One of the most far-reaching structural changes in the 2026-27 Budget is the introduction of a minimum 30% tax on the income of discretionary trusts, effective from 1 July 2028. If you operate a family trust, a family discretionary trust, or a business using a discretionary trust structure, this change affects you directly.

How discretionary trusts are taxed today

Currently, discretionary trusts are not taxed as separate entities. The trustee distributes income to beneficiaries who are taxed at their own individual or corporate rates. This flexibility has made discretionary trusts a widely used tool for managing family tax positions, allowing income to be directed to lower-taxed beneficiaries and reducing the overall tax burden of a family group.

What changes from 1 July 2028

From the 2028-29 income year, trustees will be required to pay a minimum tax of 30% on the taxable income of discretionary trusts.

The mechanism works as follows:

• The trustee pays 30% tax on the trust's taxable income (unless a higher rate already applies to the trust).
• Most beneficiaries, other than corporate beneficiaries, receive a non-refundable tax credit for the tax paid by the trustee. This means if a beneficiary's marginal rate is above 30%, they will pay additional tax on top. If their rate is below 30%, they receive the credit but no refund of the difference.
• Corporate beneficiaries do not receive the non-refundable credit. They are assessed on the trust income to which they are entitled, and the trustee's minimum tax payment is not available to offset their liability. This effectively creates a double-taxation risk for structures that use corporate beneficiaries to retain earnings at a lower rate.

What income and trust types are excluded

Not all trust income or trust structures are captured by the new minimum tax:

• Excluded trust types: Fixed trusts, widely-held trusts (such as managed investment trusts), complying superannuation funds, special disability trusts, deceased estates, and charitable trusts are all excluded.
• Excluded income: Primary production income, certain income relating to vulnerable minors, amounts subject to non-resident withholding tax, and income from assets of discretionary testamentary trusts that were already in existence at 7:30pm AEST on 12 May 2026 are excluded.
• Franking credits: Trustees receiving franked dividends will be required to use available franking credits to meet the minimum tax.
  

Three years of restructuring rollover relief

The Government has recognised that the new rules will prompt many families and small businesses to consider restructuring away from discretionary trusts into alternative structures such as companies or fixed trusts. Expanded rollover relief will be available for three years from 1 July 2027, allowing eligible taxpayers, including small businesses, to transfer assets without triggering immediate CGT or other tax consequences.

This rollover relief window closes on 30 June 2030. It is not indefinite and the CGT changes announced in the Budget (applying from 1 July 2027) mean that restructuring sooner, while existing transitional CGT protections are available, may produce a better outcome than waiting.

Please contact us if you have any questions - email us or phone our team on 02 9899 3044.