Navigating the Proposed 30% Minimum Tax on Discretionary Trusts

Discretionary trusts, commonly referred to as family trusts, have long served as a cornerstone of Australian financial planning. For decades, business owners, primary producers, and family groups have relied on their flexibility to hold assets, operate family enterprises, manage succession planning, and protect family wealth.

However, proposed tax reforms announced in the 2026–27 Federal Budget represent one of the most significant shifts in trust taxation in recent history.

From 1 July 2028, the Federal Government proposes that trustees of discretionary trusts pay a minimum tax rate of 30% on the trust’s taxable income.

Here is a breakdown of what is proposed, how the mechanism is designed to work, and what it means for your business and wealth strategies.

How the Proposed 30% Tax Mechanism Works

The stated objective behind the reform is to align tax rates on trust income with those paid by salary earners, while curbing opportunities to split income among family members in lower marginal tax brackets.

Under the primary draft framework:

• Trustee Tax Payment: The trustee pays a flat 30% tax directly on the trust’s taxable income.

• Non-Refundable Tax Offsets: When trust distributions are made to individual beneficiaries, those individuals receive a non-refundable tax offset for the 30% tax already paid by the trustee. This aims to prevent double taxation for individuals while ensuring the baseline 30% tax floor is maintained.

• Exemptions & Carve-Outs: The minimum tax will not apply universally. Excluded entities include fixed trusts, widely held trusts, complying superannuation funds, charitable trusts, deceased estates, special disability trusts, and genuine testamentary trusts. Primary production income and specific income for vulnerable minors are also proposed to be excluded.

Key Areas of Concern for Family Groups

While Treasury estimates that over 90% of small businesses will not be adversely affected, professional accounting bodies and tax advisers have raised significant concerns regarding practical implementation, administrative complexity, and potential double taxation.

1. Corporate Beneficiaries and Double Taxation

Historically, many family groups distributed surplus trust income to a corporate beneficiary (a “bucket company”) paying a 25% or 30% corporate tax rate. This strategy allowed businesses to retain working capital and re-invest cash flow for future growth.

Under the proposed rules, corporate beneficiaries will not receive a tax offset for the tax already paid by the trustee. Consequently, distributing income from a discretionary trust to a company would result in income being taxed at the trustee level and then taxed again at the company level—effectively creating a double tax burden.

2. Restructuring vs. Fixed Distribution Alternatives

To avoid severe tax friction, many advisers initially noted that family groups might be forced into costly corporate restructures. In response to feedback from professional bodies, draft legislation considerations have introduced potential relief options:

• Pre-Nominated Beneficiaries: Taxpayers may be offered an alternative mechanism allowing fixed distributions to pre-nominated beneficiaries.

• Avoiding Forced Restructures: This alternative aims to provide a path to maintain existing trust structures without requiring a full transition to a corporate entity.

What Should You Do Now?

It is important to remember that these measures are proposed legislation with a target start date of 1 July 2028. The rules, exact definitions, and transitional carve-outs remain subject to parliamentary debate and ongoing consultation with tax professionals.

However, because multi-year business strategies, profit retention plans, and asset structures take time to adjust, family groups should not wait until 2028 to evaluate their position.

Next Steps:

1. Review Current Distribution Patterns: Examine how trust distributions are currently split between individual family members, primary production entities, and corporate beneficiaries.

2. Model Future Cash Flow: Assess how a 30% baseline tax rate or the loss of corporate beneficiary offsets would impact retained working capital.

3. Evaluate Alternative Frameworks: Monitor upcoming legislative drafts to determine whether pre-nominating beneficiaries or modifying deed terms will offer a better pathway than structural reorganization.

Speak with Our Tax & Advisory Team

Every family trust operates within a unique financial ecosystem. If your group utilizes a discretionary trust for business operations or investment holding, the team at PPT is here to assist you in modeling potential scenarios and planning ahead.

To review your trust structures or discuss your broader wealth strategy, contact PPT today on (03) 5331 3711 or get in touch through our website.