Impact of Proposed Trust Tax Changes: Why Community Organisations Are Concerned
The Federal Government has proposed the introduction of a 30% minimum tax on discretionary trust income, to commence from 1 July 2028.
Under the proposed model, the tax paid at the trust level would effectively be final, even where the beneficiary would otherwise pay little or no tax.
The proposed changes have significant unintended consequences to community organisations.
Impact on Income Tax Exempt Entities
Income tax exempt entities that are not Deductible Gift Recipients (DGR) form a critical part of Australia’s social and community landscape. This includes charities, churches, religious organisations, schools, and not-for-profit organisations delivering services across the country.
Many of these entities rely on discretionary trust distributions as an important source of funding.
Under the proposed changes, that funding would be directly affected.
Because the proposed tax is applied at the trust level and is non-refundable, distributions made to tax-exempt entities would effectively be reduced by 30% before they are received. In some cases, these distributions will cease entirely due to the need to restructure because of the reform.
Even though these entities are exempt from income tax, they would bear the economic cost of the tax.
In practical terms, this means that money intended to support community services is instead diverted away from those organisations.
A Real-World Effect
To illustrate the impact, consider a community organisation currently receiving $100,000 per year from a discretionary trust.
Under the proposed rules, that amount would reduce to $70,000.
The $30,000 difference is not theoretical, it represents:
fewer services delivered
reduced support for vulnerable groups
difficult decisions about staffing and programs
For many organisations, particularly those operating on tight margins or in regional areas, this reduction is material and potentially unsustainable.
Magnitude of the Impact
There are approximately 35,000 registered charities in Australia that do not have DGR status.*
While it is not yet clear how many of these organisations receive discretionary trust distributions, the potential impact is significant.
We estimate that at least 25% of income for income tax exempt entities we work with comes from trust distributions. A 30% tax on this would directly reduce their income by at least 7.5%.
Why This Matters
Tax exempt entities are not peripheral; they are central to the functioning of Australian society.
They provide essential services across health, education, welfare, and community development. They support vulnerable Australians, strengthen communities, and contribute to social cohesion. Importantly, they often operate where government services are limited or absent.
A reduction in funding does not sit in isolation. It flows through to real outcomes:
fewer programs and services
increased pressure on government systems
reduced support for those most in need
job losses within the not-for-profit sector
Over time, this risks weakening the very fabric of the communities these organisations support.
Policy Tension
There is a clear tension in the proposed approach.
Income tax exemption is intended to support organisations that deliver community or public benefit, including charities and other not-for-profit entities. However, under the proposed rules, they would effectively face a tax burden indirectly through reduced funding from trust distributions.
While the policy may be directed at broader concerns around trust taxation, its current design captures outcomes that extend beyond that objective. In doing so, it risks undermining the very principles that underpin their income tax exemption.
A Practical Solution
There is a straightforward way to address this issue without disrupting the broader policy.
Trust income distributed to income tax exempt entities should be excluded from the 30% minimum tax.
This targeted carve-out would:
preserve funding for income tax exempt organisations
maintain alignment with the purpose of their income tax exemption
allow the broader reform to operate as intended in other contexts.
Importantly, such an approach would not introduce integrity concerns. Existing anti-avoidance provisions, including sections 100AA and 100AB of the Income Tax Assessment Act 1936, already operate to prevent inappropriate arrangements involving exempt entities.
Recommended Position
The proposed 30% minimum tax on discretionary trusts should not apply to trust distributions made to income tax exempt entities, as it would significantly reduce funding to organisations that deliver essential services to the Australian community.
How you can help
You can support this advocacy by:
Writing to your local Federal MP or relevant Ministers (Download the template here)
Informing your members and supporters about the proposed changes
Encouraging other community organisations to make submissions
Raising awareness through newsletters, media, or social media
Sharing real examples of how reduced funding would affect your organisation
Providing an endorsement to our submission by emailing us directly (here).
About us
Mission Advisory is a leading national accounting and advisory firm. We are passionate about supporting effective stewardship, generosity, and sustainable charitable outcomes across Australia.
If you would like to discuss the proposed changes or collaborate on advocacy efforts, please contact us.
*ACNC Annual Report 2024-25 indicates there are 64,000 registered charities in Australia. Treasury indicates that 29,000 entities have DGR status: Deductible gift recipient status – specific listing | Treasury.gov.au
This article is based on Budget announcements and factsheets. No draft legislation or explanatory materials were available at the time of writing.