Most tax measures announced in a Federal Budget get a burst of attention and then fade from view until they’re closer to taking effect. The discretionary trust changes announced in the 2026-27 Federal Budget are a good example of why that habit can be costly.
The headline measure doesn’t start until 1 July, 2028, which is exactly why so many business owners and families are tempted to file it away as a future problem. It shouldn’t be.
Here’s why this one deserves attention now, not later.
What Was Actually Announced
On May 12th, 2026, the Federal Government announced a 30 per cent minimum tax on discretionary trusts, to apply from 1 July, 2028. It represents one of the most significant changes to trust taxation in decades, and a real departure from how discretionary trusts have worked for as long as most business owners can remember.
Under the current rules, a discretionary trust is a flow-through vehicle. The trust itself generally pays no tax. Instead, income is distributed to beneficiaries who are presently entitled to it, and each beneficiary pays tax at their own marginal rate.
This is the mechanism that lets families allocate income across various beneficiaries, reducing the household’s overall tax bill. Where a trust retains income rather than distributing it, the trustee is taxed at the top marginal rate plus Medicare levy, currently 47 per cent, which is part of why distribution has always been the default approach.
From 1 July, 2028, that changes. Trustees of discretionary trusts will pay a minimum tax of 30 per cent on the trust’s taxable income, regardless of how that income is distributed. Beneficiaries other than companies will receive a non-refundable tax credit for the tax already paid at the trustee level.
In practice, that means beneficiaries on tax rates above 30 per cent will owe additional tax on their share. Meanwhile, beneficiaries on rates below 30 per cent may lose the benefit of some of that credit altogether, since it isn’t refundable.
Some structures are proposed to be excluded, including primary production income, fixed trusts, widely held trusts, superannuation funds, special disability trusts, deceased estates, certain testamentary trusts and charitable trusts. New discretionary testamentary trusts established after 12 May, 2026 will need to limit beneficiaries to individuals only to qualify for exemption.
Importantly, no grandfathering relief has been proposed. Existing discretionary trust structures will be captured from 1 July, 2028, the same as new ones.
Why “Two Years Away” Is The Wrong Way To Think About It
It’s tempting to treat a 2028 start date as something to revisit closer to the time, but a few things make that approach risky here.
Structures take time to unwind or restructure. If a family or business ultimately decides that a discretionary trust is no longer the right vehicle given the new rules, moving out of that structure, whether into a company, a fixed trust, or another arrangement, isn’t something done overnight. It involves valuation, potential capital gains tax and duty consequences, and careful sequencing. Waiting until 2027 to start that conversation leaves very little room to move.
“If you’ve got a trust that holds property, we don’t yet know whether state governments will exempt stamp duty on transferring that property out of the trust. Until that’s resolved, restructuring isn’t as simple as it sounds, and clients will need to pay both accountants and solicitors to unwind structures that have been in place for many years.” – Shane Borg, Director, Stones Sharp
The measure isn’t law yet, but the direction is clear: The ATO has confirmed this remains in the announcement phase, with exposure draft legislation and consultation still to come. Some technical details, including exactly how bucket companies and franking credits interact with the new rules, remain unsettled. But the policy intent, closing down the income-splitting benefit that discretionary trusts have historically offered, is not likely to change in substance even if the mechanics are refined.
No grandfathering means existing trusts aren’t safe simply because they’re old: A trust that has operated the same way for twenty years, distributing income to a spread of family beneficiaries on lower marginal rates, will be affected in exactly the same way as a trust set up next month. There’s no benefit to sitting still and assuming an established structure is somehow protected.
Succession and estate plans built around trusts may need a second look: Testamentary trusts created within wills are a common estate planning tool, and the new rules carry specific implications for how these are structured and who can be a beneficiary. If your will, or a client’s will, currently contemplates a discretionary testamentary trust, this is worth revisiting well before 2028, not after the fact.
Who Should Be Paying Attention Now?
This measure is relevant well beyond high-net-worth families. It affects:
- Families using trusts to distribute investment or business income across multiple beneficiaries on different marginal rates.
- Anyone with an existing Will that includes, or contemplates, a discretionary testamentary trust.
- Business owners currently weighing up whether to establish a new trust structure should factor the 2028 changes into that decision now rather than building a structure that will need to be revisited in two years.
- Small and family businesses operating through a discretionary trust structure, including those with a corporate beneficiary (a “bucket company”) to manage tax on retained profits.
“The biggest unknown for clients with a corporate beneficiary is double taxation. The trust gets taxed at 30 per cent, then the income gets distributed to a company and gets hit with company tax again. The question is whether the company will get a credit for the tax the trust has already paid, and at this stage we don’t know.” – Shane Borg, Director, Stones Sharp
What To Do Between Now and 2026?
Rather than waiting for final legislation, it makes sense to start modelling the impact now.
That means understanding how your current distributions would be taxed under the new 30 per cent minimum. It also means identifying whether any of the proposed exclusions apply to your structure. Lastly, you may want to review whether your trust deed and succession documents still achieve your intended outcome once the rules change.
None of this requires jumping to a decision today, but it does mean the conversation should be happening well before the measure becomes law.
Talk To Us
Trust tax reform of this scale doesn’t come around often, and the lead time before it applies is a genuine opportunity to prepare properly rather than react under pressure.
If you hold assets or run a business through a discretionary trust, or your estate plan relies on one, get in touch with our team. We’ll be able to talk you through what these changes could mean for your structure and what, if anything, is worth doing ahead of 2028.
