A tax-free threshold is not a loophole. For many families, a trust is a necessary protection.
Across three separate issues – vulnerable beneficiaries, the mechanics of the offset itself and its effect on middle- and higher-income family businesses – the same underlying problem keeps surfacing: because the minimum tax offset is non-refundable, it is regularly not usable in full. Below, I bring those three issues together to show how consistently that problem appears, across very different beneficiary circumstances and income levels.
Vulnerable beneficiaries subject to higher taxes
The consultation paper contemplates exclusions for vulnerable minors and special disability trusts.
Those exclusions are welcome.
But they leave major gaps.
An adult does not stop being vulnerable merely because they turn 18. Many people with permanent disability will not be within a special disability trust. Nor will every person temporarily be unable to work due to illness, caring responsibilities or parental leave.
Under the proposed framework, a distribution to a beneficiary with no other income may be subject to 30% trustee tax even though that person would currently pay little or no personal income tax.
The offset does not solve the problem if it is non-refundable.
Examples may include:
- A spouse taking time out of paid work to care for children.
- An adult beneficiary with a disability outside the special disability trust regime.
- A beneficiary recovering from illness or injury.
- A young adult at university.
- A person with tax losses.
- A beneficiary below the tax-free threshold.
There is also a broader question of coherence.
If other minimum-tax proposals recognise the need to protect income-support recipients and low-income individuals, the same policy logic should be considered here.
Child maintenance trusts warrant separate attention as well. Their income already receives specialised treatment under the tax law, yet they do not appear to receive equivalent protection.
Tax integrity measures should be calibrated to artificial arrangements, not built on an assumption that every lower-income family beneficiary is part of a tax problem.
The vulnerable-beneficiary cases above are really a specific instance of a broader mechanical problem in the offset itself — one that, as the next section shows, is not limited to vulnerable or low-income circumstances at all.
A 30% rate is not always 30%
The most important feature of the proposal may be the one most easily overlooked: the offset is non-refundable.
At first glance, the proposed regime may appear relatively straightforward.
The trustee pays 30% tax. A beneficiary receives a minimum tax offset. If the beneficiary’s own tax rate exceeds 30%, they pay any additional amount.
But that explanation is incomplete.
Whether a beneficiary can actually use the offset depends on their total personal income-tax liability. The relevant issue is therefore not their marginal tax rate.
It is their average tax rate.
That distinction is critical.
A beneficiary may be in a 30% marginal tax bracket and still be unable to use a substantial part of the trustee-paid tax offset. The tax-free threshold and lower marginal-rate brackets mean their total income-tax liability is materially less than 30% of their income.
On the current modelling, a beneficiary needs taxable income of approximately $229,320 before their average income-tax rate reaches 30% and the offset can be fully utilised.
Until then, some of the offset is lost.
That creates a result which is difficult to characterise as proportionate or arrangements that only affect streaming of income to low income taxpayers.
A beneficiary receiving $45,000 or even $135,000 of trust income may have a marginal rate of 30%, yet still lose a significant amount of the offset because their actual tax payable remains below 30% of their income.
The apparent “30% minimum tax” is then not a 30% tax at all.
It is a higher effective tax burden because part of the credit attached to the distribution cannot be used, refunded or carried forward.
This is inherently regressive.
The taxpayers most affected are not necessarily those with the highest incomes or the most sophisticated arrangements. They may be beneficiaries in middle-income ranges – the very people whose average tax rate is below 30% notwithstanding that their marginal rate has reached that level.
By contrast, a beneficiary with income above the point at which their average rate reaches 30% can use the offset in full.
The proposal imposes its harshest practical burden on people below that threshold, not above it.
The examples above — beneficiaries on $45,000 or $135,000 of trust income — show this problem at lower income levels. The next example shows the same mechanism playing out for a family business at the very top of the income scale, where two adult beneficiaries are each close to, but still below, the point at which the offset can be used in full.
Higher incomes don’t guarantee the full offset
The section above considered why beneficiaries may not be able to use the full minimum tax offset. The problem does not end there.
Even where beneficiaries have relatively high incomes, the proposed minimum tax offset may not be fully usable.
The reason remains the same: a beneficiary’s ability to use the offset depends on their overall income-tax liability—not simply the marginal rate that applies to their next dollar of income.
Consider a family business conducted through a discretionary trust with net income of $380,000.
Assume it is distributed equally between two adult beneficiaries, each receiving $190,000.
At that level, each beneficiary is at the threshold for the highest marginal rate. Income above $190,000 attracts the 45% marginal rate – 47% including Medicare levy.
Yet, even at that level, the proposed offset cannot be fully used.
Under the proposed 2027–28 rates, each beneficiary’s income-tax liability on $190,000 would be approximately $51,638 before Medicare levy. Their combined income-tax liability would be approximately $103,276.
Under the proposed minimum-tax regime:
- The trustee pays 30% of $380,000: $114,000.
- Each beneficiary receives a $57,000 minimum tax offset.
- Each beneficiary can use only approximately $51,638 of that offset.
- More than $5,300 of offset is lost for each beneficiary.
- The family group therefore pays approximately $10,724 more income tax than if the same income were derived personally by the two individuals or through a company with refundable franking credits.
The Medicare levy does not solve this problem. The proposed offset is applied against income-tax liability, not the Medicare levy.
That outcome is difficult to reconcile when compared with the treatment of company profits.
A company paying tax may distribute franked dividends. The shareholder includes the dividend and attached franking credit in assessable income but receives credit for company tax already paid. If the credit exceeds the shareholder’s final tax liability, it may generally be refundable.
The proposed trust offset operates differently. Any unused amount is simply lost.
This is not just a question of whether a trust should produce a tax benefit. It is a question of whether income derived through a trust should bear more tax than the same income derived personally or through a company subject to the imputation system.
The arrangements most likely to be described as income splitting may not bear the heaviest practical cost.
The clients most exposed may instead be family businesses using trusts in the ordinary way—distributing income between working spouses or adult family members who have real roles in the family enterprise.
The offset problem, side by side
The examples above span very different circumstances — a vulnerable beneficiary with no other income, a beneficiary on a modest income, and a family business distributing income to two adult beneficiaries near the top marginal bracket. Set side by side, they show how consistently the non-refundable offset falls short:
| Beneficiary scenario | Trust income involved | What happens to the offset |
| Beneficiary with no other income (e.g. carer, student, person recovering from illness) | Any amount | May be subject to 30% trustee tax despite little or no personal tax liability. |
| Beneficiary on $45,000 or $135,000 of trust income | $45,000–$135,000 | Marginal rate may be 30%, but a significant amount of the offset is still lost |
| Two adult beneficiaries in a family business, $190,000 each | $380,000 total | Each loses more than $5,300 of a $57,000 offset — over $10,724 extra tax for the family group |
| Beneficiary above ~$229,320 taxable income | $229,320+ | Offset can be used in full — no loss |
Key takeaways:
- The offset is non-refundable — what matters is a beneficiary’s average tax rate, not their marginal rate.
- A beneficiary needs taxable income of approximately $229,320 before the offset can be used in full. Below that, some of it is lost.
- This affects a wide range of beneficiaries — from those with no other income, to those on $45,000–$135,000, to family businesses distributing $190,000 each to two adult beneficiaries.
- Unlike franking credits, which are generally refundable, any unused portion of the trust offset is simply lost.
- The people most exposed are not necessarily the wealthiest or the most aggressive planners — they may be ordinary family businesses and vulnerable beneficiaries alike.
