Insights

The 2026–27 Federal Budget, handed down on 12 May, introduced a major structural change to the taxation of discretionary (family) trusts.

From 1 July 2028, discretionary trusts will be subject to a minimum tax rate of 30%, regardless of how income is distributed among beneficiaries. While the measure is framed as improving fairness in the tax system, it will have implications for family investment structures, professional practices, business owners and intergenerational planning. The changes are designed to reduce the benefit of distributing income to low income individuals and companies however there will be no change if your average or effective tax rate is above 30%.

Importantly, these changes are not yet law, but the policy intent and framework are now clearly articulated.

What has been announced?

The Government will introduce a 30% minimum tax on discretionary trusts, applying from 1 July 2028, with the tax payable at the trustee level.

In broad terms:

• The trustee will pay tax at 30% on the trust’s taxable income
• Trust income will still be allocated to beneficiaries, with discretion still of who receives the distribution
• Non-corporate beneficiaries (individuals) will receive a non-refundable tax credit for the tax paid by the trustee
• Any additional tax above 30% will still be paid by the beneficiary at their marginal rate
• Corporate beneficiaries will not receive credits, effectively removing the tax advantage of “bucket company” strategies

The Government estimates this measure will raise approximately $4.5 billion over five years. I suspect they will raise far less than this as there are strategies to reduce the impact and/or assets will move to other structures.

Which trusts are affected – and which are not?

In scope:

• Discretionary (family) trusts used for:
  • Business income
  • Investment portfolios
  • Professional practices
  • Asset-holding entities

Excluded from the minimum tax:

• Fixed trusts and widely held trusts
• Complying superannuation funds (including SMSFs)
• Deceased estates
• Special disability trusts
• Charitable trusts
• Certain income types, including:
  • Primary production income
  • Income relating to vulnerable minors
  • Income subject to non-resident withholding tax
  • Income from testamentary trusts existing at 12 May 2026

Why is the Government making this change?

Treasury analysis shows that discretionary trusts are increasingly used to split income across family members, resulting in materially lower effective tax rates compared to individuals earning the same income through wages.

Key statistics highlighted in the Budget include:

• Australia now has over one million trusts, the majority being discretionary trusts
• Trust income is disproportionately concentrated among higher-income households
• Families using discretionary trusts paid, on average, around four percentage points less tax than comparable families without trusts

The Government has stated the reform is intended to align trust income more closely with the 30% marginal tax rate applying to ordinary workers earning between $45,001 and $135,000. Preliminary numbers show that there will be no impact if individual incomes are above $200,000.

Practical impact for families and business owners

For many private groups, the change will not simply increase tax, but fundamentally alter how trusts are used.

Key impacts include:

1. Reduced benefit of income splitting

Where trust income is distributed to adult children or non-working spouses, the overall tax outcome may now default to at least 30%, even if beneficiaries have low personal income.

2. Bucket company strategies lose effectiveness

The inability for corporate beneficiaries to receive credits for tax paid by the trustee significantly undermines traditional accumulation strategies.

3. Cashflow implications at trustee level

Trustees will need to fund the minimum tax liability, regardless of distribution timing.

4. Estate and succession planning complexity increases

Many testamentary and intergenerational strategies will need to be revisited in light of the exclusions and grandfathering rules.

Transitional relief and restructuring options

To support affected taxpayers, the Government will introduce time-limited rollover relief:

• Available from 1 July 2027
• Runs for three years
• Facilitates restructuring from discretionary trusts into:
  • Companies
  • Fixed trusts
  • Other eligible structures
• Intended to apply without triggering immediate income tax or CGT consequences

State-based taxes (such as stamp duty) are not automatically covered, making planning and sequencing critical.

Strategic considerations we will be discussing with clients

There is no need for immediate action as these changes need to pass both houses and the opposition has already advised it will not support them so it will rely on the Greens and some independents to pass. We will be reviewing all clients in the coming months to prepare as the impact will be different for everyone:

• Discretionary trusts are still effective asset protection vehicles and at higher income levels there are no changes to tax rates
• Moving some or all assets to fixed trusts or individual names may result in a better outcome and provide the current tax benefits with less flexibility
• Superannuation becomes even more compelling
• Structure selection must be driven by commercial, estate planning and asset protection objectives, not just tax flexibility
• For some families, a company or hybrid structure may become more appropriate

What should you do next?

The proposed minimum tax on discretionary trusts represents a significant shift in how family and business structures are taxed. Although the changes are not immediate, now is an appropriate time to review whether your existing trust structure remains fit for purpose. Speak with your adviser, they can help assess the implications, identify potential planning opportunities and ensure any future decisions are aligned with your long-term objectives.

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