Discretionary trusts, often referred to as family trusts, have been a popular structure for Australian families and businesses for many years. They are commonly used to operate family businesses, hold investments and assist with succession planning.
Their flexibility, together with potential asset protection and estate planning benefits, has made them an attractive option for many groups.
However, the Government has proposed significant changes that could affect how discretionary trusts are taxed in the future.
What is changing?
In the 2026–27 Federal Budget, the Government announced a proposal for trustees of discretionary trusts to generally pay a minimum tax rate of 30% on the trust’s taxable income from 1 July 2028.
According to the Government, the proposal is intended to better align the tax paid on trust income with that paid by salary and wage earners, while reducing opportunities to split income between family members.
The proposal has generated considerable debate, with professional bodies, business groups and tax advisers raising concerns about the potential increase in complexity and compliance costs for genuine family businesses and investment structures.
How is the proposed tax expected to work?
Under the proposal:
- The trustee would generally pay tax at a minimum rate of 30% on the trust’s taxable income.
- Where trust income is distributed to individual beneficiaries or certain other non-corporate beneficiaries, those beneficiaries would generally receive a non-refundable tax offset recognising the tax already paid by the trustee.
- The offset is intended to reduce the risk of the same income being taxed twice, while maintaining the effect of the 30% minimum tax rate.
The minimum tax would not apply to every trust. The Government has indicated that a number of trusts would be excluded, including:
- fixed trusts and widely held trusts;
- complying superannuation funds;
- charitable trusts;
- deceased estates;
- special disability trusts; and
- genuine testamentary trusts.
Primary production income and certain income relating to vulnerable minors would also be excluded.
The Government has also stated that more than 90% of small businesses are not expected to be affected. However, there are still important issues for family groups using discretionary trusts to consider.
What could this mean for family businesses?
One area likely to receive close attention is the use of companies as beneficiaries of family trusts.
Many family groups have historically distributed some trust income to a company. This can provide flexibility to manage cash flow, retain profits within the business and fund future growth.
Under the proposed rules, however, the corporate beneficiary would not receive a tax offset for the tax already paid by the trustee. In some circumstances, this could result in income distributed from a discretionary trust to a company being subject to double taxation.
The proposed changes could also make it more difficult for some family groups to fully utilise existing tax losses.
The overall impact will depend on each group’s circumstances, but the proposed minimum tax could reduce some of the flexibility currently available when managing taxable income within a family structure.
Rollover relief for restructuring
The Government has also proposed a temporary three-year rollover period, commencing from 1 July 2027, to help businesses and other taxpayers restructure from discretionary trusts into alternative structures, such as companies or fixed trusts, without triggering immediate income tax or capital gains tax consequences.
While this may assist some groups, restructuring is rarely straightforward. Depending on the circumstances, other matters may need to be considered, including:
- stamp duty;
- loan approvals and financing arrangements;
- changes to contracts;
- licensing requirements; and
- professional and implementation costs.
Even relatively simple restructures can involve significant time and cost, so careful planning will be important.
The rules are not yet final
The proposed 30% minimum tax remains subject to consultation.
Treasury released a consultation paper in July 2026 seeking feedback on a range of design issues, including how the proposed rules would operate in different circumstances.
Final legislation has not yet been introduced, meaning aspects of the proposal could still change before the rules become law.
For this reason, groups using discretionary trusts should avoid making major structural decisions based solely on the current proposal. Instead, it is sensible to monitor developments while considering whether existing structures are likely to remain appropriate if the proposal proceeds.
What should you do now?
For many families, discretionary trusts provide benefits that extend beyond tax, including asset protection, succession planning and business flexibility. The proposed changes do not remove these benefits or prevent discretionary trusts from continuing to be used.
However, the proposal has the potential to change the tax outcomes for some family groups, particularly those with more complex structures or those that regularly distribute income to companies.
With the proposed start date still some time away, there is an opportunity to understand how the changes could affect your circumstances and consider whether any planning or restructuring may be appropriate.
As the legislation develops, we can help you assess the potential impact on your business or investment structure and determine whether any action is warranted.
If you have questions, please do not hesitate to contact our office to speak to one of our team.
