Australia Imposes 30% Minimum Tax on Discretionary Trusts from 1 July 2028

(AUSTRALIA) — Australia plans to impose a 30% minimum tax on discretionary trusts from 1 July 2028, a budget measure that would recast how many family groups and small businesses distribute trust income and curb the tax benefit of splitting that income among lower-tax beneficiaries.

Under the proposal in the 2026–27 Federal Budget, the trustee of a discretionary trust would pay 30% tax on the taxable income of the trust, unless a higher tax rate applies. Beneficiaries would still report that income in their own tax returns.

Non-corporate beneficiaries would generally receive non-refundable credits for tax paid by the trustee. Corporate beneficiaries would not receive those credits, a change aimed at structures that channel distributions through companies, often called “bucket companies”.

The measure reaches a part of the tax system that has become common in wealth planning and small business structures. Budget papers say Australia now has over one million trusts, and about 840,000, or 80%, are discretionary trusts.

In 2022–23, discretionary trusts distributed $142.4 billion in income. Around 90% of total private trust wealth is held by the wealthiest 10% of households, according to the budget papers, which frame the change as a response to income splitting and a way to raise about $4.5 billion over the forward estimates.

The government says the current system lets trustees direct income to family members or related entities with lower tax rates, cutting the overall tax paid by a family group. The new floor is meant to ensure discretionary trusts are not taxed below 30% on that income.

Officials also linked the change to wage taxation. The budget argues the plan would better align trust income taxation with workers who pay a 30% marginal rate on income between $45,001 and $135,000.

Not every trust would fall inside the new rules. The proposed tax would not apply to fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

Some income types would also sit outside the measure, including primary production income, certain income relating to vulnerable minors, income subject to non-resident withholding tax, and income from assets of testamentary trusts that existed at the time of announcement. The budget positions the change as a targeted intervention in discretionary trusts, not a blanket tax across the trust system.

Many family trusts and business trusts use flexible distributions for asset protection, succession planning and tax management. Those structures would remain available, but the tax advantage attached to allocating income to low-tax beneficiaries would narrow sharply once the 30% minimum tax starts on 1 July 2028.

Business groups that operate through discretionary trusts would face some of the hardest choices. Budget papers estimate about 350,000 active small businesses, or less than 15% of active small businesses, operate through discretionary trust structures.

Of those, around 40% are not expected to pay additional tax or need to restructure in any given year. More broadly, the budget says more than 90% of all small businesses are not expected to be affected in any given year.

Even so, the proposal puts pressure on thousands of firms that have long used discretionary trusts to divide profits among relatives or related entities. A trust that already distributes income to beneficiaries taxed at 30% or more may see little change, and the government says around half of discretionary trusts may not be affected in any given year for that reason.

Others would need to decide whether to keep the trust and accept the new floor, change how income is paid out, or shift to another structure. The budget says salary or wages paid to employees will not attract the minimum trust tax, which could push some family-run businesses to rely more on wages for relatives who actually work in the business.

Another route is restructuring into a company or fixed trust. To ease that shift, the government proposes expanded rollover relief for small businesses and others that choose to move out of discretionary trusts, with that relief available for three years from 1 July 2027.

The proposed relief may cover income tax consequences, including capital gains tax. That transition window opens a year before the new trust tax begins, giving trustees and advisers time to test whether the commercial case for a family trust still outweighs the added tax cost.

The Australian Small Business and Family Enterprise Ombudsman is expected to assist small businesses from 1 January 2027 in understanding restructuring options and where to obtain advice. ASIC is expected to support small businesses that wish to incorporate.

The treatment of corporate beneficiaries stands out because those entities have been a common feature of trust planning. Under the proposal, a trustee would still pay the minimum tax, but a corporate beneficiary would not receive the non-refundable credit available to non-corporate beneficiaries, closing off a path that can defer or manage tax through company rates and franking credits.

That change affects family groups that pair trusts with private companies to warehouse income. Structures built around a discretionary trust and a company would not disappear, but the tax arithmetic would change once credits stop at the company level.

The measure sits inside a wider tax package in the budget. The government is also replacing the 50% CGT discount with cost-base indexation from 1 July 2027, introducing a 30% minimum tax on real capital gains, and limiting negative gearing for residential property to new builds.

Budget papers say those changes are intended to shift part of the tax burden away from wages and toward asset income, while improving housing affordability and the sustainability of the tax base. The trust changes fit that pattern by focusing on structures often used to allocate investment and business income across a household or related group.

Families and advisers reviewing their position would likely focus first on trusts that distribute income to low-tax family members, trusts that make distributions to corporate beneficiaries, and trusts that run active small businesses or hold investment assets. Structures chosen mainly for tax flexibility, rather than business continuity or asset protection, face the clearest reset under the proposal.

Trusts with minors, non-residents or related companies among the beneficiaries also warrant attention because excluded income categories are narrower than the system itself. Primary production income and some other carved-out income can avoid the new floor, but most ordinary discretionary trust income would still be drawn into it.

The proposal does not abolish family trusts. It changes the price of using them for tax planning, and it does so on a timetable that starts with possible restructuring relief on 1 July 2027 and ends with the new tax taking effect on 1 July 2028.

Between those dates, trustees, business owners and beneficiaries face a simple calculation: whether a discretionary trust still serves the group’s commercial and succession goals once the tax on its income cannot fall below 30%.