Federal Budget 2026 Review - Discretionary Trust Changes and What You Need to Know

The Australian Federal Government has announced major proposed reforms that will have impacts on the tax treatment of discretionary trusts. These proposed measures are likely to affect many of the 840,000 discretionary trusts operating throughout Australia.

A key driver for the proposed changes by the Federal Government is to address ‘fairness concerns’ and the frequency with which families and beneficiaries use trusts to split income among family members and other beneficiaries who are subject to lower tax rates. The government has stated that evidence that trustees cluster income around key tax thresholds indicates that they structure distributions to minimise tax. In some cases, the government is concerned that trustees also direct payments to corporate beneficiaries in order to access the lower corporate tax rate.

This article covers the current treatment of discretionary trusts and how these proposed changes differ from the current norm. This article also discusses the proposed timeline for the changes, which may give you time to determine if your structures remain suitable before the changes take effect.

Please note that these changes are proposed measures only and have not yet passed into law. As at the date of this article, the Government has not introduced any legislation into Parliament to give effect to these announcements. However, given the Government’s stated intent and the proposed commencement date of 1 July 2028, now is a good time to begin reviewing your arrangements so that you are prepared if and when the changes do take effect.

How are Discretionary Trusts Currently Treated?

Discretionary trusts have been a go-to option for holding assets or running a business through a trust structure. Where families establish a discretionary trust for their benefit, they commonly refer to it as a ‘Family Trust’. The terms set out in the trust deed establish and govern the trust, and while it is not a separate legal entity, the Australian Taxation Office recognises it as a separate entity for tax purposes.

Under the current approach, a trust does not have to pay tax on income that the trustee distributes to beneficiaries, but does have to pay tax on undistributed income. The trustee is free to distribute trust income to as many beneficiaries as possible, and in proportions that take best advantage of those beneficiaries' personal marginal tax rates. Some trust structures also use a ‘bucket company’. This is simply a company included as a beneficiary of the discretionary trust. At the end of the year, once the trustee has distributed income to beneficiaries up to their desired tax brackets, the trustee can distribute any remaining income to the company instead.

As companies pay tax at a flat rate (around 25-30%), the company pays tax on that income at that rate and retains it in the company, rather than the income attracting higher individual tax rates. The company can then pay out those funds later (for example, as dividends), usually with franking credits attached, so that the ultimate recipients do not pay tax again on amounts on which the bucket company has already paid tax.

What are the Proposed Changes?

The Federal Government has announced that, from 1 July 2028, this flow-through treatment will no longer apply. Instead, the Government will require trustees to pay a minimum tax of 30% on the trust's taxable income before making any distributions to beneficiaries.

Beneficiaries will then receive 'non-refundable tax credits' representing the tax the trustee has already paid. Unlike franking credits, these credits cannot generate a refund. The practical effect is as follows:

• If a beneficiary's marginal tax rate is above 30%, they will need to pay a 'top-up' amount to cover the shortfall between the 30% the trustee has already paid and their applicable marginal rate.

• If a beneficiary's marginal tax rate is below 30%, they will not receive a refund or credit for the difference, so the excess tax the trustee has paid is effectively lost to the beneficiary.

Importantly, the Federal Government has indicated that corporate beneficiaries, such as bucket companies, will not receive non-refundable tax credits. The practical effect means that this will result in double taxation, whereby the trust pays the 30% minimum tax on its taxable income, and the corporate beneficiary then pays company tax at its applicable rate on the same income without any credit for the tax the trust has already paid.

Are There Any Transitional Arrangements?

The Federal Government will provide rollover relief for a period of three years from 1 July 2027 to assist small businesses and others that wish to restructure out of discretionary trusts into a different structure. This rollover provides relief from certain tax consequences (such as income tax and capital gains tax) if the trustee considers that a restructure is suitable for its circumstances.

It is important to note that the rollover relief window is intended to commence from 1 July 2027, one year before the new minimum tax rules take effect on 1 July 2028. This means there may be a window of opportunity to restructure before the changes take hold. If you are considering a restructure, it is advisable to seek advice well before the rollover window opens, as restructuring can take time to plan and implement properly.

What is the Landscape Moving Forward?

The exact mechanism or policy driving how the Government intends to implement and address the collection of the minimum 30% tax on trusts, how trustees use excess franking credits, or certain details of rollover relief for restructuring are not yet clear.

It will be important for small businesses or other groups which utilise discretionary trusts to review and consider if their current structure(s) are suitable following the proposed changes. While discretionary trusts retain certain benefits (such as an asset protection vehicle), it may be the case that they are no longer appropriate or a tax-effective option for certain groups or classes of taxpayers.

What Should I Do Now?

If you currently hold assets or run a business through a discretionary trust, we recommend taking the following steps:

• Review your current trust structure with your accountant or tax adviser to understand how the proposed changes would affect the tax position of your trust and its beneficiaries.

• If your trust distributes income to a bucket company, consider seeking specific advice on the potential double taxation impact, as the proposed rules mean that neither the trust nor the company will receive a credit for tax already paid at the trust level.

• Consider whether restructuring out of a discretionary trust into a different structure (such as a company or unit trust) may be appropriate for your circumstances, keeping in mind the rollover relief window proposed to be available from 1 July 2027.

• Keep across any further Government announcements or draft legislation, as the details of how these changes will operate in practice are yet to be confirmed.

What Cleardocs Products Are Available?

Cleardocs offers the following relevant products:

• Trusts Documents
• Discretionary Trust - bucket company

More Cleardocs information on related topics

• Family trusts and the 'Bucket Company' – why should I use one?
• Family Trusts and end-of-year distributions - Revisiting the benefits of the 'Bucket Company' structure