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If you operate a family trust, run a business through a discretionary trust, or distribute income to family members each year, this is the budget change that matters most to you. The Government has introduced a 30% minimum tax on discretionary trusts starting 1 July 2028, and while it was only briefly mentioned in the Budget speech, the detail in the budget papers is significant.
First, how do discretionary trusts currently work for tax purposes?
Under the current system, a discretionary trust doesn't pay tax itself. Instead, the trustee distributes the trust's income each year to beneficiaries, and each beneficiary pays tax on their share at their own marginal tax rate.
This flexibility is valuable, and intentional. A trustee can distribute income to a spouse working part-time, an adult child at university, or other family members on lower incomes, with the result that the family group pays less tax overall than if all the income had been earned by one person. Trustees can also distribute to a corporate beneficiary (a "bucket company") and take advantage of the 25% or 30% corporate tax rate.
This strategy is entirely legal, widely used, and has been a cornerstone of wealth and business structuring in Australia for decades. The Government acknowledges that trusts have legitimate purposes; asset protection, succession planning, collective investment; but has taken the view that the tax advantages have gone too far. Australia now has over 840,000 discretionary trusts, more than double the number in 2001, and the ATO's own data shows that distributions are heavily concentrated around tax bracket thresholds, a clear signal that income-splitting is a primary driver.
What is changing?
From 1 July 2028, trustees will be required to pay a 30% minimum tax on the total taxable income of the discretionary trust. This is paid at the trust level, before distributions go to beneficiaries.
Beneficiaries still need to declare their share of trust income in their own tax returns. However; and this is the critical part; individual beneficiaries (other than corporate beneficiaries) will receive a non-refundable credit for the minimum tax paid by the trustee. That credit can reduce the beneficiary's own tax liability, but if their personal tax rate on that income is less than 30%, they cannot claim back the difference.
What does "non-refundable" actually mean in practice?
This is where the rubber meets the road for most families, so let's walk through it with an example.
Suppose a trust earns $100,000 and distributes it equally to two adult children; $50,000 each. Each child has no other income.
Under the current system, each child pays tax on $50,000 at their marginal rate, which after the tax-free threshold would be relatively modest. The family captures a meaningful tax saving compared to the trust income all being taxed at the highest rate.
Under the new system, the trustee first pays 30% minimum tax on the full $100,000, that's $30,000 to the ATO. Each child then declares $50,000 and receives a $15,000 credit. If the child's actual tax liability on $50,000 is, say, $7,500, their credit wipes out that liability completely and they owe nothing. But the remaining $7,500 of unused credit simply disappears. It is not refunded.
The net result is that the trust income has been taxed at 30% regardless of who it was distributed to. The income-splitting advantage is largely neutralised.
What about corporate beneficiaries?
Corporate beneficiaries, often called "bucket companies", receive no credit at all for the minimum tax paid by the trustee. This is a deliberate design choice. Previously, distributing to a bucket company at the 25% or 30% company rate was a common strategy for retaining profits at a lower rate. Under the new rules, the trustee has already paid 30% minimum tax, and the company gets no offset. The double-tax risk here will need careful analysis, and this is one area where we expect the legislation to be watched very closely.
Which trusts are affected, and which aren't?
The minimum tax applies specifically to discretionary trusts, the most common type used by families and business owners. The following are excluded:
Certain types of income are also excluded even within discretionary trusts:
When does it start, and what can you do before then?
The minimum tax doesn't take effect until 1 July 2028, which is over two years away. That's not accidental. The Government is providing a transition window, and importantly, it has announced expanded rollover relief for three years from 1 July 2027.
This rollover relief means that if you choose to restructure your affairs, for example, moving from a discretionary trust into a company or a fixed trust, you can do so without triggering capital gains tax or income tax on the transfer. This is a meaningful concession, because restructuring assets out of a trust would normally be a taxable event.
The Australian Small Business and Family Enterprise Ombudsman will also be available from 1 January 2027 to assist small businesses understand their options.
What should you be thinking about now?
There is no need for immediate action, the changes don't start until 2028 and the rollover relief window opens in 2027. But there are several questions worth working through with your adviser well before then:
If you currently use income splitting to distribute to family members on lower incomes: The tax benefit of this strategy will be substantially reduced. You can still distribute income to family members and move cash to them, but the 30% minimum tax will have already been paid and the excess credit is lost. The question becomes whether the structure still serves your goals, or whether a simpler arrangement makes more sense.
If you use a bucket company as a beneficiary: The interaction between the trustee-level minimum tax and no corporate credit creates a potentially significant double-taxation issue. This will need detailed analysis once draft legislation is available.
If you operate a business through a discretionary trust: The rollover relief window is an opportunity to consider whether incorporating into a company structure makes more sense, particularly given the 25% small business company tax rate and the benefits of a corporate structure (retained earnings, access to capital, franking credits). This is not the right answer for everyone, but it deserves serious consideration.
If your trust holds a farm or primary production assets: Your primary production income is excluded from the minimum tax, which is a meaningful carve-out.
If your trust was set up under a Will (testamentary trust): Fixed testamentary trusts and discretionary testamentary trusts existing at announcement are excluded. If you are in this situation, your arrangements are unlikely to be affected.
What we don't yet know
The budget papers note that the Government will consult with stakeholders on key design details, including the mechanism for how the trustee actually pays and remits the minimum tax, how excess franking credits held by the trust interact with the new rules, and the precise scope of rollover relief. These are important practical questions that will affect how the rules work in practice, and we expect draft legislation to be released for consultation before the 2028 start date.
We will keep you updated as those details become available.
This post is general information based on the 2026–27 Federal Budget papers released 12 May 2026. It does not constitute personal financial or tax advice. The legislative details of these changes are yet to be finalised. If you hold or are a beneficiary of a discretionary trust, we strongly recommend speaking with us before making any changes to your current arrangements.
Next in the series: Capital Gains Tax — how the new indexation method works, what the 30% minimum tax on capital gains means, and why this matters whether you've owned assets for years or are just starting to invest.
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