The federal government has stepped back from its original plan for a flat 30 per cent minimum tax on discretionary family trusts, after pushback from small businesses, financial advisers and state governments. For older Australians who use trusts for succession and estate planning, the revised proposal still brings significant change.
Under the 2026 federal budget, Treasurer Jim Chalmers announced that from 1 July 2028, trustees of affected discretionary trusts would pay a minimum 30 per cent tax on the trust’s taxable income. Individuals would generally get a credit for tax already paid at the trustee level, but income paid to a “bucket company” beneficiary could face an extra layer of company tax, pushing the effective tax rate as high as 70 per cent once profits were eventually paid out as dividends.
Treasury says Australia has roughly 840,000 discretionary trusts, and families using them have on average paid tax rates about four percentage points lower than comparable families without one. The government argued the change would align tax on trust income with tax paid by wage earners.
The government has now proposed an alternative: trustees of existing discretionary trusts could make a one-off election to lock in fixed percentages of income and capital for a nominated list of beneficiaries, rather than distributing at the trustee’s discretion each year. Trusts that make this election, and stick to it, would avoid the 30 per cent minimum tax altogether.
The election must allocate 100 per cent of both income and capital, and each beneficiary’s share of income must match their share of capital. Once made, the arrangement is largely locked in: changes are only permitted if a nominated beneficiary dies or a relationship between beneficiaries breaks down. There is no general right to add grandchildren born later, or to adjust shares as a family’s circumstances change.
If a trustee strays from the agreed distribution pattern, the election is automatically revoked. The trust would then be taxed at the top marginal rate plus the Medicare levy for that year, before moving into the 30 per cent minimum tax regime in future years. A trustee can also revoke the election voluntarily, but once revoked it cannot be remade.
Trustees who would rather restructure out of a discretionary trust, for example into a company or a fixed trust, will have access to three years of rollover relief from 1 July 2027 to reduce income tax and capital gains tax costs.
The draft legislation excludes several categories, including fixed trusts, widely held managed investment trusts, bare trusts, complying superannuation funds, special disability trusts and charitable trusts. Deceased estates and discretionary testamentary trusts set up for genuine testamentary purposes are also intended to remain exempt, as are distributions to registered charities and deductible gift recipients.
This matters for older Australians in particular: many families use testamentary trusts, created through a will, as part of estate planning. Under the current draft, these would not be swept up in the new minimum tax.
Business groups warn that even with tax relief on offer, other costs of restructuring remain unresolved. Master Builders Australia says moving a business out of a trust into a new company can mean losing existing licences, insurance arrangements and contracts tied to the old entity, a concern that extends to family businesses generally.
Tax professionals note that rollover relief only addresses income tax and capital gains tax. It does not resolve stamp duty, which several state governments (most notably Queensland) say may still apply depending on individual circumstances, nor does it deal with land tax, finance arrangements or existing loan and contract terms.
For many older Australians, a discretionary trust is a long-term tool for asset protection, succession planning and providing for children and grandchildren across generations. The proposed election trades that flexibility for a lock-in that could last decades, at a time when nobody can predict future marriages, deaths, illness, care needs or family disputes.
The legislation remains in exposure draft form, with consultation closing on 18 September 2026 and further detail expected in later tranches. Financial advisers recommend that families with a discretionary trust use the time before 2028 to review their trust deed, understand who can benefit under it, and model different scenarios, rather than rushing into a restructure or election before the final rules are settled.
Anyone relying on a family trust as part of their retirement or estate plan should seek coordinated legal, tax and fin
