A major change for discretionary trusts
Discretionary trusts, including family trusts, have long been a common structure for small business owners, family groups, investors and professional practices. They are often used for asset protection, succession planning and flexible income distribution. The 2026-27 Federal Budget proposes a major change to that flexibility.
From 1 July 2028, trustees of discretionary trusts will pay a minimum tax of 30% on the taxable income of the trust. Beneficiaries will still include their trust distributions in their own tax returns, but beneficiaries other than corporate beneficiaries will receive non-refundable credits for tax payable by the trustee.
This is not a tax on every trust. It is aimed at discretionary trusts. Fixed trusts, widely held trusts, fixed testamentary trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts are proposed to be outside the new minimum tax.
Why the Government is targeting discretionary trusts
The Budget materials frame the measure as a fairness reform. Treasury notes that the number of discretionary trusts in Australia has grown substantially, and that discretionary trusts allow income to be allocated to beneficiaries who may have lower marginal tax rates.
For small business families, this flexibility has often been part of annual tax planning. A trust may distribute income among adult family members, a spouse, children over 18, or a corporate beneficiary. In some situations, family members genuinely work in the business. In others, distributions may be made for tax reasons rather than because the beneficiary has contributed to the business.
The proposed 30% minimum tax is designed to reduce the benefit of distributing income to beneficiaries who would otherwise pay tax at less than 30%.
How the new minimum tax is expected to work
Under the proposed system, the trustee will pay 30% tax on the taxable income of the discretionary trust, unless a higher rate already applies. Non-corporate beneficiaries, such as individuals, will receive non-refundable tax credits for tax paid by the trustee. This means the tax paid by the trustee is recognised, but the total tax on that trust income should generally not fall below 30%.
Corporate beneficiaries are treated differently. The Budget materials state that corporate beneficiaries will not receive the non-refundable credits for tax paid by the trustee. This is intended to stop arrangements where a company receives trust income, accesses corporate tax rates and potentially converts credits into refundable franking credits.
For many small business groups, this will require a rethink of bucket company arrangements. It does not necessarily mean bucket companies will disappear, but the tax benefit and cash-flow benefit may change.
What income and entities are excluded?
The minimum tax will not apply to fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates or charitable trusts. Certain income is also proposed to be excluded, including primary production income, certain income relating to vulnerable minors, amounts subject to non-resident withholding tax, and income from assets of testamentary trusts existing at the time of announcement.
The primary production exclusion is particularly important for farming families and agribusiness clients who use trusts as part of their operating or succession structure. However, the detail will still matter. The exclusion is for primary production income, not necessarily every dollar flowing through a trust that has some connection with a farming family.
What this means for small business trusts
The impact will depend on how the trust currently distributes income. If a trust already distributes income to adult beneficiaries who pay tax at rates of 30% or more, there may be little or no overall increase in tax. The Budget fact sheet says around half of discretionary trusts are not expected to be affected in any given year.
The impact will be greater where a trust regularly distributes income to low-rate beneficiaries, minors, adult children with little other income, or corporate beneficiaries. For these groups, the new rules may reduce the tax effectiveness of discretionary distributions.
Small businesses may also need to distinguish between trust distributions and wages. The Budget fact sheet notes that small businesses can reduce the impact of the minimum tax by employing beneficiaries who work in the business, rather than paying them trust distributions. Salary and wages paid to employees will not attract the trust minimum tax.
That does not mean every family member should suddenly be placed on payroll. Wages need to be commercially supportable, linked to actual work performed and properly documented.
Restructuring relief from 1 July 2027
The Government has proposed expanded rollover relief for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or fixed trust.
This is likely to be one of the most important planning windows for family businesses. A company may offer access to a 25% corporate tax rate for qualifying base rate entities, dividend imputation and simpler retention of profits for working capital. A fixed trust may preserve some trust features while giving beneficiaries more certain entitlements.
However, restructuring is not just a tax decision. Business owners need to consider asset protection, finance arrangements, stamp duty, succession plans, Division 7A loans, retained profits, family control, estate planning and future sale plans.
What should trustees do now?
Trustees should review their trust deed, distribution patterns, bucket company arrangements and payroll arrangements well before 1 July 2028. Where a discretionary trust owns valuable assets or operates an active business, the restructure window from 1 July 2027 should be considered early.
Family trusts will still have a place, but the way they are used may need to change. Trustees should review their structure and distribution strategy early, rather than assuming the same year-end approach will continue to produce the best tax outcome.
Note: The changes discussed in this article are proposed Budget measures only. At the time of publishing, they still need to pass through Parliament before becoming law.
