As part of the Federal Budget 2026–27, the Australian Government has announced plans to introduce a 30% minimum tax on discretionary trusts from the 2028–29 income year.
If your business currently operates through a discretionary trust, these proposed changes could significantly impact your tax position and business structure.
While the legislation is not yet in force, now is the ideal time to review your arrangements and consider future planning opportunities.
What Is a Discretionary Trust?
A discretionary trust, commonly known as a family trust, is a popular structure used by Australian businesses and investors. Under this arrangement, a trustee manages assets and income on behalf of a group of potential beneficiaries, typically family members.
Discretionary trusts are widely used because they offer:
- Asset protection benefits
- Succession planning flexibility
- The ability to distribute income to beneficiaries in lower tax brackets
- Flexibility in managing family wealth
There are more than one million trusts in Australia, with approximately 80% classified as discretionary trusts. Around 350,000 active small businesses currently operate through this structure.
What Is Changing?
Under the proposed measures, trustees will pay a minimum tax rate of 30% on the trust’s taxable income from 1 July 2028.
The Government’s stated objective is to align the tax outcomes of discretionary trusts more closely with those of salary and wage earners, who currently face a 30% marginal tax rate on income between $45,001 and $135,000.
How Will the New Rules Work?
Under the proposed framework:
- Trustees will pay a minimum 30% tax on trust taxable income.
- Beneficiaries will continue to declare trust distributions in their personal tax returns.
- Non-corporate beneficiaries will receive non-refundable tax credits for tax already paid by the trustee.
- Corporate beneficiaries (often referred to as “bucket companies”) will not receive these tax credits.
For trusts that already distribute income to beneficiaries taxed at marginal rates of 30% or higher, the overall tax impact may be minimal.
Trusts Excluded from the Minimum Tax
The proposed minimum tax will not apply to:
- Fixed trusts
- Widely held trusts
- Complying superannuation funds
- Special disability trusts
- Deceased estates
- Charitable trusts
Certain income types will also be excluded, including:
- Primary production income
- Income relating to vulnerable minors
- Amounts subject to non-resident withholding tax
- Income from discretionary testamentary trusts that existed at the time of the announcement
Example: Trust vs Company Tax Outcomes
The Federal Budget papers illustrate the impact of the proposed changes using two business owners, Kurt and Loretta.
Loretta’s Company Structure
Loretta earns $300,000 through a company structure. She:
- Pays herself a salary of $100,000
- Retains $200,000 in the company to support business growth
The company pays the small business company tax rate of 25% on retained profits.
Total tax paid: $72,002
Kurt’s Discretionary Trust Structure
Kurt also earns $300,000 but operates through a discretionary trust. He:
- Pays himself a salary of $100,000
- Distributes the remaining $200,000 equally among four adult family members with no other income
- Retains the funds within the trust to support business growth
Under current rules, the family pays:
Total tax paid: $42,010
However, under the proposed minimum trust tax:
- The trust would pay 30% tax on the $200,000 not paid as wages
- The tax would apply regardless of how the income is distributed
Total tax paid: $86,002
As this example demonstrates, some business owners may find that operating through a company becomes more tax-effective than using a discretionary trust once the new rules commence.
Restructuring Relief for Small Businesses
Recognising the impact of these changes, the Government has proposed expanded restructuring concessions.
From 1 July 2027, eligible businesses will have access to a three-year period of expanded rollover relief when restructuring out of discretionary trusts.
This is expected to include relief from capital gains tax (CGT), making it easier and less costly to transition to alternative business structures.
Should You Review Your Business Structure?
If your business operates through a discretionary trust, now is the time to start assessing the potential impact of these proposed reforms.
Key considerations may include:
- Whether your current trust structure remains tax-effective
- The potential benefits of transitioning to a company structure
- Employing family members who actively work in the business and paying salary or wages instead of trust distributions
- Taking advantage of future restructuring concessions
Every business is different, and the right strategy will depend on your specific circumstances, growth plans and succession objectives.
Need Advice?
The proposed minimum tax on discretionary trusts could have significant implications for small business owners and family groups.
We can help you assess how these changes may affect your business, review your current structure, and develop a tax-effective strategy for the future.
Contact our office today to discuss your options and ensure your business remains well positioned ahead of the proposed 2028 changes.