Discretionary Trust Tax Changes (2026 Federal Budget): What You Need to Know

The tax landscape for discretionary trusts in Australia is facing its most significant structural shift in decades. Announced in the 2026–27 Federal Budget, the Australian Government has proposed a 30% minimum tax rate on the taxable income of discretionary trusts.

If you operate a business, hold property, or manage family wealth through a discretionary trust structure, these proposals could fundamentally alter your tax position.

Below is a breakdown of the proposed changes, the current legislative status, and why taking a measured approach is critical.

1. What Are the Proposed Trust Tax Changes?

Historically, discretionary trusts have operated under a "flow-through" tax model. The trust itself pays no tax; instead, net income is distributed to beneficiaries who pay tax at their individual marginal tax rates.

Under the proposed measures:

30% Minimum Tax Rate

Trustees will be required to calculate and pay a baseline 30% tax on the taxable income of a discretionary trust.

Non-Refundable Beneficiary Tax Credits

Beneficiaries receiving distributions will receive non-refundable tax credits for the 30% tax paid by the trustee. However, individuals on marginal tax rates below 30% (e.g., lower-income family members or adult students) will no longer benefit from their lower tax thresholds on trust distributions.

Corporate Beneficiaries ("Bucket Companies")

Under the initial proposal, corporate beneficiaries will not receive non-refundable credits for tax paid by the trustee. Without changes in final draft legislation, this could create a risk of double taxation on distributions flowing to bucket companies.

CGT & Asset Changes

A separate 30% minimum effective tax rate on net capital gains will take effect from 1 July 2027, alongside the replacement of the general 50% CGT discount with a CPI indexation regime.

What Entitlement Types Are Excluded?

The proposed minimum tax applies strictly to discretionary trusts. Current exclusions include:

• Fixed trusts and unit trusts
• Fixed testamentary trusts and existing discretionary testamentary trust assets (as at 12 May 2026)
• Complying superannuation funds and charitable trusts
• Primary production income and vulnerable minor trust allocations

2. Key Timeline & Implementation Dates

3. What is the Current Legislation Status?

It is vital to distinguish between a Budget announcement and enacted law.

[ Budget Announcement ]

↓

[ Treasury Consultation Paper ] (WE ARE CURRENTLY HERE)  

↓

[ Draft Exposure Legislation ]

↓

[ Bill before Parliament ]

↓

[ Enacted Law ]

As of late 2026, no Bill has been introduced to Parliament regarding the discretionary trust 30% minimum tax. Treasury issued a consultation paper on 8 July 2026 seeking industry feedback on key mechanics, such as the double-taxation impact on corporate beneficiaries and franking credit interactions.

Because the measure remains in consultation, the implementation details, effective rate mechanisms, and start date are subject to change before final legislation is drafted.

4. Proposed Restructuring & Rollover Relief

To assist small business owners and family groups whose structures become unviable under a 30% floor rate, the Government announced a 3-year CGT rollover relief period running from 1 July 2027 to 30 June 2030.

This rollover relief is intended to allow entities to restructure out of discretionary trusts and into alternative vehicles, such as companies or fixed unit trusts, without triggering immediate Federal Capital Gains Tax (CGT) liabilities.

Important Warning on Transfer Duty: Federal CGT rollover relief does not automatically grant relief from state-based taxes. Transfer duty (stamp duty) and land tax surcharges differ across Australian states and territories, and restructuring real estate or business assets could still trigger substantial state-level tax liabilities if executed without careful planning.

5. Practical Steps: What Should Trust Owners Do Now?

While the direction of government tax policy is clear, acting prematurely can be costly.

Step 1: Hold Off on Immediate Restructuring

Do not rush to liquidate or restructure your trust today. Restructuring based on a consultation paper exposes your entity to real transfer duty and legal expenses today to avoid a tax law that has not yet passed Parliament.

Step 2: Review Your Beneficiary Distribution Profiles

If your trust regularly distributes income to low-marginal-rate adult beneficiaries (such as university students or non-working spouses), rerun your projections assuming a 30% tax floor to understand your family group's future cash-flow impact.

Step 3: Model Your Corporate Beneficiary (Bucket Company) Usage

Review existing Unpaid Present Entitlements (UPEs) and distributions flowing into corporate entities. Track how Treasury responds during consultation regarding bucket company credits.

Step 4: Schedule an Annual Strategic Review

Discretionary trusts will continue to offer strong asset protection and estate planning benefits. A dedicated tax planning session will ensure your wealth structure accounts for both asset protection needs and emerging tax compliance rules.

Disclaimer: This article provides general information only and does not constitute formal tax, financial, or legal advice. Tax laws in Australia are complex and subject to legislative change. You should consult a Registered Tax Agent to obtain advice tailored to your specific circumstances before taking action.