Treasury’s consultation paper reveals a fundamental change to the taxation of family trusts
The Federal Government’s 2026–27 Budget contained several significant tax measures affecting the structures through which Australians hold property, operate businesses and accumulate wealth. In our recent article, “Residential Property Tax Reform: New Negative Gearing and SMSF Borrowing Restrictions,” we examined the Government’s proposed changes affecting residential property investment.
The next major proposal concerns discretionary trusts.
On 8 July 2026, Treasury released a consultation paper setting out how the Government’s proposed 30% minimum tax on discretionary trusts may operate. The measure is intended to commence on 1 July 2028. Consultation closed on 31 July 2026, but the final design and legislation have not yet been released. Although described as a “minimum tax”, the proposal is not merely an adjustment to the tax rates paid by beneficiaries. It would introduce a new tax liability at the trustee level, materially changing the way many family trusts, business trusts and investment structures are taxed.
For some taxpayers, particularly those distributing income to adult beneficiaries on tax rates below 30%, the proposal would substantially reduce the tax advantages historically associated with discretionary trusts. For others, the consequences could be more severe. Distributions to corporate beneficiaries—or “bucket companies”—may become commercially unworkable in their current form.
Importantly, these proposals are not yet law. However, trustees, business owners and family groups should begin assessing their structures now, rather than waiting until 2028.
What is being proposed?
From 1 July 2028, the trustee of an in-scope discretionary trust would generally be required to pay tax equal to at least 30% of the trust’s taxable income.
Trustees would continue to determine which beneficiaries are presently entitled to the trust’s income. Beneficiaries would also continue to include their respective shares of the trust’s taxable income in their own income tax returns.
The critical change is that the trustee would first pay the minimum tax.
Eligible individual and other non-corporate beneficiaries would receive a corresponding non-refundable tax offset for the tax paid by the trustee. The offset would reduce the beneficiary’s income tax liability but could not generate a refund.
The Government describes the proposal as a means of ensuring that income earned through discretionary trusts is taxed at no less than 30%, regardless of how that income is allocated among family members. The Budget materials state that discretionary trusts currently allow income to be distributed to beneficiaries on lower marginal tax rates, producing tax outcomes unavailable to individuals who earn their income directly.
In practical terms, the proposal establishes a tax floor beneath trust income.
Individual beneficiaries
An individual beneficiary would continue to be assessed on their share of the trust’s taxable income at their marginal tax rate.
They would receive a non-refundable offset for their share of the minimum tax paid by the trustee.
Where the beneficiary’s ordinary income tax liability exceeds the offset, the beneficiary would pay the difference. Where the beneficiary’s tax liability is less than the offset, the unused portion would not be refunded or carried forward.
This means that distributing income to adult beneficiaries whose marginal rates are below 30% would generally no longer reduce the tax on that income below 30%.
There is also an important Medicare levy issue. The proposed minimum tax offset would reduce income tax, but it would not reduce the beneficiary’s Medicare levy liability. This may result in an effective minimum burden of approximately 32% for many individual beneficiaries once the Medicare levy is included.
Example
Assume a discretionary trust derives taxable income of $200,000 and distributes all of that income to one individual beneficiary.
The trustee would pay minimum tax of $60,000.
The beneficiary would include the $200,000 in their assessable income and receive a $60,000 non-refundable offset. Depending on the beneficiary’s other income, additional income tax may still be payable, together with the Medicare levy.
The Government’s measure therefore does not impose a flat final tax rate of 30%. Rather, it ensures that the combined income tax paid on the trust income is generally not less than 30%, while preserving higher marginal rates where they otherwise apply.
Corporate beneficiaries and bucket companies
The proposed treatment of corporate beneficiaries is considerably more significant.
Under the consultation model, a corporate beneficiary would include its share of the trust’s taxable income in its own assessable income. However, unlike an individual beneficiary, the company would not receive an offset for the minimum tax already paid by the trustee.
The Government says this is necessary to prevent the minimum tax from being converted into refundable franking credits through a corporate beneficiary.
The immediate consequence may be tax at both the trust and corporate-beneficiary levels.
Example
Assume a discretionary trust has taxable income of $200,000 and makes a corporate beneficiary presently entitled to that amount.
Under the proposed rules:
- the trustee may pay $60,000 of minimum tax; and
- the corporate beneficiary may also be assessed on the $200,000 and pay $60,000 at the 30% company tax rate, without receiving an offset for the trustee tax.
The immediate combined liability would therefore be $120,000—an effective tax impost of 60% at the trust and company levels on the same $200,000 of taxable income.
The company’s shareholders may subsequently obtain some benefit through the imputation system when it pays franked dividends to them. However, the timing, cash-flow implications and ability to use the resulting franking credits may make the structure highly inefficient.
If the measure proceeds in this form, it is difficult to identify many circumstances in which discretionary trust distributions to corporate beneficiaries would remain viable.
This represents a direct challenge to one of the most common tax-planning structures used by Australian family groups.
Trust-to-trust distributions
The proposal may also affect distributions between trusts.
Where an in-scope discretionary trust receives income from another discretionary trust, it would generally receive a minimum-tax offset. That offset would be applied against its own minimum-tax liability but could not ordinarily be refunded or carried forward.
This could create adverse results where the recipient trust has carried-forward tax losses. Those losses may no longer provide the same economic benefit when applied against income that has already borne minimum tax in the distributing trust.
Family groups operating chains of trusts, interposed entities or trusts with accumulated losses will therefore require particular attention.
Which trusts would be affected?
The proposed minimum tax is intended to apply to discretionary trusts.
However, identifying precisely what constitutes a discretionary trust is itself one of the matters under consultation. Existing tax law often defines a fixed trust narrowly, with trusts falling outside that definition treated as non-fixed or discretionary.
Treasury acknowledges that relying on the existing fixed-trust boundary could capture more trusts than intended.
The current proposal would exclude several categories, including:
- fixed and widely held trusts;
- complying superannuation funds;
- special disability trusts;
- deceased estates;
- charitable trusts; and
- certain testamentary trusts.
Certain types of income would also be excluded, including primary production income, qualifying income relating to vulnerable minors and some income subject to non-resident withholding tax.
The boundaries of these exclusions—and the treatment of tax-exempt beneficiaries and testamentary trusts—remain important design issues.
Franking credits
Trustees receiving franked dividends would be required to use the associated franking credits against their tax liabilities, including the minimum tax.
Treasury has canvassed two possible treatments for franking credits exceeding the trustee’s minimum-tax liability:
- Refunding excess franking credits to the trustee; or
- Carrying the excess credits forward against future liabilities, potentially subject to limits and additional integrity rules.
The chosen approach will materially affect trust cash flow and compliance.
Further rules will also be required to ensure that beneficiaries receive appropriate recognition for underlying company tax and that a refund received by the trustee can be distributed without giving rise to another tax liability.
Expanded rollover relief
Recognising that some taxpayers may wish to move away from discretionary trusts, the Government proposes expanded income-tax rollover relief for a three-year period beginning on 1 July 2027.
The relief is intended to permit qualifying assets to be transferred from a discretionary trust into another structure—such as a company or fixed trust—without immediately triggering capital gains tax or other income-tax consequences.
The proposed relief appears broader than the existing small business restructure rollover. It may:
- apply regardless of the size of the trust;
- extend to passive investment assets;
- not require the transaction to satisfy the existing “genuine restructure” test; and
- permit changes in legal ownership where ultimate economic ownership remains within the same family group.
However, rollover relief does not necessarily make a restructure tax-neutral or commercially desirable.
State taxes remain a major concern
The proposed Commonwealth relief would not automatically relieve taxpayers from:
- State and Territory transfer duty;
- landholder duty;
- land tax consequences;
- foreign purchaser or surcharge land tax issues; or
- other State-based taxes.
For trusts holding valuable real property, these costs may make restructuring prohibitively expensive.
A restructure into a company may also involve the loss of the individual and trust 50% CGT discount on future capital gains. Fixed ownership interests may reduce asset-protection and succession-planning flexibility. Existing tax losses, trust elections and unpaid present entitlements may also be affected.
Accordingly, the existence of rollover relief should not be confused with a recommendation to restructure.
Division 7A and unpaid present entitlements
Treasury is also considering the interaction between the minimum tax and Division 7A.
In Commissioner of Taxation v Bendel [2026] HCA 18, the High Court held that a corporate beneficiary’s unpaid present entitlement was not, without more, a “loan” for the purposes of Division 7A.
The Government is now seeking feedback on implementing the previously announced but unenacted proposal to bring certain unpaid present entitlements within Division 7A, and on how that proposal should interact with the new minimum tax.
The practical significance of corporate beneficiary arrangements may diminish if distributions to bucket companies become subject to the proposed double layer of tax. Nevertheless, existing unpaid present entitlements and historic arrangements will need to be reviewed separately.
More than an income-splitting measure
The Government presents the proposal primarily as a measure to restrict income splitting.
Its impact is broader.
Discretionary trusts are widely used not only for tax planning, but also for:
- asset protection;
- holding family investments;
- succession planning;
- accommodating changes in family circumstances;
- separating business risks from valuable assets; and
- providing flexibility between generations.
The Budget materials acknowledge that trusts can serve asset-protection and succession-planning purposes.
By imposing tax at the trustee level and discouraging distributions to low-rate and corporate beneficiaries, the proposal alters the economic value of that flexibility.
For some family groups, the trust may remain the best structure despite the higher tax burden. For others, a company, fixed trust or combination of entities may produce a better long-term outcome.
The correct answer will depend on far more than the tax rate applying in 2028.
What should trustees and family groups do now?
The proposal is not yet law, and important design questions remain unresolved. Immediate restructuring would generally be premature.
Nevertheless, affected groups should begin a structured review addressing:
- whether each trust is likely to fall within the proposed regime;
- the trust’s current distribution pattern;
- distributions to low-rate individual beneficiaries;
- the use of corporate and trustee beneficiaries;
- unpaid present entitlements and Division 7A exposure;
- carried-forward tax and capital losses;
- the nature and cost base of assets held by the trust;
- potential CGT, duty and land-tax consequences of restructuring;
- the loss of the CGT discount if assets move to a company;
- asset-protection and succession-planning objectives; and
- the projected after-tax outcome under alternative structures.
The three-year rollover period proposed to commence on 1 July 2027 may become an important planning window. But the decision should be driven by the family group’s long-term objectives—not solely by the headline 30% rate.
The takeaway
The proposed minimum tax represents one of the most significant changes to the taxation of discretionary trusts in decades.
For individual beneficiaries, it would largely remove the ability to reduce tax on trust income below 30% through distributions to family members on lower marginal rates.
For corporate beneficiaries, the consequences may be much more disruptive. Unless the design changes, conventional bucket-company arrangements may face an immediate tax burden at both the trust and company levels.
Expanded rollover relief may provide an exit route, but restructuring can involve substantial trade-offs, including State duties, loss of the CGT discount, fixed ownership interests and reduced structural flexibility.
The legislation has not yet been finalised. Trustees should not rush to dismantle established structures, but neither should they wait until 2028 to understand the potential consequences.
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Gavel Law can assist trustees, business owners and family groups to review existing structures, model the proposed tax outcomes and assess whether restructuring would support their broader commercial, asset-protection and succession-planning objectives.
This article provides general information only and does not constitute legal, taxation or financial advice. The proposals discussed are subject to consultation and may change before legislation is introduced or enacted.
