The recent 2026-27 Federal Budget introduced significant proposals that have caught the attention of many business owners and investors. At the centre of these announcements is a planned overhaul of how discretionary family trusts are taxed. It is important to note upfront that these measures are currently proposals and are not yet law. However, if enacted, they will fundamentally alter the way families distribute income and manage wealth.
The Core Change: A 30 Per Cent Minimum Tax
According to the official Budget tax reform factsheets, the government plans to introduce a 30 per cent minimum tax on discretionary trusts, starting from 1 July 2028.
Under the current system, a discretionary trust generally does not pay tax itself. Instead, the trustee allocates the income to beneficiaries, who then pay tax at their own individual marginal rates. The proposed rules shift this obligation. The trustee will be required to calculate and pay a 30 per cent tax on the trust’s taxable income before any money reaches the beneficiaries.
How the Non-Refundable Income Tax Credit Works
When the remaining income is distributed, individual beneficiaries will receive a non-refundable income tax credit for the 30 per cent tax already paid by the trustee.
This mechanism will impact beneficiaries differently depending on their personal circumstances.
- Taxpayers above the 30 per cent bracket: If a beneficiary’s personal tax rate is higher than 30 per cent, they will simply pay a top-up tax to cover the difference between the trustee’s tax and their own marginal rate.
- Taxpayers below the 30 per cent bracket: If a beneficiary’s personal tax rate is lower than 30 per cent, the credit will reduce their tax bill to zero. However, because the credit is non-refundable, the ATO will not refund any excess credit. This sets a hard floor, ensuring that trust income is always taxed at a minimum of 30 per cent, regardless of how little the beneficiary earns.
The Impact on Corporate Beneficiaries
The new rules will heavily affect distributions made to corporate beneficiaries, commonly known as bucket companies. The government has stated that these corporate beneficiaries will not receive the non-refundable tax credits.
As a result, trust income distributed to a company will effectively be taxed twice. The trust pays 30 per cent upfront, and the company then pays its own 30 per cent corporate tax on the remaining 70 per cent it receives. This produces a tax rate of 51 per cent at the corporate level. When those profits are ultimately distributed as dividends to an individual on the highest tax bracket, independent analysis from Pitcher Partners calculates that the effective tax rate could reach up to 62.9 per cent. This change essentially removes the financial advantage of using a bucket company structure.
Real-World Examples
To see how this might play out, consider a successful plumbing business operated through a discretionary trust. Currently, the business owners might distribute profits to family members who study or work part-time, taking advantage of their lower tax brackets. Under the new proposal, the trust will pay a flat 30 per cent on those profits first. The part-time earning family members will not be able to claim a refund for the tax already paid, meaning the family’s overall tax bill will increase.
Similarly, consider a property investor who holds a portfolio of residential properties through a discretionary family trust. If the properties generate positive rental income or a capital gain upon sale, the trustee will be forced to pay 30 per cent tax on that income immediately. The investor loses the flexibility to stream that income tax-effectively to a lower-earning spouse.
It is worth noting that not everyone will be negatively affected. Treasury estimates suggest that approximately 40 per cent of small businesses operating through discretionary trust structures are not expected to pay additional tax or need to restructure under these proposals.
Exclusions and the Reality of ‘Fixed’ Trusts
The government has recognised that certain structures exist for reasons other than income splitting. The minimum tax will not apply to complying superannuation funds, charitable trusts, special disability trusts, deceased estates, and testamentary trusts in existence on 12 May 2026. Specific types of income are also excluded, such as primary production income from agriculture and certain income derived by vulnerable minors.
Fixed trusts and widely held trusts are also exempt. However, the distinction between a fixed trust and a discretionary trust is strict. Whether a trust is considered ‘fixed’ for tax purposes depends on whether beneficiaries have a vested and indefeasible interest (an absolute, unchangeable right) to the trust’s income and capital.
This brings us to hybrid trusts, which combine elements of both discretionary and fixed structures. Many people assume their hybrid trust, or even a trust drafted specifically to be fixed, will be safe. Yet, if the trust deed contains variation powers or amendment clauses that allow the trustee to alter entitlements, it will likely fail the fixed test and be caught by the new rules. Owners will need to carefully review their trust deeds to confirm their exact legal status.
The Window to Restructure
Recognising that these changes will require a massive shift in how businesses and investments operate, the government is offering a transitional period. From 1 July 2027, a rollover relief period will be available for three years. This relief is intended to allow business owners and investors to transfer their assets out of a discretionary trust and into a company or a true fixed trust without triggering capital gains tax penalties.
Reviewing your business and investment structures takes time. By examining your options early with a professional advisor, you can plan effectively and make the most of the upcoming rollover relief should these proposals become law. As always, please feel free to reach out to us if you would like to have a chat.
