The 2026 federal budget introduces discretionary trust tax changes, with implications for distributions, compliance, and planning strategies. These changes have left many Australian business owners wondering how their trust will be affected.
Here at Australian Business Magazine, we’ve been covering the budget measures closely. We’ll break them down for the SME owners and entrepreneurs who need plain-English answers, rather than legal commentary.
In this guide, we’ll cover:
- Which discretionary trusts are excluded
- The rollover relief window and your options
- What to do before the rules take effect
Before looking at the upcoming changes, it’s worth revisiting the basics of how discretionary trusts work and why they are widely used.
What Is a Discretionary Trust in Australia?
A discretionary trust holds assets managed by a trustee for a group of potential beneficiaries. No single beneficiary is presently entitled to a fixed share of the income (which sets these structures apart from fixed arrangements like unit trusts).
Here are five things to know about how they work before we get into the tax changes:
- The Trustee’s Role: The trustee legally owns and controls all trust assets on behalf of the beneficiaries. They can be an individual or a corporate trustee, and every distribution decision sits with them.
- Who the Beneficiaries Are: Beneficiaries are typically family members, related entities, or companies listed in the trust deed. None of them holds a guaranteed entitlement to income or capital in any given year.
- How Income Gets Distributed: At the end of each financial year, the trustee determines how much income each beneficiary receives. They work within the bounds of the trust deed and Australian tax law.
- The Asset Protection Benefit: Assets held inside the structure are generally shielded from a beneficiary’s personal creditors and financial difficulties. That separation is a core reason many businesses have chosen this structure over the years.
- Why It’s Called “Discretionary”: The trustee holds full discretion to vary distributions from one year to the next. In this case, no beneficiary can expect the same amount twice, and there’s no obligation to be consistent.
Historically, discretionary trusts operated as flow-through vehicles, meaning they paid no tax themselves. Beneficiaries paid tax on their share of the income at their own marginal rates.
This allowed flexible income distribution and potential tax savings. It also created the income-splitting opportunities the government now wants to address.
How Does the 30% Minimum Tax on Discretionary Trust Income Work?
The trustee pays 30% tax on the trust’s taxable income before any distributions. It’s a direct departure from decades of trust taxation, where the entity itself was never the one writing the cheque. Non-corporate beneficiaries still get credit for that tax paid (but not always in full).
Take a look at how the minimum tax on discretionary trusts operates.
How the Tax Applies at the Trustee Level
From 1 July 2028, the trustee will calculate the trust’s taxable income and pay a minimum 30% tax before any distributions go out.
Prior to this, the discretionary structure operated as a flow-through vehicle under Division 6 of the ITAA 1936 (Income Tax Assessment Act). Because of that, the structure itself paid no tax at all. Beneficiaries who were presently entitled to trust income paid tax at their own rates instead.
Under the new model, however, the trustee will pay first. Furthermore, when a trust receives franked dividends, the attached tax credits cannot immediately flow to beneficiaries. They must first be used to reduce the trustee’s minimum tax liability.
What Non-Corporate Beneficiaries Need to Know
Non-corporate beneficiaries still include their share of trust income in their own returns. They’ll also receive non-refundable credits for the tax paid by the trustee.
If their marginal tax rate is below 30%, the excess credit will be lost (it won’t generate a refund). But if it’s above 30%, they’ll have to pay extra tax to reach their usual marginal rate. These credits can reduce their tax bill to zero but cannot create a refund.
The Capital Gains Tax Floor: A Second Hit From 1 July 2027
A separate 30% minimum tax on realised capital gains will apply from the effective date, which covers individuals, trusts, and partnerships broadly. That’s a full year before the income minimum tax kicks in, so discretionary trustees will basically face two timelines.
The long-standing 50% CGT discount is replaced with CPI-based (Consumer Price Index) indexation, and the 30% tax floor tops up any gains that fall below that rate. Both floors will then compound for trustees, with income caught from 1 July 2028 and capital gains caught from the year before.
Why the Government Chose the 30% Rate
The Government chose the 30% rate to match the company tax rate and limit tax advantages from trust distributions. In particular, it will apply to individual income between $45,001 and $135,000, which is the band most salary earners sit in.
Framing it that way lets the government position this change as a way to make trust tax treatment closer to what many workers already pay on similar income. The government argues that this alignment is what makes the tax system more consistent across different holding structures.
One area where this change has particular implications is the use of corporate beneficiaries and bucket companies.
What Happens to Corporate Beneficiaries and Bucket Companies?
Corporate beneficiaries receive no non-refundable credit for the trustee’s 30% tax, unlike individual beneficiaries. That single design decision effectively dismantles one of the most widely used private group tax strategies in Australia.
The double taxation outcome for corporate beneficiaries is deliberate, and the budget papers make no attempt to soften it. As a result, these private groups will potentially face the steepest impact.
How the Bucket Company Strategy Used to Work
Discretionary trusts would distribute surplus income to corporate beneficiaries. That way, the tax would be at the 25% small business rate rather than the higher marginal rates individual beneficiaries would face.
Take a business earning $300,000 annually, for example. They could route those trust distributions to a bucket company locked in a 25% rate, with shareholders free to choose when to draw franked dividends and pay personal tax.
That timing flexibility made it one of the most popular and tax-efficient structures available to Australian private groups. When those franked dividends eventually flowed out, refundable franking credits passed through to shareholders. This reduced (or eliminated) the personal tax bill at that point.
What Will Double Taxation Look Like After 1 July 2028
From 1 July 2028, the trustee will have to pay a 30% minimum tax on the trust’s taxable income first. The corporate beneficiary will then pay 25% company tax on the same income, with no credit for what the trustee already paid. This is where the numbers get uncomfortable.
That stacking produces roughly 51% effective tax at the corporate level. But from our calculations with trusts, it can rise to between 62% and 70% when those funds eventually reach individual shareholders.
Although the grossing-up methodology remains subject to consultation, these numbers could still shift.
Who Gets Hit Hardest by This Change
Discretionary structures involving multiple layers of trusts feeding into companies face the worst compounding outcomes (and the consultation process alone could take the better part of 2027).
Property investors carry an additional burden through triple compounding:
- The trust minimum tax from 1 July 2028
- CGT floor on realised gains from 1 July 2027
- Loss of negative gearing on new residential acquisitions made after 12 May 2026
Beyond that, beneficiaries below the 30% marginal tax rate, such as non-working spouses and adult children, will lose any unused tax credits. These excess credits cannot be refunded or carried forward.
Which Trusts Are Excluded from the Minimum Tax?
Certain structures, including deceased estates, fixed trusts, and some special purpose entities, are excluded from the minimum tax rules.
This table summarises what’s in and what’s out:
| Trust / Income Type | Excluded? | Conditions Applied |
| Fixed and widely held trusts | Yes | Entitlements must be genuinely fixed |
| Complying superannuation funds and SMSFs | Yes | No conditions |
| Special disability trusts | Yes | No conditions |
| Deceased estates | Yes | No conditions |
| Charitable trusts | Yes | No conditions |
| Testamentary trust existing on 12 May 2026 | Income excluded | Must derive from the assets of the deceased’s estate |
| Testamentary trust created after 12 May 2026 | Subject to the minimum tax | Applies even if the will was written before budget night |
| Primary production income | Income excluded | Primary production portion only; other income still captured |
| Income relating to vulnerable minors | Income excluded | Specific conditions apply |
| Non-resident withholding tax amounts | Income excluded | Already subject to non-resident withholding tax |
| Standard discretionary (family) trust | No | Applies from 1 July 2028 |
The testamentary trust cut-off is where most people need to read the fine print carefully. This will only come into existence on the date of death (not when the will is signed). If a will drafted before 12 May 2026 includes a discretionary testamentary trust provision, the trust may not qualify for transitional rules.
This applies where the testator has not yet passed away, and the trust has not been created. Since the arrangement doesn’t exist until the testator’s death, it wasn’t an existing discretionary testamentary trust at the announcement date.
Fixed testamentary trusts, on the other hand, sit outside the regime entirely. Trustees and executors dealing with existing estate plans should get advice on this distinction well before 1 July 2028, given how much turns on the timing.
What’s the Three-Year Rollover Relief Window?
The government introduced a three-year CGT rollover window to help trustees exit discretionary structures. Eligible taxpayers can transfer assets out without activating immediate income tax or CGT consequences. It gives affected businesses time to restructure rather than react.
Here’s what you need to know about the rollover:
When the Rollover Window Opens and Closes
The rollover window opens on 1 July 2027 and closes permanently on 30 June 2030. Fortunately, the Australian Small Business and Family Enterprise Ombudsman will start advising eligible small businesses from 1 January 2027. It’s a full six months before the window opens, which gives trustees time to model their options before transferring assets.
ASIC (Australian Securities and Investments Commission) will also put specific support arrangements in place for small businesses choosing to incorporate during that period. These will include registration guidance, information resources, and transition support.
What You Can Move Into Without Triggering CGT
Eligible restructures let you move assets from a discretionary structure into a company or fixed trusts free of immediate income tax and CGT.
For instance, a small business owner converting during the rollover window can defer CGT on transferred assets. They can further access the 25% small business tax rate on taxable income, provided turnover stays under $50 million.
The trust’s taxable income treatment changes from that point.
Why Restructuring Isn’t Always the Right Call
A company might offer a lower tax rate, but it removes distribution flexibility. It also changes the trust structure’s asset protection profile permanently (there’s no switching back).
Moreover, moving into a company locks in beneficiary entitlements. This means trust distributions can no longer be redirected to different household members based on changing family circumstances. That’s a significant trade-off for many.
Do Discretionary Trusts Still Have Value After the Changes?
The 2026 reforms are tax-focused only, and the non-tax advantages of discretionary trusts are completely unaffected. Across the businesses we’ve covered, the non-tax reasons for holding a discretionary trust are often the ones that endure long after the tax position shifts.
Those reasons should guide any decision to keep or restructure the trust. So let’s see when a trust makes more sense than moving to a company structure.
Asset Protection and Succession Planning Stay Intact
Trust assets will remain legally separated from a beneficiary’s personal estate, creditors, and financial difficulties, and that separation holds firm after the reforms.
The same applies to broader protections. The tax changes don’t affect a trust’s ability to protect assets from creditors or pass a business between generations. This is because the reforms apply to tax treatment only, rather than trust law or the deed itself.
When a Trust Still Beats a Company Structure
Families where all beneficiaries already pay tax at or above 30% will face no increase in overall tax under the new minimum tax rules. The trust’s future value will come less from income splitting and more from:
- Maintaining structural control
- Flexible trust distributions
- Long-term succession planning
Fixed trusts and companies simply can’t replicate these benefits.
What Should You Do Before 1 July 2028?
Before 1 July 2028, review your trust structure, distribution strategy, and succession plans to understand how the new minimum tax rules may affect you.
We suggest taking these practical steps now:
- Review Your Beneficiary Mix Now: Check which individual beneficiaries are presently entitled to trust income below the 30% marginal rate threshold. Those non-corporate beneficiaries carry the most direct exposure to the non-refundable credit trap under the new rules.
- Model the Numbers Before Acting: A side-by-side comparison of tax outcomes across trust, company, and individual structures can help clarify the impact of the changes. Complete it well before 1 July 2028 using your actual income levels.
- Hold Off on Major Restructuring: The budget papers outline the policy direction, but major design details remain unsettled. Locking in a permanent structural change now risks a costly decision that better information would’ve adjusted.
- Pencil in a 2027 Review: Schedule a proper review of your trust structure for early 2027. So once the rollover relief window opens, you can act quickly and adjust your structure if needed before the new rules apply.
- Flag Your Existing Testamentary Trusts: Wills containing testamentary trusts in existence on 12 May 2026 may qualify under the grandfathered exclusion. It’s best to confirm with a solicitor rather than assume.
- Talk to a Specialist Tax Adviser: The interaction between trust income changes, CGT reform, Division 7A, and estate planning requires a deeper review than standard tax compliance. A specialist can show how the shifts may affect your future distributions.
Two things to hold in mind before deciding anything: there are two years before the changes take effect, and the draft legislation hasn’t landed yet. That’s enough time to review structures without rushing into premature decisions.
One Last Thing Before You Close This Tab
The minimum tax on discretionary trusts isn’t law yet, and 1 July 2028 is still far enough away that you don’t need to panic. What you do need is a clear-eyed view of how your trust’s income and tax position sit right now.
Get that picture sorted before the draft legislation drops, and you’ll be in a far stronger position to move quickly when the details are confirmed.
To keep track of the wider budget changes, head over to Australian Business Magazine. You’ll find the full 2026 federal budget series and see what the broader updates mean for Australian business owners.
Frequently Asked Questions About Discretionary Trust Tax Changes
We often see these questions come up when trustees and business owners start working through what the 2026 reforms mean for them.
Are Family Trust Tax Changes the Same as Discretionary Trust Changes?
Broadly, yes. “Family trust” is the everyday name most people use, while “discretionary trust” is the legal term the legislation works with. The proposed changes to family trust tax treat them identically for these purposes.
Will the Reforms Affect Primary Production Farms?
Primary production income is specifically excluded from the minimum tax, which gives farm-based discretionary trust structures some breathing room. That said, any non-primary-production income earned by the same arrangement is still captured and taxed at the trustee level.
Farm trusts holding mixed income should get careful advice on how that split applies, since the exclusion doesn’t cover the whole structure, only that portion of income.
Can a Trust Still Distribute to a Non-Working Spouse After 1 July 2028?
Yes, trust distributions to a non-working spouse can still be made after 1 July 2028. The trustee pays the 30% minimum tax first, and the spouse receives a non-refundable credit for the tax paid by the trustee.
If their marginal rate sits below 30%, the excess tax credits are lost and can’t be recovered. The distribution still happens, but the tax benefit of directing income that way largely disappears.
Does the 30% Minimum Tax Apply to Trust Losses?
The minimum tax applies to taxable income, rather than losses. So a trust running at a loss in a given year won’t face the 30% minimum tax charge for that period. What changes is that losses from one discretionary trust cannot offset income from another related one.
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.
