Quick Summary
The key discretionary trust reforms are:
Introduction of a 30% minimum tax on discretionary trusts.
The tax is paid by the trustee.
Beneficiaries generally receive tax credits for tax already paid.
Corporate beneficiaries are treated differently.
A three-year restructuring rollover is being introduced.
Numerous trust types and income categories are exempt.
The reforms commence from 1 July 2028.
As at September 2026, the reforms are proposed but not yet enacted into law.
Key Dates
| Date | Event |
|---|---|
| 12 May 2026 | Budget announcement of discretionary trust reforms |
| 8 July 2026 | Treasury consultation paper released |
| 3 September 2026 | Exposure draft legislation released for consultation |
| 1 July 2027 | Three-year restructuring rollover commences |
| 1 July 2028 | Proposed commencement of 30% minimum trust tax |
What This Means for FMA Clients
Clients most likely to be affected are:
Family discretionary trusts.
Business owners operating through trust structures.
Investment trusts distributing income to family members.
Trusts currently using bucket companies.
The biggest planning questions over the next 18 months are likely to be:
Should the trust remain in place?
Should assets be restructured during the rollover window?
How will bucket company strategies be affected?
What is the expected tax cost post-2028?
For many SME and family-group clients, these reforms could have a greater long-term impact than the negative gearing changes because they affect the core structure through which businesses and investments are owned and income is distributed.
1. Why Is the Government Changing Trust Taxation?
The Government's position is that discretionary trusts provide flexibility to distribute income to beneficiaries on lower marginal tax rates, commonly referred to as "income splitting".
According to Treasury:
Australia has more than 1 million trusts.
Around 840,000 are discretionary trusts.
Trust income is increasingly concentrated among higher-wealth households.
Families using discretionary trusts often face lower average tax rates than families earning similar income without trusts.
The reform is intended to align trust income taxation more closely with taxation of wage and salary earners.
2. Introduction of a 30% Minimum Tax
The headline reform is a minimum 30% tax on discretionary trust income.
From 1 July 2028, trustees will generally be required to pay tax at a minimum rate of 30% on taxable income distributed through a discretionary trust.
This effectively removes much of the tax advantage obtained by distributing income to beneficiaries who pay tax below 30%.
3. The Tax Is Paid by the Trustee
Unlike the current regime where beneficiaries generally pay tax on their share of trust income, the new system imposes the minimum tax liability at the trustee level.
The Government's rationale is that trustees control discretionary distributions and therefore should bear responsibility for the minimum tax obligation.
4. How Tax Credits Will Work
Beneficiaries will still include trust distributions in their tax returns.
However, non-corporate beneficiaries will generally receive a non-refundable tax credit for the tax already paid by the trustee.
Example
Current Rules
Trust profit: $50,000
Distributed to adult beneficiary with no other income
Beneficiary pays tax at their marginal rate
Under Proposed Rules
Trustee pays 30% minimum tax ($15,000)
Beneficiary declares $50,000
Beneficiary receives a tax credit for the trustee tax paid
This ensures the overall tax paid is generally at least 30%
5. Impact on Income Splitting
Historically, many family groups used discretionary trusts to distribute income among:
Spouses
Adult children
Retired parents
Other family beneficiaries
where tax rates were lower.
The new rules significantly reduce the effectiveness of this strategy because trust income will already have been taxed at a minimum 30% rate.
For many family trusts, this is the single biggest practical impact of the reform.
6. Corporate Beneficiaries ("Bucket Companies")
One of the most important aspects for accountants is the treatment of corporate beneficiaries.
Under the proposal:
Corporate beneficiaries generally do not receive the same tax credits as individuals.
The reforms are specifically designed to reduce the use of bucket companies.
This means many existing trust structures that rely on corporate beneficiaries may require review well before 1 July 2028.
7. Restructure Relief
Recognising the impact of the reforms, the Government will provide a restructuring rollover.
The proposed relief will:
Commence 1 July 2027.
Apply for three years.
Facilitate the transfer of assets out of discretionary trusts into alternative structures.
The objective is to allow affected taxpayers to restructure without immediate tax consequences.
8. Trusts That Are Exempt
The minimum tax is not intended to apply to all trusts.
Proposed exclusions include:
Fixed trusts
Widely held trusts
Managed investment trusts
Superannuation funds
SMSFs
Special disability trusts
Charitable trusts
Deceased estates
Testamentary trusts
These exemptions substantially limit the scope of the reform to traditional family discretionary trust arrangements.
9. Consultation Updates Since the Budget
Since the Budget announcement, Treasury released a consultation process and exposure draft legislation
The draft legislation introduced additional concepts including:
An "Excluded Election Trust" mechanism.
Detailed restructuring provisions.
Transitional arrangements and anti-avoidance measures.
The design continues to evolve and FMA Partners is monitoring further legislative developments closely.