Family trusts just got a lot more complicated. The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trusts, which could change how much tax your family pays at the end of the financial year.
Specifically, if you run a family business through a trust or use a bucket company to reduce your tax bill, this reform will directly affect you. Although it hasn’t become law yet, the proposed changes signal that many family groups could face higher taxes once it passes.
This guide explains who will pay more, who will remain protected, and the steps you can take before 1 July 2028. Stick with us, and by the end you’ll clearly understand the position of your trust under the proposed rules.
Family Trust Tax Changes: What’s Actually Changing?
The federal government has tightened how family arrangements distribute earnings to companies and lower-earning recipients. Our research into the 2026-27 Budget papers shows this reform targets one thing above all: income splitting through low-taxed beneficiaries.
In particular, the government has focused heavily on discretionary trusts using bucket companies to reduce overall tax paid. Family groups that spread income tax obligations across multiple entities each year are exactly who this measure aims to catch.
These discretionary trust tax changes in Australia mark one of the most significant shifts in trust taxation in decades. Previously, a family arrangement could split earnings among those receiving distributions on lower marginal rates and keep the household’s overall tax bill down.
Under the new rules, much of that opportunity for revenue splitting is removed. As a result, family groups are forced to reconsider their distribution strategies.
Fortunately, the Australian Taxation Office will apply the discretionary trust tax changes of 2026 from 1 July 2028. So you’ll get enough time to review their structure before the new rate locks in.
Why Are Bucket Companies Under the Microscope?
Bucket companies have come under closer attention because trustees often use them to limit tax at the corporate rate instead of higher individual rates. This strategy has allowed discretionary trusts to reduce the overall tax burden for years.
However, under the proposed reform, corporate beneficiaries lose the tax credit that individual recipients still receive. So distributions that previously passed through a bucket company at a lower tax rate may now face double taxation.
Let’s break down exactly how these bucket business structures work and where corporate individuals fit into the picture.
Bucket Company Structures Explained
A bucket enterprise is often part of a discretionary trust structure. And that trust distributes income to the firm instead of individual recipients. The company then pays tax at the lower corporate rate, which can reduce the total tax for the trust group.
Sometimes, the same corporate trustee manages both the trust and the bucket organisation. This setup allows trustees to control how earnings flow and how tax is applied.
According to the regulations, the government will now monitor these revenue flows to ensure the money actually reaches the business (not just on paper). So if an individual is presently entitled to profit but hasn’t paid the tax in real life, the regulators can investigate the taxation of that amount.
How Corporate Beneficiaries Fit In
Corporate beneficiaries are companies that receive income from a trust instead of distributing it directly to a family member. Under current rules, this arrangement lets the trust pay tax at the company rate, which is usually lower than an individual’s marginal rate.
The proposed 2026–27 budget has changed this. Now, non-corporate beneficiaries will get a non-refundable credit for the tax the trustee already paid, but corporate recipients won’t. It means any unpaid present entitlements to a firm will face a far closer review than before.
The 30% Minimum Tax Rule on Trust Distributions
Sometimes, a single new rule could push your trust’s effective tax rate up almost overnight. This represents a major change from how family trusts have operated for decades.
We’ve already mentioned that the new proposal introduces a 30% minimum tax on a trust’s taxable profit at the trustee level, effective from 1 July 2028. So trustees must pay at least a 30-cent minimum tax on each dollar of taxable earnings distributed, even if a beneficiary’s own marginal tax rate sits lower than that.
Here’s how the mechanics play out for trustees and recipients:
- Trustees Pay First: The trustee calculates the trust’s taxable income each year and pays the new rate on that amount before any distribution reaches a beneficiary.
- Higher Earners Barely Notice: Little changes for recipients whose marginal rates already sit at 30% or above, since their own rate matches or exceeds the new lowest rate.
- Lower Earners Feel the Squeeze: Adult children or a non-working spouse on lower marginal rates will lose their old advantage of paying little or no tax on trust distributions. The top-up tax now applies to bring their share up to that 30-cent tax rate.
- Credits Replace Refunds: Getting a non-refundable tax credit for what the trustee already paid is the new norm for those receiving distributions. And this credit doesn’t result in an actual cash refund at tax time.
Simply put, if your trust regularly distributes to family members at low marginal rates, this is the rule to watch most closely. It directly increases the tax payable on distributions that were previously taxed lightly or not at all.
Capital Gains Tax and Your Family Trust
The upside is that capital gains inside a family trust still get flexible treatment, even under the new settings. To be more specific, capital gains tax applies whenever a trust sells an asset for a profit.
In practice, trusts can distribute those gains to beneficiaries, who pay tax on their share at their own marginal rate (the family home is handled differently). Our review of the Budget papers confirms that capital gains continue to flow through largely unchanged.
That said, the interaction becomes more complex when business assets sit inside a discretionary trust. If a trust sells business assets and distributes the gain to a bucket company, the trustee pays tax first. But the bucket organisation doesn’t get the same tax credit as an individual, which can increase its effective tax rate.
Moreover, primary production income tied to farmland or business assets carries a specific carve-out from the minimum tax regime. Why? Well, it supports essential agricultural and business activities and often involves long-term investments with variable returns.
The normal capital gains tax rules still apply when those assets are eventually sold.
Who Ends Up Paying More Tax?
High-income family groups and trusts that lean on bucket companies are the ones taking the largest hit from this shift.
And beneficiaries who previously paid tax at low marginal rates lose that advantage first. Meanwhile, those already sitting near the top marginal tax rate barely notice the change.
Let’s learn about the two groups of people in detail:
High-Income Family Groups
Previously, these groups could distribute trust earnings to lower-earning family members, like adult children, to reduce the overall household tax bill. At present, family groups with several high-revenue earners have fewer opportunities to split taxes.
And the impact of discretionary trust tax changes on family business planning is most noticeable in these situations. Trustees may now need to review distribution minutes before each financial year. This ensures they stay compliant and aligned with the new requirements.
Trusts Using Bucket Companies to Cap Tax
Trusts relying heavily on bucket companies may pay additional tax on business income that they once routed through at a lower rate. Understandably, every family business owner we’ve spoken with about this reform asks the same question first.
“Will my bucket company still work the way it used to?”
This concern is particularly important as the 30% minimum tax rule reduces the benefit of routing income through discretionary trusts and companies. Corporate beneficiaries will lose the tax benefits they previously received under the old credit system.
As a result, trustees need to reassess whether their current structure still provides meaningful tax savings if the trustee-level charge applies. For instance, a Melbourne retail family trust distributing $200,000 through a bucket enterprise would now face a higher combined tax outcome than under the previous system.
Excess Franking Credits: What Happens Now?
Some family arrangements will receive smaller refunds from franking credits on bucket company dividends. Normally, the system refunds excess franking credits to shareholders when the credits exceed the tax they owe.
Based on our review of the Budget papers, trustees receiving fully franked dividends must use those franking credits to cover the new tax rate first. Only after that can any remaining credits flow through to beneficiaries. This change alters how family trusts have historically used franking credits from bucket dividends.
The treatment shifts under the new rules as follows:
| Situation | Current Treatment | Proposed Treatment |
| Trustee receives franked dividends | Credits offset trustee tax. Excess flows to beneficiaries | Credits must cover the minimum tax first |
| The beneficiary receives excess franking credits | Refundable at tax time | Reduced or unavailable if the trustee used credits already |
| Medicare levy on distributed income | Applied normally at an individual rate | Still applies on top of the minimum tax outcome |
The table shows the main shifts more clearly. Trustees now have less flexibility in how they apply franking credits. That interferes with what recipients report on their own tax returns.
Specifically, family groups that rely on discretionary trust income from company dividends will notice the impact quickly. Their usual refunds shrink because the trustee must pay the least tax first.
Asset Protection: Does It Still Stack Up?
Once the tax implications are understood, the discussion naturally shifts to asset protection. Discretionary trusts still protect family assets from creditors, but the tax cost of keeping that protection has gone.
Generally, families use trust structures for succession planning as well as wealth protection, and this reform doesn’t remove that benefit entirely. Instead, private groups need careful consideration before assuming their existing discretionary trust structures still make sense financially.
A few structures fall outside the new regime entirely, and it’s worth checking where yours sits:
- Primary Production: Income from agriculture, horticulture, or similar primary production activities held in a trust is exempt from the minimum tax. However, normal capital gains tax rules still apply when you intend to sell those assets.
- Testamentary Trusts: They remain exempt from the reform. So discretionary testamentary trusts created through deceased estates continue as before.
- Charitable and Fixed Trusts: Neither charitable trusts, fixed trusts, nor superannuation funds fall under this measure. Since none of them operates the same way as discretionary trusts do.
- Vulnerable Beneficiaries: The shift in budget doesn’t apply to distributions made to vulnerable minors. This exclusion recognises that income splitting isn’t the objective in these instances.
Suggestion: If your trust holds the same property company and trust structure, or you are seeking expanded rollover relief to restructure before 2028, you should get advice early.
Where to Go From Here
Family arrangement tax changes are coming, and waiting until 1 July 2028 to act isn’t a good idea. The proposed 30% minimum tax, tighter rules around bucket companies, and reduced franking credit benefits all point in the same direction: less flexibility, more scrutiny.
Some trust setups remain largely unaffected. Others, particularly those relying on low-taxed beneficiaries or corporate structures, require careful review. You can use the period before 1 July 2028 to plan accordingly.
If you’re interested in knowing more about what’s influencing Australian business, tax, and trust structures, stick with Australian Business Magazine. We’ll keep tracking this shift as it moves through Parliament.
Frequently Asked Questions About Family Trust Tax Changes
Here are some quick answers to the questions family trust owners keep asking us about this reform.
Will my family trust election affect how these changes apply to me?
A family trust election can’t protect a discretionary trust from the proposed minimum tax. Even trusts with a valid family arrangement election will be subject to the new rules if they distribute income to lower-taxed beneficiaries.
Do trust beneficiaries need to do anything before 2028?
Not yet, since the measure isn’t law, but companies with trust recipients on marginal rates below 30% should talk to their accountant early. They might be the ones losing the most value once the top-up tax applies.
Does this change how much income tax I pay personally?
Your personal income tax stays the same, since your marginal rate doesn’t change. What changes is how much credit you get for tax already paid by the trustee.
Should I still use a trust for asset protection if this goes ahead?
Yes, in most cases. Asset protection was never part of trust structures under threat here. The reform targets tax outcomes instead of the legal separation between trust assets and your personal assets. So that protection stays intact either way.
Disclaimer: This article is for general information only and does not constitute financial, tax, legal, or accounting advice. Everyone’s circumstances are different, and you should seek advice from a qualified accountant, tax adviser, or other professional before making any decisions. Australian Business Magazine (ABMAG) is not responsible for any actions taken based on the information in this article
