The 2026 Federal Budget announced some of the most substantial tax reforms to trusts in decades.

What are the key changes?
  • Quarantine losses from residential rental properties from 1 July 2027. Limited carve out for new properties.
  • For all post CGT assets, the 50% CGT discount is replaced with a new indexation method. and a minimum 30% CGT will be applied to individuals on net capital gains from 1 July 2027.
  • For pre-CGT assets, capital gains accruing from 1 July 2027 will be subject to CGT and the minimum 30% CGT will also apply.
  • Apply a minimum 30% tax rate on discretionary trust taxable income from 1 July 2028.

Although all these changes will impact discretionary trusts, this article focuses on the minimum tax of 30% discretionary trusts.

Who is likely to be affected?

The minimum tax rate will impact all discretionary trusts, particularly those that distributes to low-income beneficiaries (include young adults and retirees) or corporate beneficiaries. These reforms continue to limit the tax benefits and flexibility that have been available to trust for years.
These announcements will also apply to discretionary testamentary trusts that did not exist before Budget night (12 May 2026). This means minors who receive distributions from such testamentary trusts will be impacted.

What this means for trusts
  • The flexibility and tax efficiency of income splitting is significantly reduced.
  • Distribution to individual beneficiaries will be taxed at minimum rate of 30%. Low-income individuals will be disadvantaged because they will not get back the tax credits paid over and above their marginal tax rates.
  • The Government is not yet clear on how the trust uses franking credits that exceed minimum tax liability.
  • Punitive outcome for corporate beneficiaries as their effective tax rate on trust income will be 51%. See below.
  • SME owners will need to review whether their current trust structure remains suitable for their business and family needs.
  • The new rules may prompt many to consider restructuring into companies or fixed trusts, especially with the temporary rollover relief available from 1 July 2027 for three years.
Penalty to corporate beneficiaries and 30% tax rate

From 1 July 2028, trustees of discretionary trusts will face a minimum 30% tax on taxable income. Except for certain classes of beneficiaries and limited types of income, majority of the trust income will be caught in this new tax.
Crucially, corporate beneficiaries will not receive non-refundable credits for tax paid by the trustee. This effectively means distributions to corporate beneficiaries will be taxed at around 51%, potentially effective tax rate will be as high as 62.9% when the same income goes out to ultimate shareholders. Removing the previous advantage of using corporate beneficiaries.

New rollover relief for restructuring

A new rollover will be available from 1 July 2027 for three years, designed to help small businesses and families restructure out of discretionary trusts into companies or fixed trusts without triggering immediate income tax or capital gains tax. This may be a valuable window for those considering a change in structure using rollover or the more favourable Small Business CGT concessions. However, careful planning is essential and subject to the relevant State taxes.

Treatment of unrealised capital gains

For post CGT assets held before 1 July 2027 and sold after, the tax treatment on capital gain is split:

  • the pre-1 July 2027 portion remains eligible for the 50% CGT discount,
  • the post-1 July 2027 portion is subject to indexation and the new minimum tax. This means unrealised gains up to the rollover can still access the discount, but gains accruing after will be taxed under the new regime.

For pre-CGT assets, capital gains accruing from 1 July 2027 will be subject to CGT and the minimum 30% CGT.

Double taxing on capital gains?

Could a beneficiary face a double-tax situation where they receive a trust distribution consisting of capital gains?
Although the Bill that deals with the minimum CGT rate did not mention how this new tax interacts with the trustee minimum tax, we expect (and hope) the answer is emphatically No.

Will State/Territory governments allow duty concessions?

Duty can be a significant cost when transferring assets out of trusts, so it’s vital to check the latest state-based guidance before proceeding.
It is unlikely that any State/Territory government will provide duty concessions for these restructures, as dissatisfactions from the State governments over the splitting the GST pie continue.

Transitioning your business out of a trust successfully

Restructuring is much more than a tax exercise. It requires:

  • New contracts with clients, suppliers, landlords, and employees
  • Updates to banking arrangements and finance facilities
  • Careful communication with all stakeholders to ensure continuity and compliance
Timing of trust legislation

The trust legislation is expected to be introduced by the end of this calendar year, with the 30% minimum tax applying from 1 July 2028.

Examples: Comparing tax outcomes before and after the change

The flexibility and tax efficiency of splitting income to low-rate individuals or companies is significantly reduced as shown in the following examples.
The trust structure will need to be reviewed for ongoing suitability.
Example 1 – Individual beneficiaries
Scenario

  • Steven earns $200,000 investment income via a family discretionary trust.
  • Distributes $50,000 each to 4 family members (no other income)

Current rules

  • Steven’s family pays $24,008 tax
  • Average tax rate of around 12%

Proposed rules (from 1 July 2028)

  • Trust pays 30% minimum tax on $200,000
  • Beneficiaries receive non-refundable credits

Example 2 – Corporate beneficiaries
Scenario

  • $1,000 trust income distributed to a corporate beneficiary

Tax outcome

  • Trustee pays $300 – 30% minimum tax
  • Company taxed on the $700 (after the $300) – pays $210 tax
  • If profits distributed to an individual, additional $119 top-up tax

Overall result

  • Effective tax rate – 51% at company level
  • Up to 62.9% once paid to individual
What should SME owners do now?

Talk to your tax advisors. Stay calm and be alert. There is quite some time until these changes come into effect. Due to the increasing pressure since Budget night, it is possible that the Government will modify the proposed rules after stakeholder consultations. Don’t just think about tax – asset protection and commercial practicality remain important.