In the upcoming federal budget, all eyes are on capital gains tax (CGT), but Labor’s rumored tweaks to family trusts might also help fight tax inequality, writes Greg Jericho. If Albanese’s budget can tame discretionary trust tax dodging, it will be a good step in ensuring the rich are treated the same as the rest of us.
When it comes to how wealth and high income is taxed in Australia, it is not hard to agree with F Scott Fitzgerald’s line that “the rich are different from you and me.” The difference between the rich and the rest is abundantly clear when you look at how most people make money. Whereas most of us earn income from salary and wages, those who earn $1 million or more a year generate most of their income through capital gains, dividends, partnerships, and trusts.
Unsurprisingly, the way millionaires make money makes it much easier to avoid tax—whether through the current 50% capital gains tax (CGT) discount or the complex tax arrangements of trusts. But the government finally seems ready to address the gross inequality in the tax system. As I wrote two weeks ago, the strong rumor is that the CGT 50% discount will be abolished and replaced with the pre-1999 system of only taxing real gain. However, one other significant move that looks set to occur is curtailing the rampant use of family discretionary trusts to limit tax.
How Discretionary Family Trusts Work
Discretionary family trusts are tax vehicles used to split up income among everyone in the trust, thereby reducing the overall tax paid. They are different from non-discretionary trusts where the benefits are defined, such as those set up in wills. Discretionary family trusts allow people to divide income among those within the trust in any way they like. This reduces tax because under progressive income taxation, less tax can be paid—for example, if you split $400,000 between four people, you get four goes at the tax-free threshold, four lots of the low-income tax offset, and four lots of income up to $45,000 being taxed at marginal rates of 16%. In this example, you can reduce your tax bill by nearly $63,000—a 43% cut.
Growth and Prevalence of Trusts
Discretionary trusts are not something most people have any use for; they are not applicable for people who only earn wages—but they are a huge deal among the wealthy. Consider Hudson Financial Planning’s list of “The nine most effective tax minimisation strategies for wealthy Australians in 2025.” No. 1 is “family trusts with corporate beneficiaries.” Or an article in the AFR that asks the vital question of “How to stop your kids and grandkids being taxed like CEOs?” An answer is “use a family trust.” Their use has grown significantly over the past couple of decades, from 328,725 in 1990-91 to 1.02 million in 2022-23. The big growth occurred in the early 2000s, perhaps not coincidentally alongside the big increase in capital gains after the Howard government introduced the CGT 50% discount. In 2000-01, there were 3.3 discretionary trusts per 100 taxpayers. Now it is up to 5.1.
The problem of people using trusts to reduce their tax is not new, nor is it small. My colleague at the Australia Institute, David Richardson, has calculated that the annual income generated through trusts is now around $600 billion—or equivalent to a touch under a quarter of Australia’s GDP. Back in 2019, the ATO conservatively estimated that the manipulation of trust and tax laws was costing the government between $672 million and $1.2 billion a year in lost tax revenue. And the richest get the most benefit. While the average salary of a person earning more than $1 million a year is around 10 times that of someone earning $60,000 to $100,000, the average income from trusts for millionaires is 50 times greater.
Government Proposal and Reactions
The government is rumored to be bringing in a 30% minimum tax rate for income in discretionary trusts. This would greatly reduce the benefit of using them to avoid tax. Farmers always get antsy about talk of trusts because aside from minimizing tax, families use them to prevent the breakup of farms across generations. But the ATO actually differentiates between trusts for primary production and those for non-primary production (i.e., investments), so this political issue would be pretty easy to solve. Unsurprisingly, conservatives are circling the wagons. A former Howard government advisor argues in the AFR that it would be all too complex to do and that absurdly it would only raise “$100 million or $200 million.” That is rather lower than the ATO’s 2019 estimate of $672 million to $1.2 billion. It’s also lower than what Hudson Financial Planning advises can be saved. They suggest “high-net-worth individuals save an average of $145,000 annually using family trusts.” In 2022-23, 14,694 people who earned over $1 million had trust income. Were they to get that average, we are talking $2.1 billion alone from them—enough to nearly double the funding for TAFE.
Next week’s budget will no doubt disappoint many for not doing enough. But if the government does introduce a minimum tax rate for trusts, it will at least finally bring some equity to the system and ensure how the rich are taxed is not so different from you and me.
