21 Oct Mark Fowler’s Op-ed for The Australian Financial Review on Discretionary Trust Reform
In its quest to legislate a 30 per cent tax on discretionary trusts the Commonwealth Government now proposes that ‘all distributions from trusts to registered charities and deductible gift recipients will be excluded from the minimum tax.’ This is a welcome response to significant concerns raised by the charity sector. Businesses that remain within a discretionary trust structure will thus retain the ability to distribute pre-tax dollars to charities at their current levels.
I estimate that $1.333 billion in cash donations to charities could be lost over the first five years if the Australian Greens’ opposition to the exemption prevails in the Senate. This opposition is difficult to reconcile with the interests of the Greens’ own supporters, many of whom contribute to environmental and human rights charities.
However, even if the Greens were to support the legislation, it would retain several impediments that could significantly undermine the Government’s stated intent ‘to ensure there is no disincentive for these distributions to continue’.
Most troubling is the prospect that, to avoid the higher tax rate of 30% and the associated non-refundable tax credit regime, many business owners will move to other structures that do not enjoy the same charity exemption, significantly diminishing their current philanthropic capacities. To that extent, the charity exemption would be but a pyrrhic victory. For these owners, the legislation offers two alternatives.
First, a trust will be exempt from the 30% tax where the beneficiaries’ entitlements under the discretionary trust are fixed. For those taking this option, the legislation now permits tax-free payments to charities and DGRs, a further welcome move. However, while the fixed trust can vary the charities and DGRs to which it gives from year to year, the election regime locks in the annual proportion that must be given for the life of the trust. This means a business owner would be precluded from issuing additional one-off tax-free distributions to charities in response to crises, or from varying their giving commensurate with the performance of their business. The latter may prove a significant restraint on giving, with cautious owners opting for a lower fixed proportion to account for the prospect of lean years.
There is no identifiable policy rationale for withdrawing the discretion currently available to philanthropists. An elegant solution would be to permit discretionary trusts to convert to a hybrid trust structure that retains the discretion to vary distributions to charities, while allocating the owner’s share according to the predetermined entitlements.
The second option is to migrate to a company to take advantage of the lower 25% tax rate and associated refundable tax credit regime, for which rollover the Government offers CGT relief. Those not affected by State duty concerns (which are significant) are likely to prefer this option, as it avoids the novelty of fixing entitlements and offers greater tax advantages and flexibility for family planning over time.
If a business restructures as a company, assigning shares to a discretionary trust would maintain philanthropy at commensurate levels. The Government intends that tax-free distributions and refundable franking credits (necessary because charities have no tax liability) will be passed through trust shareholders to charitable beneficiaries. Like the fixed election regime, this would permit the discretion to include new charities, but would fix the amount that must be given according to the trust’s shareholding.
However, the gadfly: rollover relief is denied where a company retains a discretionary component for the payment of dividends. This appears contrary to the Government’s intent to preserve existing philanthropy. Although a possible oversight in the drafting of the legislation, effectively the Government giveth with one hand, but taketh away with the other.
Australian civic life depends on thousands of comparatively modest contributions from small and family businesses—to sporting clubs, cultural organisations, community and religious groups and other grassroots institutions.
It is now widely recognised that the twentieth-century welfare state, by displacing much of civil society’s former role, weakened local associational life and helped drive the decline of civic engagement across the West. Alexis de Tocqueville, the nineteenth-century proto-sociologist, anticipated this danger when he warned that the democratic “tutelary” state would ultimately come “to the side of each one of his subjects in order to rule over him and lead him.” Absent the thick associational bonds necessary to sustain civil society in such an expanded state, “tyranny will necessarily grow with equality.”
Rather than accelerate this process of civic atrophy, the Government should grandfather existing trusts and apply the reforms only to new trusts. Even were the above issues to be addressed, the reform’s administrative burden, transaction costs and tax implications mean that this is the only certain path to preserving existing philanthropy. Australia should pursue tax reforms that unleash our civic potential, not fetter it.
Dr Mark Fowler
The foregoing appeared as an opinion piece in The Australian Financial Review, 20 October 2026.
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