If you run a business or hold investments through a family trust, the 2026-27 Federal Budget is worth a close read. Handed down on 12 May 2026, it proposed a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028.

A discretionary trust is the ordinary family trust, so the measure reaches far more households than the term might suggest. Genuine testamentary trusts, the less common kind created through a will when someone dies, are a separate case and stay largely exempt, subject to integrity conditions we set out in their own section below.

What Is the Proposed 30% Minimum Tax on Discretionary Trusts?

From 1 July 2028, the trustee of an affected discretionary trust would pay tax equal to at least 30% of the trust’s taxable income.

Beneficiaries would still declare their shares of the trust’s taxable income in their own tax returns. Eligible non-corporate beneficiaries would receive a non-refundable tax offset representing their shares of the tax payable by the trustee.

The proposal would work as follows:

The trustee calculates and pays the minimum tax.
Beneficiaries continue to be assessed at their applicable tax rates.
Eligible beneficiaries use the trustee tax offset against their income tax.
Unused offsets cannot be refunded or carried forward.
Corporate beneficiaries receive no minimum tax offset.
Higher trustee tax rates continue to apply where required.

The 30% rate is therefore a floor, not a flat rate or maximum rate. For example, accumulated trust income may still be taxed at the top marginal rate under existing rules.

The ATO’s summary of the proposed discretionary trust reform confirms that the underlying trust taxation framework would remain in place.

When Would the Changes Take Effect?

The proposal contains two important dates.

Date	Proposed Change
1 July 2027	Expanded three-year rollover period begins
1 July 2028	30% minimum tax starts for affected discretionary trusts
30 June 2030	Proposed rollover period ends

Opening the rollover period one year earlier is intended to give taxpayers time to move eligible assets into another structure without immediate federal income tax or capital gains tax consequences.

The commencement dates may change before the legislation passes.

Which Trusts and Income Would Be Affected?

The proposal targets trusts in which the trustee has discretion over which beneficiaries receive income or capital. These may include:

Family trusts holding investments
Discretionary trusts operating businesses
Service trusts used by professional practices
Trusts distributing income to bucket companies
Private groups containing several discretionary trusts

Existing family trusts are not expected to receive a general grandfathering exemption. A trust established years ago may therefore fall within the measure from 1 July 2028.

Treasury is still considering how discretionary trusts should be defined. Under current tax law, a trust may be treated as discretionary when its beneficiaries do not have fixed and indefeasible interests. The name on the deed is not decisive. A unit trust or hybrid trust may require closer examination if the trustee can change beneficiary rights or economic entitlements.

What Would Be Excluded?

The proposed exclusions cover both entity types and particular income streams.

Excluded Trust Structures

Fixed trusts
Widely held trusts
Complying superannuation funds
Special disability trusts
Deceased estates
Charitable trusts
Fixed testamentary trusts

Excluded Income

Primary production income
Certain income relating to vulnerable minors
Amounts subject to non-resident withholding tax
Qualifying income from genuine discretionary testamentary trusts

An income exclusion does not necessarily remove the entire trust from the measure. A discretionary trust earning both primary production income and unrelated investment income may need to separate the two amounts.

How Are Testamentary Trusts Treated?

A testamentary trust is established under a will after a person dies. It is different from an ordinary family trust created during someone’s lifetime.

Treasury’s July 2026 consultation paper states that income from genuine discretionary testamentary trusts would be exempt, provided the required conditions are met. These conditions include:

Exempt income must come from assets of the deceased estate.
Income from unrelated assets injected after 7:30 pm AEST on 12 May 2026 would be subject to the minimum tax.
A trust established on or after 1 July 2028 could benefit only individuals and income tax-exempt entities.

The integrity conditions are designed to stop taxpayers from transferring unrelated assets into a testamentary trust solely to access its exemption.

The proposal does not impose tax on inherited capital or the transfer of assets following a person’s death. It concerns taxable income earned through particular trust arrangements.

How Would the 30% Tax Work in Practice?

Assume an affected discretionary trust has $100,000 of taxable income and makes one individual beneficiary presently entitled to all its income.

Trustee Calculation

The trustee calculates minimum tax of:

$100,000 × 30% = $30,000

Beneficiary Assessment

The beneficiary includes $100,000 in their tax return and receives a non-refundable offset of up to $30,000.

The outcome depends on the beneficiary’s personal tax position.

Beneficiary’s Income Tax Position	Likely Treatment
Liability above $30,000	Offset reduces the bill, but additional tax remains payable
Liability of $30,000	Offset may cover the income tax liability
Liability below $30,000	Unused offset is lost
No income tax liability	Offset does not produce a refund
Medicare levy payable	Minimum tax offset cannot reduce the levy

A beneficiary with a marginal tax rate below 30% would therefore lose some or all of the excess credit. This limits the tax benefit previously available from distributing trust income to adult beneficiaries with little other taxable income.

Why Could Corporate Beneficiaries Face Double Taxation?

A corporate beneficiary would still be assessed on its entitlement to the trust’s taxable income. However, it would receive no credit for the tax paid by the trustee.

Treasury illustrates the proposed treatment using a trust that distributes $100,000 to a company subject to a 30% tax rate:

The trustee pays $30,000 in minimum tax.
The company is assessed on the same $100,000.
The company pays another $30,000.
Combined trust and company tax reaches $60,000.

The company may generate franking credits from its own tax payment, which could be used when it later pays dividends. It would not receive a credit for the $30,000 already paid by the trustee.

Actual outcomes would depend on the company’s tax rate, income and future dividends. Nevertheless, this aspect of the proposal is specifically designed to discourage the use of bucket companies to receive and retain discretionary trust income at a lower rate.

What Would Happen to Franking Credits?

A trustee receiving franked dividends would be required to use the attached franking credits against its own tax liability, including the proposed minimum tax.

Treasury is considering two treatments for credits remaining after that liability is paid:

Refund the excess to the trustee.
Carry the excess forward against the trustee’s future tax liabilities.

A refund would preserve the refundable nature of eligible franking credits. A carry-forward model would require trustees to maintain records linking unused credits to the relevant income and beneficiaries.

The final approach has not been decided.

How Could the Proposal Affect UPEs?

An unpaid present entitlement, or UPE, generally arises when a beneficiary is entitled to trust income but the amount is not physically paid. The money may remain available for use within the trust.

UPEs are particularly significant when the beneficiary is a private company.

In June 2026, the High Court decided in Commissioner of Taxation v Bendel that a corporate beneficiary’s UPE was not a loan for Division 7A purposes. The decision differed from the ATO’s previous administrative position.

A separate measure announced in the 2018–19 Budget proposed bringing company UPEs within Division 7A, but it was never enacted. Treasury is now seeking feedback on how that measure should be implemented and how it would interact with the minimum trust tax.

Trust groups should identify:

Outstanding UPE balances
The beneficiaries entitled to those amounts
Associated loan agreements
Repayments and interest charges
Prior trust resolutions
Funds still being used by the trust

The final treatment could affect whether company UPEs remain practical and what documentation or repayment arrangements are required.

How Would the Expanded Rollover Relief Work?

The Government proposes a three-year rollover window from 1 July 2027. It would allow affected taxpayers to transfer assets from a discretionary trust to a different structure without immediate federal income tax consequences, including capital gains tax.

The Treasury consultation paper proposes relief broader than the existing Small Business Restructure Rollover.

Its possible features include:

Access for in-scope discretionary trusts regardless of size
Coverage for business, revenue and passive investment assets
Transfers to a company, fixed trust, individual or eligible partnership
A requirement to transfer all or almost all trust assets
Australian residency for the transferor and receiving entity
Continuing economic ownership within a defined family unit
Fixed and transparent rights in the new structure

The receiving entity could not be another affected discretionary trust, a complying superannuation fund or an income tax-exempt entity. The relief would also be designed to prevent taxpayers from recreating the same discretionary distribution rights through multiple share classes or similar arrangements.

Federal rollover relief may not remove transfer duty, land tax consequences, GST, finance costs, contract issues or legal expenses. These costs must be assessed before assets are moved.

Should You Replace Your Discretionary Trust?

Not necessarily. The tax proposal does not remove the non-tax reasons for using a discretionary trust.

A trust may still provide:

Separation between business and investment assets
Control over family wealth
Succession planning options
Flexible capital distributions
Protection from certain business risks

The decision should be based on what the trust owns, how it earns income and the family’s long-term requirements.

Structure	Points to Consider
Discretionary trust	Flexibility and asset separation remain, but income may face the 30% floor
Company	Can retain profits and use dividend imputation, but generally cannot access the CGT discount
Fixed trust	Offers defined economic rights but less distribution flexibility
Individual ownership	Simpler administration, but income and legal responsibility sit with the owner
Partnership	May suit multiple owners, but requires clear agreements and liability planning

Operating as a sole trader may be simpler, but it may not provide the asset separation needed by an established business. Anyone selecting a structure for a new business or startup should consider the proposed rules before transferring valuable assets or entering long-term agreements.

What Should Trust Owners Do Before 2028?

Planning should begin with facts, not an assumption that every trust must be closed.

Review the deed. Confirm the trustee’s powers, beneficiary classes and rules for distributing income and capital.
Map the group. Record connected companies, trusts, individuals, loans and UPEs.
Separate income streams. Identify business income, rent, dividends, primary production income, foreign income and capital gains.
Model several years. Account for changing beneficiary incomes, future asset sales and working capital needs.
Compare structures. Measure tax, asset ownership, succession, financing and administration under each option.
Wait for final legislation. Prepare the analysis now, but avoid irreversible transfers based only on a consultation proposal.

A restructure that lowers annual income tax may create larger costs when assets are sold, ownership changes or funds are eventually paid to individuals.

Make Sure Your Trust Still Works for You

The proposed tax does not mean every discretionary trust should be replaced. It does mean that distributions, corporate beneficiaries, UPEs and long-standing tax assumptions should be reviewed before the new rules are due to begin.

Coleman Financial Group’s family trust accountants can review your trust and connected entities, model the likely tax outcomes and compare practical structure options. For advice based on your business, assets and family circumstances, contact Coleman Financial Group at 1300 84 84 21.

FAQs

Would a Family Trust Election Avoid the Minimum Tax?

No. A family trust election does not convert a discretionary trust into a fixed trust. An affected trust could remain subject to the minimum tax after making the election.

Would a Trust Loss Be Taxed at 30%?

No minimum tax should arise where the trust has no taxable income for that year. Existing trust loss rules would still determine whether losses can be used in a later year.

Are All Unit Trusts Exempt?

No. A unit trust must meet the relevant tax-law requirements to be treated as fixed. Trustee powers to alter units or beneficiary entitlements may affect its classification.

Would Net Capital Gains Be Included?

Net capital gains ordinarily form part of a trust’s taxable income. Their final treatment would also depend on the separate proposed CGT reforms and any available concessions or transitional rules.

What Happens When One Discretionary Trust Distributes to Another?

An affected trust beneficiary could apply its share of the first trust’s minimum tax offset against its own tax liability. Under the consultation model, an unused offset could not be refunded, carried forward or passed through another affected discretionary trust.

Could Directors of a Corporate Trustee Become Personally Liable?

Treasury is considering measures that could make directors jointly and severally liable for unpaid minimum tax. Earlier collection through PAYG instalments and stronger recovery rights over trust assets are also under consideration. These measures are not yet law.