Restructuring out of a discretionary trust: tax, stamp duty and what it means for your loans

This article explains what is proposed, why restructuring raises stamp duty and lending questions, and what business owners and investors should start thinking about now. It's general information, not tax advice.

What is proposed

The federal government's draft legislation would introduce a 30% minimum tax on the net income of discretionary trusts, for income years starting on or after 1 July 2028.

The minimum tax wouldn't apply to some entities and arrangements, including fixed trusts, widely held trusts, attribution managed investment trusts, complying superannuation funds, charitable trusts and certain types of income.

The draft legislation also includes relief to help small businesses and others restructure from discretionary trusts into alternative structures, such as companies or fixed trusts.

Some discretionary trusts may be able to opt out of the minimum tax by making an election that nominates the beneficiaries who will receive trust income and capital.

The proposal isn't law yet. Its design, including where the line falls between a discretionary trust and a fixed trust, is still being worked out.

Why it matters to so many businesses

Family trusts are widely used by small businesses, including in construction. The Housing Industry Association says 60% of its members operate through family trusts, and it has criticised the proposal as a new tax on tradies, builders and small family businesses.

The stamp duty problem

Federal relief can address income tax and capital gains tax on a restructure. Stamp duty, however, is a state tax. Moving business assets from one structure to another can trigger stamp duty, which the states collect. For a business or investor holding property in a trust, transferring that property into a new company or fixed trust could mean a significant stamp duty bill.

In Victoria, Labor has pledged that, if re-elected, it would waive stamp duty for three years for businesses restructuring out of discretionary trusts because of the federal reforms. The waiver would apply to businesses already eligible for Commonwealth rollover relief and would need new legislation. That's an election promise, not current law. See Victoria's election: what the land tax and property tax promises mean.

What restructuring means for your loans

If a trust owns property with a mortgage over it, restructuring is also a lending matter.

1. Lender consent is usually required

Transferring a mortgaged property to a new entity normally needs the lender's consent. Many loan agreements treat a change of ownership or control as an event that requires approval, or even as a default.

2. A new borrower may mean a new loan

If the property moves to a new company or fixed trust, the existing loan may need to be refinanced into the new entity's name. That can mean a new credit assessment, a fresh valuation and new guarantees.

3. Valuations may be lower than expected

With property values falling, a restructure that triggers a revaluation may show less equity than the owner expected, which affects how much can be refinanced. See Home values fall at the fastest pace in 40 years.

4. Timing matters

The proposed start date of 1 July 2028 seems a long way off. But restructures take time, and many businesses may try to restructure at once. Lenders, valuers and advisers may become busy closer to the deadline.

5. Costs need funding

Restructures involve legal, accounting and possibly stamp duty costs. Some businesses may need funding to cover them, or to bridge the period between transferring assets and finalising new facilities. See Bridging finance explained.

Practical steps now

• Get specialist advice. Ask your accountant whether your trust would be affected, whether an election to opt out could suit you, or whether restructuring makes sense.
• Map your property and debts. List which properties are held in the trust, which lenders hold security and what each loan agreement says about transfers.
• Talk to your lenders early. Find out what consent or refinancing a restructure would require.
• Watch the state rules. Stamp duty treatment depends on the state and could change, including after the Victorian election.
• Don't rush. The proposal isn't law, and its final design may differ.

For brokers

Clients with trust structures, especially builders, family businesses and property investors, may need refinancing or restructuring support over the next two years. Brokers can help by identifying affected clients early and coordinating with their accountants.

The Funding Door view

Restructuring a trust is first a tax and legal decision, but the funding consequences shouldn't be an afterthought. Business owners and investors who plan early, understand their loan terms and line up funding before the deadline will be better placed to restructure on their own terms.