Tax on discretionary trusts: not what you want to hear

The Government will fundamentally change how discretionary trusts are taxed imposing a minimum 30% tax on trustees from 1 July 2028. The practical outcome for most trusts will be more tax to pay with the cash required earlier to meet the payment.

From 1 July 2028, trustees will pay a minimum 30% tax on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

Excluded from the changes are other types of trusts such as fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

Exclusions also apply to certain types of income including:

• primary production income
• income relating to vulnerable minors
• amounts to which non-resident withholding tax applies
• income from assets of discretionary testamentary trusts existing on Budget night (7.30pm AEST 12 May 2026).

How the 30% minimum tax will work

Currently, the trustee determines which beneficiaries income will be appointed to and the amount. The beneficiary is then taxed on distributions at their marginal tax rate.

From 1 July 2028, the trustee will pay a minimum 30% tax on the taxable income of the trust, altering the traditional flow-through tax treatment.

When an individual or non-corporate beneficiary receives the distribution, they will still need to declare the income in their tax return but they will also receive a non-refundable tax credit for the tax payable by the trustee. For low or no income beneficiaries, the imposition of the 30% minimum tax will increase the amount of tax they pay. The non-refundable nature of the credits removes the tax advantage of distributing to low-income earners.

Corporate beneficiaries will not receive a tax credit for the tax paid by the trustee. The policy ends practical use of ‘bucket companies’ by denying them access to trust credits, causing potential double taxation of the same amount.

The practical impact

Changing the way discretionary trusts are taxed will have a fundamental impact for many people and might mean structural changes to improve the efficiency and administration of the trust.

The practical impact is that the measures prevent trustees from improving tax outcomes across the family group by splitting income and directing larger distributions to beneficiaries with low marginal tax rates. And, the cash flow effect of the tax is more immediate. Tax will be payable by the trustee on the trust tax return. Whilst not clear, we expect that trusts will enter the instalment tax system, which will also introduce a more immediate cashflow impact.

There are no carve-outs for small business.

The use of bucket companies

Appointing income to a company, a strategy sometimes used to defer the tax impact, may no longer be an effective strategy. Whilst not preventing it, the Government has effectively used tax policy to remove the planning option.

Going forward

If you have a family trust it will be important to review its operation. Again, there is no one-size-fits-all solution. There are tax and cashflow impacts that come with this change, and it will be important to take advice early to assess your circumstances, the impact of the changes, and the appropriate forward direction.

To aid restructures from discretionary trusts into companies or fixed trusts, the government has stated that it will extend rollover relief from 1 July 2027 for three years to protect against detrimental income tax or capital gains tax consequences.

Support to assess and restructure

We can assist you by assessing the viability of your current discretionary trust structure and where required, assist with the restructure.

Here’s who you can contact for assistance:

Linda Jing
Director, Tax Services

Stephen Maze
Director Business Services

Mario Raciti
Director Business Services

Mark Lennon
Director Business Services

Reference

• Budget 2026-27: paper No. 2 (page 22)

• Fact sheet: Minimum tax on discretionary trusts

• Media Release: Tax reform for workers, businesses and future generations