should begin assessing their structures now.

Waiting until 2027 or 2028 to evaluate the impact may leave businesses with fewer options and less flexibility.

The businesses that navigate this transition successfully will likely be those that model scenarios early, seek strategic advice and make deliberate long-term decisions rather than reactive ones.

For many Australian SMEs, the trust reforms are not just a tax issue.

They may become a defining structural challenge for the next decade of small business.