From 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee. Corporate beneficiaries will be assessed on trust income but will be unable to claim a credit for the tax payable by the trustee.
For decades, family discretionary trusts have been one of the most common business structures used by Australian franchisees. From cafés and gyms to real estate agencies, retail stores and service businesses, the “mum and dad” franchise operator has overwhelmingly relied on trusts as a practical and legitimate way to operate a small business.
Any significant reform to the taxation of trusts therefore has the potential to reshape not only tax outcomes, but the commercial viability of thousands of franchise businesses across Australia.
While trust reform is often framed as a measure aimed at “wealthy taxpayers” or “tax minimisation”, the practical reality is that many franchisees are not large corporates or high-net-worth families. They are ordinary small business operators managing rising wages, rent pressures, franchisor compliance costs and tightening margins.
Why Family Trusts Became the Preferred Franchise Structure
There are several reasons why discretionary trusts became the dominant structure in franchising:
- asset protection;
- flexibility in income distribution;
- succession planning;
- ease of introducing family members into the business;
- separation of trading risk from personal assets; and
- lender and franchisor familiarity with the structure.
Trust structures in the franchise sector are regarded as standard commercial practice. This means any changes to trust taxation do not affect a niche subset of taxpayers. They directly affect the operational structure of a significant proportion of Australia’s franchise network.
The Franchisee Reality: Small Business, Not Tax Arbitrage
Public debate about discretionary trusts often overlooks the economic profile of franchisees.
Most franchisees are:
- owner-operators;
- employing fewer than 20 staff;
- carrying significant personal guarantees;
- reliant on family labour; and
- operating with relatively modest net margins.
Unlike large corporations, franchisees generally cannot absorb sudden tax increases through scale efficiencies or offshore structuring. Increased tax burdens are usually passed on through:
- reduced staffing;
- delayed expansion;
- increased consumer prices; or
- reduced household income for the family operating the business.
For many franchisees, trust distributions are not sophisticated tax engineering. They are simply a mechanism to balance fluctuating business income across household members that work in the franchise business.
The Compounding Effect of Existing Franchise Pressures
The timing of any trust tax reform is particularly significant because franchisees are already facing sustained economic pressure.
Across the sector, operators are dealing with:
- increased award wages and superannuation obligations;
- higher interest rates;
- rising occupancy costs;
- rising electricity costs
- insurance premium increases;
- supply chain volatility; and
- growing regulatory compliance obligations under the Franchising Code of Conduct.
Many franchise systems are also experiencing margin compression due to fixed royalty models that do not adequately account for increased operating expenses.
Against that backdrop, additional tax imposts on trust distributions may disproportionately affect business sustainability at the franchisee level.
Potential Consequences for the Franchise Sector
If trust taxation becomes materially less favourable, several broader consequences may emerge.
1. Reduced Investment in Franchising: Prospective franchisees may become less willing to invest capital into franchise businesses. This is.
2. Restructuring Costs: Many franchisees may be forced to consider restructuring into companies or alternative entities. That process can trigger:
- legal costs;
- stamp duty issues;
- capital gains tax;
- lender consent requirements; and
- franchisor and landlord approval processes.
For franchise systems with hundreds of operators, the aggregate compliance burden and cost could be substantial.
3. Increased Franchisee Insolvency Risk: Where operators are already highly leveraged, additional tax liabilities may materially impact cash flow. Franchise businesses often fail gradually rather than suddenly — reduced staffing, deferred maintenance, poor customer experience and mounting debt can all precede formal insolvency.
4. Flow-On Effects to Franchisors: The impact would not stop at the franchisee level.
Franchisors rely on stable franchise networks for:
- royalty revenue;
- brand expansion;
- supplier negotiations; and
- network reputation.
Financial distress among franchisees ultimately affects the health of the franchise system itself.
The Need for Policy Precision
None of this suggests trusts should be immune from scrutiny or reform. However, any changes need to consider ordinary small business structuring and whether it was intended that the reforms capture family-operated franchise businesses.
If reform proceeds, consideration should be given to:
- carve-outs for small business;
- transitional relief measures;
- restructuring concessions; and
- alignment with existing small business CGT and asset protection regimes.
Without careful drafting, reforms aimed at improving tax integrity may instead increase instability across one of Australia’s largest small business sectors.
The franchise sector occupies a unique position in the Australian economy. It combines national brands with local family ownership.
That model has long depended on discretionary trust structures as a practical business vehicle for small operators.
Any substantial changes to trust taxation therefore cannot be viewed purely through a revenue or integrity lens. They must also be assessed through the realities of small business economics, employment, investment confidence and the long-term sustainability of Australia’s franchise networks.
When should franchisees seek legal advice?
- considering restructuring your trust into a company or alternative entity;
- buying or selling a franchise business held in a trust;
- planning succession, bringing family members into the business, or exiting;
- renewing a franchise agreement or lease where the entity may need to change;
- refinancing where lenders may require structural changes; or
- distributing trust income in a way that may attract ATO scrutiny under existing section 100A guidance.
Not sure if your structure is still right for you?
Trust tax reform may not be finalised, but the cost of acting on assumptions — or waiting too long — can be significant.
If you would like a clear view of your options before making any changes, our Franchise Lawyers can review your current structure, identify the risks specific to your situation, and help you plan with confidence.
Get in touch to arrange an initial consultation.
Key takeaways
- Discretionary trusts underpin the structure of thousands of Australian franchise businesses, not just high-net-worth taxpayers.
- Proposed reforms to trust taxation could trigger costly restructuring, CGT events, and lender or franchisor consent requirements.
- Most franchisees are small operators already absorbing wage, rent, and compliance pressures — additional tax imposts may push marginal businesses into distress.
- Franchisors are not insulated: network instability flows directly to royalty revenue and brand strength.
- Franchisees considering restructuring, succession, or new investment should obtain legal and tax advice before any reform commences.
Frequently asked questions
Will trust tax reform definitely affect my franchise business?
It depends on the final form of any legislation. Current public discussion focuses on integrity measures, but the practical effect on family-operated franchises remains unclear. Franchisees relying on discretionary trusts should monitor developments and consider obtaining advice before restructuring.
Should I move my franchise out of a family trust now?
Not without advice. Restructuring can trigger capital gains tax, stamp duty, lender consent issues, and franchisor approval requirements. The cost of acting prematurely may exceed the risk of waiting.
Are small business franchisees likely to receive carve-outs?
Carve-outs and transitional relief have been suggested in policy commentary but are not guaranteed. Until reform is finalised, franchisees should plan for multiple scenarios rather than assume small business relief will apply.
