Key Points
- The Australian Federal Budget 2026-2027 proposed a 30% minimum tax on discretionary trusts from 1 July 2028, subject to legislation.
- Changes may affect the choice, use, and review of structures for small businesses, family-owned businesses, and estate planning.
Background
The Australian Federal Budget 2026-2027 proposed changes to Capital Gains Tax (CGT) and negative gearing.
Alongside the headline reforms were significant changes to discretionary trusts.
Discretionary trusts are commonly used in Australia for tax planning, asset protection, business structuring, family wealth management, and estate planning purposes. Currently, discretionary trusts are typically used as "flow-through" vehicles, where trust income is distributed to beneficiaries at their own marginal tax rates. This enables people to distribute income between beneficiaries, which may reduce overall tax.
Legislative Changes
The Australian Federal Budget 2026-2027 announced changes to discretionary trusts. From 1 July 2028, the Government proposes to impose a 30% minimum tax on the taxable income of discretionary trusts. The tax is payable by the trustee. Non-corporate beneficiaries will receive non-refundable tax credits for tax paid by the trustee. Corporate beneficiaries will not receive those credits. This is intended to reduce income splitting and the use of bucket companies. The proposed legislation passed the House of Representatives on 29 October 2026 but has not yet become law.
Exclusions
The minimum tax would not apply to fixed and widely held trusts, complying superannuation funds, special disability trusts, deceased estates, charitable trusts, or discretionary testamentary trusts established for genuine testamentary purposes. Some income will also be excluded, including primary production income, certain income relating to vulnerable minors, and amounts subject to non-resident withholding tax. Certain distributions to charities and other tax-exempt entities would also be excluded.
Practical Implications
Small Businesses and Family-Owned Businesses
Businesses operating through discretionary trusts may face additional tax where income is distributed to corporate beneficiaries or beneficiaries with a lower marginal tax rate. The changes may have little impact where income is already distributed to beneficiaries taxed at 30% or more. Existing structures should be reviewed before 1 July 2028, particularly where the discretionary trust is used for income splitting, bucket company arrangements, asset protection, or business succession. Alternatively, discretionary trusts may elect to make fixed distributions to nominated beneficiaries to avoid the minimum tax.
The Australian Federal Budget 2026-2027 proposes rollover relief will be available for three years from 1 July 2027 for businesses seeking to restructure their business out of discretionary trusts into companies or fixed trusts.
Estate Planning
The changes may affect how discretionary trusts are used in estate planning to transfer wealth. Existing wills and trust arrangements should be reviewed to ensure continued suitability, particularly where trust income may fall outside the announced exclusions.
How Wadlow Solicitors Can Help
Wadlow Solicitors can assist small businesses and family-owned businesses to review their business structures and trust arrangements in light of the changes announced in the Australian Federal Budget 2026-2027. We can assist people with estate planning matters, including strategies for asset protection, wealth transfer, and business succession planning.
Existing business structures and estate plans should be reviewed before 1 July 2028.
The official Budget 2026-27 Factsheet can be accessed here.
For over 45 years, Wadlow Solicitors has helped individuals and companies overcome adversity. We provide comprehensive legal services in Adelaide's CBD, cultivating dedicated and lasting client relationships. Contact Wadlow Solicitors or call (08) 8212 2955 to schedule an appointment.
