Budget Reform Projected to Have Significant Impact on Philanthropic Giving

21 May Budget Reform Projected to Have Significant Impact on Philanthropic Giving

Summary

The changes to the taxation of discretionary trusts proposed in the 2026-27 Federal Budget Papers are likely to have a significant adverse effect on charitable giving and philanthropic activity within Australia. The Government proposes to ‘introduce a 30 per cent minimum tax on discretionary trusts to improve the fairness of the tax system’.[1] Given the Australian Government has committed to doubling philanthropic giving by 2030, it is not known whether this impact on giving may be an inadvertent consequence of the proposed reform.[2] In this update we identify a simple solution to address the issue.

The Problem

The new tax on family discretionary trusts is ‘estimated to increase [tax] receipts by $4.5 billion over the five years from 2025-26.’[3] However, the Budget Papers do not identify the impact that the measure will have on philanthropic giving. As noted in the Budget materials, discretionary trust structures are commonly used by families that operate small businesses. These arrangements presently provide flexibility in the allocation of trust income, including the ability to distribute money to income tax exempt and charitable organisations prior to the imposition of tax. This means that the operators of discretionary trusts can effectively give more to the charitable and not-for-profit (‘NFP’) organisations they wish to support. This long-standing feature of the Australian tax system means that the amount that taxpayer beneficiaries would otherwise have paid in tax goes directly to the charity or NFP they wish to support.

Under the Government’s proposal, trustees would be taxed at 30% on trust income before distributions are made. This is likely both to reduce the incentive to make charitable distributions through discretionary trusts and to materially diminish the pool of funds available for philanthropic purposes. In practical terms, the amount available for distribution from discretionary trusts may be reduced by up to 30%. We do not know the amount of distributions that flow to charities and tax exempt NFPs through discretionary trusts, as trustees are not required to identify their trust’s exempt or charitable beneficiaries in their tax returns.

Who Will the Reform Impact?

We expect these changes would particularly affect charities that do not hold deductible gift recipient (‘DGR’) status. Those income tax exempt charities that will be impacted include the following:

• human rights organisations;
• charities whose activities are focused on prevention of disadvantage;
• social welfare charities engaging in advocacy to further a charitable purpose;
• charities advocating for policies they believe are necessary to achieve charitable ends, including to avert major global catastrophes;
• religious institutions;
• educational organisations;
• charities focused on the prevention of human injuries;
• charities focused on public interest journalism; and
• charities that pursue multiple purposes, including charities that support groups of people rather than a single activity (for example charities that support women, young people, consumers or Aboriginal and Torres Strait Islander people and communities).

In addition to these charities, it is expected that the reform will also impact upon charitable trusts that rely on discretionary trust distributions to fund future grants and charitable activities. In addition, various discretionary trusts also give to not-for-profit organisations that are not eligible to be charities, but are otherwise tax exempt pursuant to Division 50 of the Income Tax Assessment Act 1997 (‘ITAA’). These entities include:

• Community service organisations
• Cultural organisations
• Educational organisations
• Health organisations
• Employment organisations
• Resource development organisations
• Scientific organisations
• Sporting organisations.

What is the Solution?

Leaving aside the option of withdrawing the reform, one way to address the loss in charitable giving is to enable charities and tax exempt NFPs to claim the tax remitted by family trusts as a refundable tax offset. This, however, would increase red tape for charities and NFP entities, requiring them to identify payments made from discretionary trusts and then claim the tax offset on a new government form. This offset mechanism may also be of limited benefit to charities and NFP entities, as many charities are not aware whether a donation is from a discretionary trust, as such trusts are not required to be named as a ‘trust’ in their bank records.

The simpler means to ensure that the reform does not cause charities and NFPs to incur the projected shortfalls in giving is to provide in the amending legislation that payments made by discretionary trusts to charities or income tax exempt NFP entities are not subject to the new 30% tax on trust income. Operationally, this would have the minimal impact of requiring trustees to identify distributions being made to charities or income tax exempt entities in their ongoing trust tax returns.

[1] Commonwealth of Australia Budget 2026-27 Budget Measures, Budget Paper No. 2 (12 May 2026) 22.

[2] Andrew Leigh, ‘Labor to double philanthropic giving by 2030’ Media Release (07 April 2022) https://www.andrewleigh.com/labor_to_double_philanthropic_giving_by_2030_media_release

[3] Commonwealth of Australia (n 1).