In the May 2026 Federal Budget, the Federal Government announced significant changes to the taxation of discretionary income.  The proposed legislation has been drafted and introduced to Parliament on 14 October 2026, so Parliament may make further changes before it becomes law.

From 1 July 2028, certain discretionary trusts – including most family trusts – are proposed to be subject to a minimum tax rate of 30% on their taxable income.

The trustees of discretionary trusts will be required to pay a minimum 30% tax on the trust’s taxable income, regardless of how the income is distributed to beneficiaries.  This leaves the remaining 70% net profit to be actually distributed to the beneficiaries.  This is similar to the company dividend franking system, but the big difference is that eligible beneficiaries (excluding companies) only receive a non-refundable credit for tax already paid by the trustee (company franking credits on dividends are refundable).   This means that non-corporate beneficiaries receiving a trust distribution will now be subject to an effective minimum tax rate of 30% on that income rather than their normal marginal tax rate.

Another important consequence to note is that because companies are not eligible to receive this offset, they will be effectively double taxed, resulting in an effective tax rate of 55 or 60% on any discretionary trust distributions received.  This obviously has significant implications for trusts currently distributing income to corporate or “bucket company” beneficiaries.

How will the new minimum tax work?

The Trustee will pay 30% tax on the Trust’s taxable income to the ATO.  The Trustee will be able to reduce the amount of tax actually paid to the ATO by the amount of any dividend franking credits it may have received on any investment income.  This effectively converts normally refundable franking credits into non-refundable Trust Tax credits.

This leaves the Trust with 70% of their net profit to actually distribute to the beneficiaries but for tax purposes the beneficiaries need to declare the gross distribution received and then claim the tax credit for the tax already paid by the Trustee.

For example, if a family trust has $100,000 of income subject to the new rules and wants to distribute it to an adult beneficiary, the trustee will deduct the $30,000 minimum tax and send that to the ATO.

The beneficiary includes the gross distribution of $100,000 in their assessable income and receives a $30,000 tax offset. If they have other income such that their personal tax marginal tax rate is say 39%, then the tax on the trust distribution would be $39,000 and after deducting the $30,000 tax credit, they effectively pay an additional $9,000 to the ATO.

However, if they have no other income, their tax liability would be only $20,000 (based on normal marginal tax rates).  They can use the $30,000 tax credit from the Trust to offset this tax, but the surplus $10,000 offset is not refundable.

In practical terms, relevant discretionary trust income will therefore be taxed at a minimum of 30%.

If a company received a trust distribution, it would declare the gross distribution as taxable income and pays 25 or 30% company tax on it.    The company will not receive a credit for the tax already paid by the Trustee.  This effectively results in double taxation, with an effective tax rate of 55% or 60%.

Which trusts will be affected?

The rules primarily target discretionary trusts, where the trustee can decide which beneficiaries receive the trust’s income or capital.

A number of trusts and arrangements are excluded, including:

• fixed trusts;
• complying superannuation entities, including SMSFs;
• special disability trusts;
• deceased estates while under administration; and
• qualifying testamentary trusts.

Other trusts and arrangements may also fall outside the regime.

The draft legislation introduces a broader concept of a fixed trust, which will be important in determining whether particular structures are caught.

For most ordinary family discretionary trusts, however, the starting point should be that the new rules are potentially relevant.

What about testamentary trusts?

Genuine testamentary trusts receive important protection.

Broadly, income from assets originating in a deceased estate, including assets subsequently acquired by reinvesting those assets, can remain outside the minimum tax regime.

However, integrity rules aim to prevent unrelated assets from being introduced into a testamentary trust simply to access the exemption. Additional restrictions are also proposed for some new testamentary trusts with companies or other trusts as beneficiaries.

Testamentary trusts therefore remain an important estate planning structure, but their terms and the assets subsequently introduced into them will need careful consideration.

Does the minimum tax apply to all trust income?

No. The draft legislation excludes a number of types of income or distributions, including certain:

• primary production income;
• amounts applied for the benefit of vulnerable minors;
• distributions to charities, deductible gift recipients and other exempt entities;
• income subject to Australia’s non-resident withholding tax regime; and
• qualifying testamentary trust income.

An affected trust could therefore have some income subject to the 30% minimum tax and other income that continues to be dealt with under the ordinary rules.

What happens with bucket companies?

This will be particularly important for many family and business groups.

Discretionary trusts commonly distribute income to a corporate beneficiary, or “bucket company”, particularly when family members already pay tax at higher marginal rates.

Under the proposed rules, corporate beneficiaries will not receive the minimum tax offset, effectively resulting in double taxation of the trust distribution. 

Family groups routinely making bucket company distributions will therefore need to review their strategy before the new rules commence.

What happens to franking credits received by a Trust?

Special rules are proposed for franked dividends received by affected discretionary trusts.

Rather than the franking credit flowing through to beneficiaries in the usual way, the trustee will generally use it as an offset against its own 30% tax liability.

For example, if a trust receives a $70 fully franked dividend with a $30 franking credit, it has gross income of $100. It can satisfy its $30 minimum tax liability with the $30 franking credit, and an eligible beneficiary receives the corresponding, but now non-refundable, tax offset.

Importantly, if the trustee has excess franking credits after satisfying its minimum tax liability, the draft legislation provides for those excess credits to be refundable to the trustee.

The trustee will be responsible for paying the minimum 30% tax and for providing eligible beneficiaries with the information required to claim their tax offsets. Some of the detailed administration, reporting and collection rules are still to come.

What options will discretionary trusts have?

The changes do not necessarily mean existing family trusts should be wound up. Discretionary trusts can still provide valuable asset protection, succession planning and flexibility.

However, affected families will need to reconsider whether their existing structure remains appropriate. Broadly, there are three options.

1. Keep the existing discretionary trust

   For some families, retaining the trust and operating under the new minimum tax regime may remain appropriate. The benefits of asset protection, succession planning and flexibility may outweigh the additional tax cost.

   We also note that for businesses operating via trust structures, there may be opportunities to use surplus profit, for example, to pay additional wages to family members that would then be subject to their normal marginal rate, rather than leaving that profit to be paid out as a Trust Distribution and therefore be subject to the 30% Trust tax rate which then becomes a non-refundable tax credit.

2. Restructure into another entity

   The Government is proposing special income tax roll-over relief allowing eligible discretionary trusts to transfer assets into another structure, such as a company or fixed trust.

   The roll-over is proposed to be available from 1 July 2027 to 30 June 2030 and can defer income tax and capital gains tax consequences that might otherwise arise on transferring the assets.

   However, it does not make restructuring completely tax-free. Ordinary state and territory stamp duty rules continue to apply, together with other potential taxes and transaction costs.

   For trusts holding significant property, investments or business assets, these costs will need careful consideration.

   We strongly recommend not undertaking restructuring until the proposed legislation has passed and/or closer to the commencement date.  But of course, families should still seek advice to develop the appropriate strategy well before then.

3. Elect to fix the beneficiaries’ entitlements

   As the legislation is only going to apply to Discretionary Trusts ie ones where the Trustee has the discretion on how the income is to be distributed to which beneficiaries each year.  So, an alternative if for an existing Trust to elect to effectively fix who receives the trust’s income and capital and in what percentages.

   For example, a trust could nominate Parent 1 – 40%, Parent 2 – 40%, Adult Child 1 – 10% and Adult Child 2 – 10%.

   This would allow the trust to remain in place without restructuring or transferring its assets, and would avoid any stamp duty that an asset transfer could trigger.

   The trade-off is that the trust has to give up much of its flexibility. The nominated beneficiaries and percentages generally cannot simply be changed from year to year, except in limited circumstances such as certain deaths or relationship breakdowns.

   The important planning question becomes: how valuable is the flexibility of the existing discretionary trust compared with the tax cost of retaining it?

What should you do now?

There is no need to rush into restructuring. The minimum tax is not proposed to commence until 1 July 2028; the legislation is still in draft form, and further details and potentially changes are expected.

However, we recommend families start reviewing their trusts that:

• distribute income to family members on tax rates below 30%;
• make distributions to corporate or bucket company beneficiaries;
• hold substantial assets that could be expensive to transfer;
• receive significant franked dividends; or
• rely heavily on changing distributions between family members each year.

For some families, retaining the discretionary trust may remain appropriate. Others may benefit from restructuring or fixing beneficiary entitlements.

Importantly, tax should not be considered in isolation. Asset protection, control, succession and estate planning, CGT implications, financing arrangements and stamp duty can all influence the right structure.

Start planning before the rules commence

The proposed 1 July 2028 commencement gives affected families time to understand their options.

DFK Everalls can help you review your existing trust, model the tax outcomes of different strategies and compare the implications of retaining the trust, making the proposed election or restructuring.

Starting that review early gives you time to make considered decisions before the new rules commence.

The legislation discussed in this article is currently in exposure draft form and may change before enactment. This information is general in nature and should not be relied upon as advice for your particular circumstances.