Discretionary trusts, often called family trusts, have been part of the Australian business landscape for decades. They're used to run family businesses, hold investments, and support succession planning, valued for their flexibility, asset protection, and estate planning benefits.
The 2026-27 Federal Budget put a significant proposed change on the table. From 1 July 2028, trustees of discretionary trusts would generally be required to pay a minimum tax of 30% on the trust's taxable income.
It's a proposal that's sparked plenty of debate, and if you run a family business or investment structure through a discretionary trust, it's worth understanding early, even though the rules aren't final yet.
Why the Government is proposing this
The stated aim is to bring the tax paid on trust income closer in line with what salary and wage earners pay, while reducing the ability to split income between family members to reduce overall tax.
Under the proposal, the trustee would generally pay the 30% minimum tax upfront. Where income is then distributed to individual beneficiaries, those beneficiaries would generally receive a non-refundable tax offset for the tax the trustee already paid, so the same income isn't taxed twice.
Not every trust would be caught. The Government has flagged exclusions for fixed trusts, widely held trusts, complying superannuation funds, charitable trusts, deceased estates, special disability trusts and genuine testamentary trusts, along with primary production income and certain income relating to vulnerable minors.
The Government estimates more than 90% of small businesses won't be affected. That's reassuring on the surface, but it doesn't mean every family group using a discretionary trust is in the clear.
Where it gets complicated
One area likely to draw close attention is trusts that distribute income to a company beneficiary, a common strategy for managing cash flow and retaining profits for growth. Under the proposed rules, a corporate beneficiary wouldn't receive the same tax offset, which could mean that income is effectively taxed twice.
Some family groups may also find it harder to fully use existing tax losses, and the overall flexibility that comes with managing taxable income across a family structure is likely to be reduced.
If your trust regularly distributes to a corporate beneficiary, this is the change most worth watching closely.
A temporary three-year rollover period, starting 1 July 2027, has been proposed to help groups restructure into companies or fixed trusts without triggering immediate income tax or CGT consequences. That sounds helpful, but restructuring is rarely simple. Stamp duty, loan approvals, financing arrangements, contracts and licensing can all come into play, and even a straightforward restructure takes time and money to get right.
Restructuring isn't the only path being considered anymore either. Exposure draft legislation has since introduced an election option, letting existing trusts nominate fixed beneficiaries and sidestep the minimum tax without changing their legal structure at all. More on that below.
Getting closer, but still not final
This proposal has moved considerably since it was first announced, and it's worth pausing on what's changed. Treasury released a consultation paper on 8 July 2026, with submissions closing 31 July, and has since gone further, releasing exposure draft legislation with submissions open until 18 September 2026. Several important details have been clarified or added along the way:
- A new election option. Instead of restructuring, trusts already in existence at 1 July 2028 can elect to make fixed distributions to pre-nominated beneficiaries and avoid the minimum tax applying, without needing to restructure or triggering stamp duty.
- A wider charitable exclusion. The exclusion for distributions to charities now extends to other income tax-exempt entities, such as sporting clubs, up to a cap still being finalised.
- A new fixed trust definition. A broader test based on whether a trust has "material discretionary elements" will apply, so trusts like bare trusts and managed investment trusts aren't unintentionally caught.
- Franking credits will be refunded. Trustees will be able to get refunds for excess franking credits linked to income subject to the minimum tax, rather than only carrying them forward.
- Updated impact estimates. More than 95% of individual taxfilers and more than 90% of small businesses are expected to be unaffected in any given year.
The core of the proposal hasn't changed: a 30% minimum tax from 1 July 2028, with rollover relief from 1 July 2027. But moving from consultation to exposure draft legislation is a real step closer to becoming law, even though further tranches covering administrative and integrity details are still to come.
That means it's too early to make major structural decisions based on the announcement alone. The sensible approach is to keep an eye on developments and start thinking through whether your current structure, or the new election option, would suit your situation once the rules are finalised.
What this means day to day
Whatever happens with the legislation, one thing doesn't change: businesses that keep clean, current financial records are always better placed to respond when the rules shift. Clear visibility over distributions and prior-year figures will make any future transition easier, whichever path ends up being right for your structure.
Where to from here
Discretionary trusts remain valuable for asset protection, succession planning and business flexibility, and none of that changes because of this proposal. What may change is the tax outcome for some groups, particularly those with more complex structures or regular company distributions.
With the proposed start date still some time away, there's room to pause and think through whether tax minimisation strategies or a broader business advisory conversation should be on your radar. If you're unsure how this proposal might affect your trust structure, get in touch with Trekk Advisory.
This article is general information only and does not take into account your personal circumstances. Please contact Trekk Advisory to discuss how this proposal may apply to your situation.
