Discretionary trusts — demystified

Does this affect me?

If you don't have a family trust or work for a small business that runs through one — no, this is a niche reform aimed at high-income families using trusts to split income. If you do have a discretionary (family) trust, or your family business runs through one — yes, but you've got until July 2028 to plan, and primary producers (farms) are excluded.

Quick test:

• Don't own or benefit from a family trust? Skip — this won't touch you.
• Family trust holds the shares/investments your accountant splits between you, your partner, and adult kids? Affected from 1 July 2028 — the splitting trick gets neutralised.
• Family farm running through a trust? Primary production income is excluded — farming stays fine.
• Have a special disability trust, testamentary trust set up before 12 May 2026, or a deceased estate? Excluded.
• Run a small business through a trust and pay genuine wages to family who actually work in it? Wages are deductible — that path stays open.

TL;DR

From 1 July 2028, the trustee of a discretionary (family) trust pays a 30% minimum tax on the trust's taxable income before it's distributed. Beneficiaries still declare their income and get a non-refundable credit for the tax already paid by the trustee. Effect: discretionary trust income is taxed at at least 30%, killing the income-splitting discount available from streaming income to family members on low marginal rates.

Only discretionary trusts are affected. Fixed trusts, super funds, charities, deceased estates, special disability trusts, and primary production income are all excluded.

Jargon decoder:

• Discretionary trust = a family trust where the trustee can choose, each year, which family members get the income. Used heavily for tax planning.
• Trustee = the person (or company) that runs the trust and decides where the money goes.
• Beneficiary = anyone who can receive a distribution from the trust (you, your partner, your kids, sometimes a "bucket" company).
• Income splitting = the classic trust move — pushing income onto family members on low tax rates so the household's total tax bill drops.
• Non-refundable credit = if the trustee's tax already covers your bill, you don't get a cash refund of the leftover.
• Bucket company = a passive company set up to soak up trust income at the corporate rate (25-30%). This Budget kills that workaround.

What's NOT a discretionary trust (excluded)

• Fixed trusts (most unit trusts)
• Widely held trusts (REITs, most managed funds)
• Complying super funds (incl. SMSFs)
• Special disability trusts
• Deceased estates
• Charitable trusts
• Testamentary trusts existing at announcement (12 May 2026)

Income types also excluded (even inside a discretionary trust)

• Primary production income (farms) — agricultural income protected
• Income for vulnerable minors
• Income subject to non-resident withholding tax

How the mechanics work

If the trust receives franked dividends, the trustee must use the franking credits to pay the minimum tax first.

Key dates

Worked example 1 — Classic family income splitting (current rules)

Steven owns a $200,000/yr investment portfolio in his family trust. Non-working spouse and two adult kids in uni. Each gets a $50,000 distribution.

2028-29 (current rules):

• 4 × ~$6,002 tax = $24,008 total family tax
• Average rate: 12%

If Steven held the assets personally: $59,602. Saving from splitting: $35,594.

Worked example 2 — Same scenario, with 30% minimum tax

• Trustee pays 30% × $200,000 = $60,000 regardless of distribution.
• Each beneficiary gets $50k of trust income with $15k of credits.
• Kids' personal rates on $50k are below 30%, but credits are non-refundable — no refund.
• Total family tax: ~$60,000.

The $35k splitting advantage is neutralised. Steven now pays roughly what a wage-earner on $200k pays ($59,352).

Worked example 3 — When the minimum tax does nothing

Priya: doctor on $250,000 PAYG. Family trust earns $40,000 of dividends, all distributed to her.

• Priya's marginal rate on the $40k: 47%
• Trustee pays 30% × $40,000 = $12,000.
• Priya declares $40,000, calculates $18,800 tax, claims $12,000 credit → pays $6,800 personally.
• Total: $18,800 — same as today.

About half of discretionary trusts won't be affected in any given year (Treasury).

Worked example 4 — Bucket company play (closed loophole)

Today: trustee distributes to a passive "bucket company" → company pays 25% or 30% corporate tax → later distributes franked dividends back to family.

Under the new rules:

• Trustee still pays 30% on the income.
• Corporate beneficiary gets NO credit for that tax.
• Bucket company becomes tax-disadvantageous, not advantageous.

The strategy is dead. ATO data showed 80,000 companies receiving trust distributions in 2022-23; 83% had no evidence of business activity (purely for tax).

Worked example 5 — Small business through a trust

Kurt: $300,000 consulting business in a discretionary trust. Pays himself $100k salary. $200k of trust income split across 4 family members at $50k each.

Today: Family pays ~$42,010 in tax total.

From 1 July 2028:

• Trust pays $60,000 minimum tax on the $200k.
• Family credits absorb personal liabilities.
• Kurt's salary tax: $26,002.
• Total: ~$86,002.

Three rational responses for Kurt:

1. Pay genuine wages to family who actually work in the business (deductible, no minimum tax).
2. Restructure to a Pty Ltd — 25% small business rate, dividend imputation, simpler retained earnings.
3. Restructure to a fixed trust — keeps trust benefits, escapes minimum tax (no discretion to split).

Worked example 6 — Family member who actually works

Loretta runs a café via a discretionary trust. Son Tom works 15 hrs/wk stacking shelves. Today she might "distribute" $25k to Tom as trust income.

Under the new rules, pay Tom $25k of wages instead:

• Deductible to trust → reduces minimum tax base
• Taxed at Tom's marginal rate (likely very low)
• Outside the minimum tax entirely

The change forces a real distinction between "genuine employment" and "paper distributions."

Myths vs reality

Myth 1: "All trusts pay 30% from 2028" — FALSE

Only discretionary trusts. Excluded: fixed, widely-held, super, special disability, deceased estates, charities, existing testamentary. About 80% of trusts in Australia are discretionary, so most trusts are affected, but the framing "all trusts" is wrong.

Myth 2: "Farmers will be wiped out" — FALSE

Primary production income is carved out of the minimum tax, even inside a discretionary trust. Family farms running cattle, crops, or horticulture through a discretionary trust are unaffected on farming income.

Caveat: non-primary-production income inside the same trust (share portfolio, rental property) is subject to the minimum tax.

Myth 3: "Special needs trusts are caught" — FALSE

Special disability trusts are explicitly excluded.

Myth 4: "Testamentary trusts are gone" — FALSE for existing ones

Testamentary trusts in existence on 12 May 2026 are grandfathered — income from assets in them at that date is excluded. New testamentary trusts created after 12 May 2026 are in scope.

Myth 5: "You can't pay your kids/spouse anymore" — FALSE

Paying genuine wages to family members who actually work in the business is unaffected. Wages are deductible to the trust and don't attract the minimum tax. What dies is paper distributions to non-working family members.

Myth 6: "Bucket companies are still the workaround" — FALSE

Bucket companies are the primary target of the anti-avoidance design. Corporate beneficiaries get no credit. Cycling income through a bucket company is now worse, not better.

Myth 7: "Restructuring will cost a fortune in CGT" — FALSE

For three years from 1 July 2027 (closing 30 June 2030), you can restructure a discretionary trust into a company or fixed trust without triggering CGT. This is deliberately generous. Combined with the 25% small business tax rate (turnover < $50m, < 80% passive income), many family-business trusts may end up paying less tax post-restructure.

Myth 8: "Children get hit on small distributions" — FALSE for vulnerable minors

Income for vulnerable minors is explicitly excluded. The existing Division 6AA penalty rates on minors continue unchanged.

Myth 9: "It starts when the budget passes" — FALSE

Minimum tax starts 1 July 2028. Rollover relief opens 1 July 2027. CGT changes start 1 July 2027. Three-year runway for restructuring.

Myth 10: "My 'fixed' trust is safe" — DEPENDS

Several advisors (Pitcher, BDO) flag that trusts marketed as "fixed" but containing trustee variation powers may still fail the test and be treated as discretionary. Legislative drafting will matter. If you have a "hybrid" or "non-discretionary" trust, get advice — don't assume.

Myth 11: "Small businesses through trusts are dead" — MISLEADING

Around 350,000 small businesses use a discretionary trust. Treasury estimates 40% (~140,000) won't pay additional tax or need to restructure in any given year. More than 90% of all small businesses are unaffected. Of those affected, many can switch to wages or restructure cheaply.

But what if...

...I'm a beneficiary of my parents' family trust but I don't do anything with it? You'll still get distributions, but the trust will have already paid 30% tax on the income before it lands with you. If your marginal rate is below 30%, you don't get a cash refund of the difference (non-refundable credit). If your rate is above 30%, you top up. Either way, you're not personally on the hook for more paperwork.

...we run our family farm through a discretionary trust — are we cooked? No. Primary production income is explicitly excluded — your farming income skips the 30% minimum tax entirely. Watch out for non-farming income inside the same trust (a share portfolio or rental property) — that part is in scope.

...should I restructure my trust now? You've got time. The 30% tax doesn't start until 1 July 2028. There's also a three-year CGT rollover window (1 July 2027 to 30 June 2030) where you can restructure into a Pty Ltd or fixed trust without triggering CGT. Talk to your accountant — for many small businesses the 25% small business company rate ends up cheaper than the new trust regime. The ATO will publish guidance at ato.gov.au/trusts closer to commencement.

...what about my kids who actually work in the family business? Pay them genuine wages, not paper distributions. Wages are deductible to the trust (so they reduce the 30% minimum tax base), they're taxed at the kid's normal marginal rate (usually low), and they sit completely outside the new regime. This is the design intent — reward real work, kill paper-shuffling.

...I have a testamentary trust set up under my late parent's will? If the trust existed at 12 May 2026 (announcement date), the assets in it then are grandfathered — income from those is excluded forever. New testamentary trusts created after 12 May 2026 are in scope.

...is the Age Pension or Carer Payment affected? No. This change only touches discretionary-trust income. Centrelink payments, super, and personal wages are untouched.

Where genuine debate lives

1. Compliance burden of the new collection mechanism — trustees calculating, reporting, paying, and notifying beneficiaries adds friction. Method still under consultation.
2. Treatment of trustees who use franking credits to pay the minimum tax — open consultation item.
3. Drafting precision around "fixed" vs "discretionary" — could catch hybrid structures unintentionally.
4. Impact on succession planning and asset protection — discretionary trusts have non-tax uses; the new rule doesn't kill the structure but reduces one major benefit.
5. Behavioural response — Treasury assumes ~50% of trusts don't restructure; advisors expect a much higher restructure rate, which would change the revenue projection.

A useful filter

When you see a claim about trust changes, ask:

1. Is it a discretionary trust? If not — not affected.
2. Is the income primary production? If yes — excluded.
3. Was the trust in place 12 May 2026 as testamentary? If yes — grandfathered.
4. Is the family member receiving the income actually working? If yes — pay wages, not distributions.

Sources

• Treasury fact sheet — Minimum tax on discretionary trusts
• BDO — 30% minimum tax on discretionary trusts
• Pitcher Partners — Minimum tax on discretionary trusts
• Baker McKenzie — Taxation of Discretionary Trusts
• William Buck — Federal Budget Analysis 2026 | Trusts
• The Conversation — Family and business trusts could soon have to pay more tax

Related

• Theme 04 — Tax Reform (full policy detail)
• Capital Gains Tax demystified
• Tax Cuts Package demystified