Small businesses across Australia are facing a significant financial burden under proposed changes to trust taxation in the Federal Budget 2026, according to tax experts. The overhaul, announced by the government, aims to tighten rules around trust distributions, but experts warn it could lead to enormous tax costs for many small enterprises.
Trust tax changes spark concern
The new measures are designed to prevent high-income earners from using trusts to reduce their tax liabilities. However, tax specialists argue that the changes will disproportionately affect small business owners who rely on trusts for legitimate business purposes. The proposed rules would limit the ability to distribute income to family members on lower tax brackets, effectively increasing the tax payable by the business.
Impact on small business owners
John Smith, a tax partner at a leading accounting firm, said the overhaul could force many small businesses to restructure their operations or even close. "The changes are broad and will capture many small businesses that are not the target of the reforms," he said. "The compliance costs alone will be substantial, and the additional tax burden could be crippling."
Small business owners are particularly concerned about the retrospective nature of some provisions, which could apply to existing trust structures. Many are calling for a transition period to allow them to adjust their affairs.
Government defends reforms
Treasurer Jim Chalmers defended the reforms, stating they are necessary to ensure fairness in the tax system. "We are closing loopholes that allow the wealthiest to avoid paying their fair share," he said. "The vast majority of small businesses will not be affected."
However, experts dispute this, noting that many small businesses use trusts for asset protection and estate planning, not tax avoidance. The Australian Small Business and Family Enterprise Ombudsman has called for a review of the impact on family businesses.
What the changes mean
Under the new rules, trusts will be required to distribute income to beneficiaries at a rate that reflects their actual entitlement, rather than streaming income to minimise tax. This will effectively increase the tax paid by the trust entity in many cases. The changes are expected to raise billions in additional revenue over the forward estimates.
Small business groups are lobbying for amendments to exclude genuine small business trusts from the new rules. They argue that without changes, many small businesses will be forced to sell assets or close, leading to job losses and economic damage.
