If you run a family business or hold investments through a discretionary (family) trust, this is the most significant tax proposal in the recent Federal Budget for you. The government has announced a 30% minimum tax on discretionary trusts from 1 July 2028. It is not yet law and is still working its way through consultation, with exposure draft legislation released in September 2026, but it would meaningfully change how family trusts are taxed, and it comes with more than one way to respond. Here is a plain-English explanation, and an important message up front: there is time to plan, so this is a reason to review your structure with us, not to rush into anything.
How family trusts are taxed now
To see what is changing, it helps to recall how a discretionary trust works today. The trust itself generally pays no tax where it distributes all of its income each year. Instead, the beneficiaries include their share in their own tax returns and pay at their own marginal rates. A common and legitimate feature has been distributing income to family members on lower tax rates to reduce the family group’s overall tax, often described as income splitting. It is this feature that the proposal is aimed at.
What is proposed
Announced on 12 May 2026 as part of the 2026-27 Budget, and released as exposure draft legislation for consultation in September 2026, the measure would introduce a 30% minimum tax on discretionary trusts from 1 July 2028. It is not yet law. In outline:
- It applies at the trustee level. The trustee would pay a minimum of 30% tax on the trust’s taxable income.
- Individual beneficiaries get a credit. Non-corporate beneficiaries who are presently entitled to trust income would receive a non-refundable income tax credit for the tax the trustee has paid on that income.
What it means in practice
The effect depends on the beneficiary’s own tax rate, and the word non-refundable is doing a lot of work:
- Beneficiaries on 30% or higher. Broadly, if a beneficiary’s marginal rate is already 30% or more, the credit offsets their liability and there is little or no extra tax overall.
- Beneficiaries on lower rates. Broadly, for beneficiaries with taxable income under about $45,000, the 30% paid by the trustee exceeds the tax they would have paid, and because the credit is non-refundable they cannot get the difference back. In effect, that income is taxed at a 30% floor. This is the intended result, since the measure targets distributions to lower-taxed beneficiaries.
There are two further points worth knowing. Corporate beneficiaries, commonly known as bucket companies, would not receive the non-refundable credit, which is designed to stop the credit being converted into refundable franking credits. The practical effect is potential double taxation, with the trust paying 30% and the company then paying tax on the same income without a credit, so bucket-company strategies would largely stop working. And where a trustee receives franked dividends, it would be required to apply available franking credits against the minimum tax first, with the exposure draft proposing refunds for franking credits that remain after the trustee has offset its own liabilities.
Which trusts and income are not caught
Importantly, this targets discretionary trusts specifically. A number of trust types are proposed to be excluded, including fixed trusts, widely held trusts, complying super funds, special disability trusts, deceased estates and charitable trusts, and distributions to charities and other income tax exempt entities are carved out. The exposure draft also proposes a broader new definition of a fixed trust, under which a trust can qualify as fixed where it has no material discretionary elements, so that genuinely commercial structures are not caught. Certain income is also proposed to be excluded, including primary production income and, subject to integrity limits, income of genuine testamentary trusts. The precise boundaries are still being finalised through consultation, so they may shift.
The restructure window
Recognising the impact, the government also proposed a time-limited rollover to help those who decide to change structures. The key features:
- It would provide relief from some immediate tax consequences, including capital gains tax, when moving assets out of a discretionary trust into a different structure such as a company or a fixed trust.
- It would be available for three years, from 1 July 2027 to 30 June 2030.
- There is no grandfathering, so existing trusts would be subject to the 30% minimum tax from 1 July 2028 unless they restructure or take one of the other options below.
A third option: electing to fix the beneficiaries
The exposure draft legislation released in September 2026 added a further option beyond paying the tax or restructuring out. Under the draft, an existing discretionary trust could elect to nominate specific beneficiaries and fix their entitlements, and by doing so sit outside the 30% minimum tax regime entirely, without restructuring into a company or a fixed trust. Some commentators refer to it as a fixed-distribution election. In broad terms:
- The trustee nominates specific beneficiaries and sets their fixed percentage entitlements to both the income and the capital of the trust, with each nominated beneficiary taking the same share of both.
- The trust then sits outside the minimum tax, and its income is taxed in the beneficiaries’ hands at their own rates, as it is now. The election would not require a restructure and is not expected to trigger a capital gains tax event or state stamp duty.
- The trade-off is significant. The election is largely permanent and hard to reverse, and it gives up the year-to-year distribution flexibility that is the main reason many families use a discretionary trust. There is also a timing limit, with an existing trust needing to make the election for the relevant income year or losing the ability to do so later.
This election is still exposure draft detail, released for consultation, so it may change before the final law. Taken together, an affected trust would have three broad paths: do nothing and pay the 30% minimum tax, elect to fix the beneficiaries and stay outside the regime, or use the rollover to restructure out. Each carries significant and largely irreversible consequences, which is exactly why it is a decision to work through carefully rather than rush.
What you should, and should not, do now
Our advice is measured. Do not rush to restructure or make an election. The measure is not yet law, the detail is still under consultation and could change, and each of the options carries income tax, capital gains tax, stamp duty and Division 7A consequences that differ for every family and business. Equally, do not ignore it. There is genuine time to plan, with the rollover running to mid-2030, and the earlier we review your structure together, the more options you will have and the smoother any change can be. It is also worth remembering that even under the proposal, trusts remain valuable for asset protection and succession planning. What is changing is one particular tax benefit, not the usefulness of the trust itself.
How MS Financial Services can help
This is exactly the kind of change where good advice pays for itself. Our Business Advisory and Tax & Compliance teams can review how your trust is used, model what the proposal would mean for your family group, and, when the law is settled, help you choose between paying the tax, electing to fix your beneficiaries, or using the rollover to restructure. We will also keep you updated as the legislation is finalised. To start the conversation early, get in touch with our team.
Frequently Asked Questions
What is the 30% minimum tax on trusts?
It is a proposed tax, from 1 July 2028, under which the trustee of a discretionary trust would pay a minimum of 30% on the trust’s taxable income. Individual beneficiaries would receive a non-refundable credit for the tax the trustee paid.
Does it apply to my family trust?
If you have a discretionary (family) trust, it is the target of the measure. Several other trust types are proposed to be excluded, including fixed trusts, complying super funds, special disability trusts, deceased estates and charitable trusts, and some income such as primary production income is also excluded. The exact boundaries are still being finalised.
Will I definitely pay more tax?
Not necessarily. If your beneficiaries are already on marginal rates of 30% or more, there may be little or no change. The extra tax arises mainly where income was being distributed to beneficiaries on lower rates, because the 30% credit is non-refundable.
Can my trust avoid the tax without restructuring?
Possibly. Exposure draft legislation released in September 2026 proposes an election under which an existing discretionary trust could nominate fixed beneficiary entitlements and sit outside the 30% minimum tax without restructuring. The trade-off is that the election is largely permanent and removes the trust’s year-to-year distribution flexibility, and it is still draft detail that could change.
Do bucket company strategies still work?
Largely no, under the proposal. Corporate beneficiaries would not receive the non-refundable credit, which can lead to the same income being taxed at the trust and again at the company, so the traditional bucket-company approach would generally stop being effective.
Should I wind up or restructure my trust now?
Not without advice, and generally not yet. Because the measure is not law and the detail may change, most advisers suggest planning now but waiting for the final legislation before acting. A three-year rollover to 30 June 2030, along with the fixed-distribution election, gives time to choose the right path for you.
Is it law yet?
No. It was announced in the 2026-27 Budget, with exposure draft legislation released for consultation in September 2026, and is not yet law. The detail and timing may change before it takes effect.