Is Labor quietly trying to kill off family trusts?

There’s an old saying that the easiest tax to sell is one that only applies to “wealthy people.”

Most Australians won’t complain too loudly if Canberra says it is closing a loophole used by high-income families, business owners or investors.

But history shows that when governments start tinkering with the rules around wealth, tax and family structures, the impact rarely stops with the people they say they’re targeting.

And that’s what worries me about Labor’s latest move on family trusts.

A fairness argument that will appeal to many voters.

On the surface, this is being framed as a fairness measure.

The argument is simple enough: wealthy families have been using discretionary trusts and related companies to split income, smooth tax bills and keep money inside the family group, while ordinary salary earners do not have access to the same tools.

That line will probably play well politically.

After all, most wage earners can’t choose whether their income is paid to themselves, their spouse, their adult children, a trust or a company.

Their employer pays them, PAYG tax is withheld, and the ATO knows exactly where every dollar went.

But family trusts are different.

They’ve long been used by business owners, farming families, professionals and investors as part of sensible asset protection, estate planning and tax management strategies.

And now Labor appears to be taking aim at one of the reasons these structures have worked so effectively - the so-called “bucket company.”

Labor’s 2026 budget papers reveal a plan to impose a minimum effective tax rate of 51 per cent on distributions from discretionary trusts to corporate beneficiaries, commonly known as bucket companies with many recipients actually seeing a 62.9% tax applied on the initial income.

The change is set to make these structures highly tax inefficient from 1 July 2028, with a three-year restructuring window starting from 1 July 2027. The Federal Government has however not told you that you may need to pay stamp duty to the State Government.

Now, before your eyes glaze over because this sounds like one of those technical tax issues best left to accountants, let me explain why this matters.

What is a bucket company?

A bucket company is simply a company that sits within a family group and receives income from a trust.

Let’s say a family trust earns income from a business, investments or other assets. Rather than distributing all that income to individuals who may already be on the top marginal tax rate, the trust can distribute some of it to a company.

Existing legislation required any income from personal excursion to be paid out so the benefit was on business income. This effectively meant a PAYG earner was not treated differently to a business owner who had to pay themselves an arm’s length commercial income i.e. for their personal exertion.

That company then pays tax at the corporate tax rate, generally 30 per cent, and the money can remain within the family structure to be reinvested, saved or used later.

This allowed taxpayers to temporarily park unneeded funds at the corporate tax rate until needed at which time the individual would pay the normal tax.

In good years, this has helped families smooth their tax position.

In leaner years, the company could pay franked dividends back to family members, who then receive credit for the tax already paid.

This is not some obscure trick used only by billionaires with offshore structures.

It is a mainstream planning tool used by many Australian family businesses, medical practices, professional firms, farming groups, property investors and intergenerational wealth structures where non personal exertion income is derived.

The politics of “wealthy people.”

And that’s where I think the political language around this becomes dangerous.

When politicians talk about “wealthy people using family trusts,” many Australians picture private jets, yachts and people hiding money from the tax office.

But in reality, many of these structures are used by families who have taken risks, built businesses, employed people, bought assets, paid accountants and lawyers, and tried to legally organise their affairs in a way that protects wealth and allows it to be passed on sensibly.

That doesn’t mean every trust arrangement is perfect. Of course, there are always people who push things too far, and the tax system needs rules to stop abuse.

But there’s a big difference between closing genuine loopholes and making legitimate long-term structures so unattractive that families are effectively forced to unwind them.

And that seems to be what is happening here.

How the new tax treatment could work.

The new proposal appears to work by imposing a 30 per cent minimum tax at the trust level before money is distributed to the bucket company.

Then, when the bucket company receives the income, it pays company tax again.

Let’s look at an example where $100 earned by a trust would first be reduced by the 30 per cent trust tax, leaving $70 to go to the bucket company. The company would then pay 30 per cent tax on that $70, being $21.

That means $51 of tax has already been paid on the original $100, before the money has even reached an individual shareholder.

And if the company later pays that money out as a franked dividend to someone on the top marginal rate, there may be further top-up tax. There could then be an additional $11.90 tax paid by shareholder.

In some cases, the total tax could reportedly rise to around 63 per cent. That is extraordinary!

Australia has spent decades building a system where company tax and personal tax are meant to interact through franking credits so the same income is not unfairly taxed twice.

Yet this proposal risks creating precisely that kind of double taxation.

Salary earners and business owners are not the same.

Of course, the government’s argument is that these structures allow families to reduce tax in a way that ordinary workers cannot, and there is some truth in that.

A salary earner cannot split their wage with a spouse who is on a lower income. Nor can they send part of their annual income to a company and decide when to draw it out later.

But that comparison is also a little too convenient. Business owners and investors don’t live the same financial lives as salary earners.

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Their income can fluctuate dramatically from year to year. They take commercial risks. They borrow. They employ people. They sign leases. They face lawsuits, bad debts, downturns and regulatory changes.

They often leave money in their businesses because that is what allows them to grow, hire, invest and survive the next downturn.

So when Canberra says, in effect, “You have flexibility that wage earners don’t have, so we’re going to take it away,” it ignores the other side of the ledger.

Business owners and investors also carry risks that wage earners generally don’t.

And this is where I think we need a more mature conversation about fairness.

Fairness should not mean flattening every structure so everyone is treated as if they earn a weekly wage.

Fairness should mean taxing income sensibly, consistently and transparently, while still allowing families to protect assets, plan estates, reinvest profits and manage legitimate commercial risk.

Family trusts are about more than tax.

Family trusts have never been just about tax.

They are also about asset protection, succession planning, keeping family enterprises intact, dealing with blended families, protecting vulnerable beneficiaries, managing intergenerational wealth and ensuring assets are not easily lost through lawsuits, relationship breakdowns or poor financial decisions by the next generation.

If the government makes these structures unattractive through punitive tax treatment, families won’t simply shrug and pay more tax. They will restructure.

Some assets may move into companies. Some may move into superannuation where possible. Some may be transferred personally.

Some families may simplify their affairs, but others may end up with more complicated arrangements than before.

And that’s one of the great ironies of tax reform.

Governments often claim they are simplifying the system, but by targeting one structure too aggressively, they can create a whole new layer of complexity, advice costs and unintended consequences.

Rule changes damage confidence.

There’s another issue here that property investors and business owners should understand.

When rules change unexpectedly, confidence gets damaged.

People make long-term decisions based on the laws of the day.

They buy assets, build businesses, write wills, set up estate plans and structure investments on the assumption that the framework won’t be radically altered without careful consultation.

Yet when a government suddenly changes the tax treatment of long-established structures, it sends a message that the rules can be rewritten whenever the political mood changes.

That matters because wealth creation is a long game.

People don’t build substantial asset bases over one electoral cycle. They do it over decades.

And if investors, business owners and high-income professionals start to believe that any successful structure will eventually be politically targeted, they become more cautious.

Some will invest less. Some will hold more cash. Some will move capital elsewhere. Some will decide it’s all too hard and stop taking the risks that create jobs, housing, innovation and future tax revenue.

What families should do now?

Now, I’m not suggesting you should panic.

These measures still need detail, and anyone with a trust or bucket company should speak to a good accountant and lawyer before making any decisions.

There may also be restructuring opportunities during the proposed relief period.

But I do think this is a wake-up call.

For years, many families have assumed that their trust structures could just keep operating as they always have.

That assumption may no longer be safe.

If you have a family trust, a corporate beneficiary, investment assets inside a discretionary trust or an estate plan built around trust distributions, now is the time to review it.

Not in a rushed way. Not because of a headline. But because the direction of travel is clear.

Labor seems increasingly uncomfortable with structures that allow families to manage wealth outside the simpler PAYG tax model.

And while the first target may be bucket companies, I suspect this is part of a broader push toward more transparency, less flexibility and higher effective tax on private wealth.

My final thoughts

My concern is that, in trying to prevent a minority from gaining an unfair advantage, the government may end up punishing many productive families who have simply followed the rules.

Australia needs successful people.

We need business owners, investors, professionals and families willing to take risks, employ others, build assets and create wealth.

Yes, they should pay their fair share of tax.

But we should be very careful about defining “fair share” as whatever rate makes political sense in a budget year.

Because once governments start treating legitimate wealth structures as suspicious simply because not everyone uses them, we risk discouraging the very behaviour we should be encouraging - long-term thinking, responsibility, enterprise and intergenerational planning.

And that would be a much bigger problem than the one this policy is supposedly trying to solve.