Isla HendersonAustralia's 2026 Federal Budget delivered a structural shock to millions of family and business trust arrangements on 12 May 2026: a proposed 30% minimum tax on discretionary trusts, set to take effect from 1 July 2028. For the estimated 800,000 discretionary trusts operating across the country — many of them central to family wealth strategies and small business structures — the announcement has opened a 26-month window to assess, plan, and potentially restructure before the new rules bite.
What Changed on Budget Night
The Albanese Government announced that, from 1 July 2028, discretionary trusts will be subject to a minimum 30% tax applied at the trustee level on net trust income distributed to non-corporate beneficiaries. This is a fundamental departure from the current "flow-through" model under Division 6 of the Income Tax Assessment Act 1936, under which beneficiaries are individually assessed at their own marginal tax rates.
Under the current system, a trustee can distribute income to lower-earning family members — a non-working spouse, a university student, elderly parents — who may pay little or no tax on their share. This income-splitting strategy has been a cornerstone of family trust planning for decades and has allowed many Australian families to reduce their overall tax burden legally.
The new minimum tax closes that gap. If the trustee pays 30% tax on distributed income, non-corporate beneficiaries will receive a non-refundable credit for that amount. According to the Australian Taxation Office's reform summary, if a beneficiary's marginal rate exceeds 30%, they pay top-up tax. Critically, if their marginal rate is below 30%, the excess credit is simply lost — there is no refund.
Corporate beneficiaries are excluded from receiving any credit at all, eliminating the ability to route distributions through a corporate beneficiary as a workaround.
Who Is Affected — and Who Is Not
Not all trusts are caught by the new measure. The proposed regime targets discretionary trusts specifically. Fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts are carved out. Testamentary trusts that were in existence as at 12 May 2026 (Budget night) are also exempt.
Primary production income — income from farming activities — is carved out of the taxable base, providing some relief to the agricultural sector, which historically has relied on discretionary structures.
The changes are not yet law. The Government has flagged a consultation process before legislation is introduced, and the ATO has confirmed that no draft legislation has been released as of September 2026. However, the political intent is clear, and advisers across Australia are treating the proposal as a near-certainty given the Government's budget position.
The Expert Angle: Wealth Advisers See a Restructuring Rush Coming
For wealth managers and tax advisers, the announcement marks the start of a planning cycle unlike anything seen since the 2010 trust beneficiary tax rules. The 26-month runway to July 2028 is deceptively short when you factor in the time needed for legal restructuring, tax advice, and entity establishment.
Three restructuring pathways have emerged as the most discussed options among practitioners:
1. Retain the trust and absorb the new cost. For families where most beneficiaries earn above $45,000 — and are therefore already taxed at or above 32.5% — the 30% minimum may represent only a marginal shift. The non-refundable credit still reduces their personal liability significantly.
2. Restructure into a company. The Government has proposed a three-year rollover relief period from 1 July 2027, allowing discretionary trust assets to be transferred into a company or fixed trust structure with reduced stamp duty and capital gains tax consequences. This relief is time-limited and requires advance planning.
3. Convert to a fixed or unit trust. Where family dynamics allow for fixed entitlements among beneficiaries, a conversion to a fixed trust preserves the flow-through tax treatment. However, this eliminates the distribution flexibility that makes discretionary trusts attractive in the first place.
The right pathway depends heavily on individual circumstances: the nature of assets held in trust, the marginal rates of current and future beneficiaries, the trust's exposure to capital gains, and the intended succession plan.
This article provides general information only and does not constitute tax or legal advice. Discretionary trust restructuring decisions involve complex legal and tax considerations. Consult a qualified wealth adviser or tax professional before taking any action.
Concrete Case: The Nguyen Family Trust
Consider a common scenario playing out across suburban Australia right now. The Nguyen family established a discretionary trust in 2015 to hold the income from their property development business in Brisbane. The trust currently earns $180,000 per year in net distributable income.
Under the current system, the trustee distributes income as follows:
- $18,200 to 20-year-old daughter Linh (earning $18,200 from part-time work — tax-free threshold used up): tax-free
- $45,000 to non-working spouse Mai (total income $45,000, taxed at 0%–19%): effective tax $5,092
- $116,800 to David (principal beneficiary, total income ~$280,000 including salary): taxed at 45% marginal rate
Effective total tax under current system on the $180,000 trust income: approximately $57,000.
Under the proposed 30% minimum from 1 July 2028:
The trustee pays 30% tax on all $180,000 distributed to non-corporate beneficiaries = $54,000 in trustee-level tax.
- Linh and Mai receive non-refundable credits for their allocated shares of that $54,000. Since their marginal rates are below 30%, their excess credits are lost — they cannot claim a refund.
- David, taxed at 45%, will still owe top-up tax on his share (45% minus 30% = 15% on his $116,800 share ≈ $17,520 additional).
Total tax under the new regime: $54,000 (trustee) + $17,520 (David's top-up) = $71,520.
That is an increase of approximately $14,500 per year, or $43,500 over three years — just for the Nguyen family trust alone. For trusts with lower-earning beneficiaries receiving larger distributions, the impact is proportionally greater.
If the Nguyen family restructures into a company via the proposed rollover relief before July 2030, the company pays the 25% small business corporate tax rate on retained earnings, and David is only taxed personally when dividends are paid. The net outcome depends on dividend timing and franking credit management — a conversation that requires a tax adviser who understands both their personal income position and their business growth plans.
The window to act is 12 May 2026 (announcement) to 1 July 2028 (commencement). Effective planning time, accounting for legal lead times, is closer to 18 months.
What This Means for Succession Planning
A dimension often overlooked in early media coverage is the impact on intergenerational wealth transfer. Discretionary trusts have long served as the primary vehicle for passing business assets to the next generation while managing tax across beneficiaries at different life stages.
If the minimum tax erodes the income-splitting benefit, the relative attractiveness of holding assets in a trust versus a company or individual name shifts materially. For families mid-way through a succession plan — for example, gradually increasing distributions to adult children who are taking over the family business — the new rules could require a complete rethink of the transition strategy.
Testamentary trusts created under wills signed after 12 May 2026 will not receive the grandfathering protection and will be subject to the new rules. Families with estate planning documents that contemplate discretionary testamentary structures should review those documents with their solicitor and financial planner urgently.
What to Do Between Now and 2028
The ATO has confirmed that consultation on the implementation details will occur before legislation is finalised. This creates an unusual opportunity: the next 12 months may include a comment period during which industry feedback could shape exemptions, thresholds, or transition provisions.
In the meantime, advisers are recommending that discretionary trust holders take four immediate steps:
- Map your beneficiary tax positions. Identify every current and likely future beneficiary and their expected marginal rates at the time distributions will be made.
- Quantify your exposure. Model the tax difference under the new 30% minimum versus your current distribution patterns.
- Assess restructuring options. Understand whether a company, unit trust, or retained current structure best serves your goals — taking into account capital gains, stamp duty, and the rollover relief timeline.
- Review wills and estate plans. Any will or testamentary document that contemplates a discretionary trust created after 12 May 2026 should be revisited.
For families and business owners who built their financial structures around the current trust system, the 2026 Budget has set a clock ticking. The 30% minimum tax is not yet law, but the planning decisions made in the next 12 to 18 months will determine whether the structural shock is managed — or absorbed unprepared.
A wealth management specialist who understands discretionary trust planning can model the specific impact on your trust and outline the restructuring options available under the proposed rollover relief provisions before the legislative window closes.
