Proposed Trust Tax Changes in Australia Explained: 2026 Federal Budget

 
What is a discretionary trust?

A discretionary trust, commonly referred to as a family trust, is a legal structure used to hold investments, business assets or other property for beneficiaries.

Unlike fixed trusts, discretionary trusts allow the trustee to decide how trust income and capital distributions are allocated among beneficiaries each year.

Discretionary trusts are commonly used in Australia for:
 

• Family investment structures
• Small business operations
• Asset protection strategies
• Succession planning
• Income distribution flexibility

The proposed Federal Budget changes may significantly affect how discretionary trusts are taxed in the future, particularly for trusts distributing investment or business income to family members or corporate beneficiaries.

Proposed 30% minimum tax on discretionary trusts from 1 July 2028

A key proposal in the 2026 Federal Budget is a 30% minimum tax on discretionary trust income, to apply from 1 July 2028.

If introduced, trustees would be required to pay at least 30% tax on the trust’s taxable income. This would represent a major departure from the current “flow-through” taxation approach under Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936), where beneficiaries are taxed at their individual marginal rates.

The stated policy objective is to align trust taxation more closely with individual tax rates - specifically the marginal rate applicable to income between $45,001 and $135,000 - aiming to create greater parity between trust beneficiaries and wage earners.

Key features of the proposed trust tax changes

The proposed measures include several important design features:
 

• Non-corporate beneficiaries would receive a non-refundable tax credit for trustee tax paid
• Corporate beneficiaries (including bucket companies) would receive no credit for trustee tax
• Certain trust structures and income categories would be excluded from the regime

The denial of credits to corporate beneficiaries represents a significant shift from current rules and is intended to prevent the minimum tax being mitigated through distributions to companies.

Which trusts and income types may be excluded?

Based on the Budget announcement, exclusions may include:
 

Excluded trusts

 

• Fixed trusts
• Widely held trusts
• Complying superannuation funds
• Special disability trusts
• Deceased estates
• Charitable trusts

Excluded income categories

 

• Primary production income
• Income relating to vulnerable minors
• Non-resident withholding amounts
• Income from discretionary testamentary trusts existing at 12 May 2026

These exclusions will be important when assessing how different trust structures may be affected if the measures proceed.

How the proposed changes could affect bucket companies

The treatment of corporate beneficiaries - commonly known as bucket companies - is one of the most technically significant elements of the proposed reforms.

Under the proposed rules, corporate beneficiaries would receive no credit for trustee tax already paid. This may result in layered taxation outcomes.

Indicative modelling suggests that a $100 trust distribution to a bucket company could be subject to:
 

• 30% trustee-level tax
• A further 30% company tax on the same income
• Additional tax when profits are distributed to individual shareholders

This could produce:
 

• An effective tax rate of approximately 51% at the company level
• A total effective rate of around 62% to 70% once distributed to individuals

These potential outcomes highlight the risk of double taxation, which is expected to be a key focus during consultation.

For many existing discretionary trust structures that rely on bucket companies, these proposals could significantly change long-term tax efficiency.

Franking credits and discretionary trusts under the proposed rules

The interaction between the proposed minimum trust tax and franking credits is expected to be one of the most complex aspects of the reforms, with several design elements still unresolved.

Proposed franking credit ordering rule

Where a discretionary trust receives franked dividends:
 

• Trustees would be required to apply franking credits first to offset the trustee’s minimum tax liability

This would limit the ability to stream franked income to particular beneficiaries.

For trusts holding significant Australian share portfolios, this may materially affect existing distribution strategies.

Treatment of excess franking credits

The treatment of franking credits that exceed the trustee’s tax liability has not yet been determined and remains subject to consultation.

This issue is particularly relevant for trusts with large holdings of franked investments.

Non-refundable vs refundable credits

A key change is the shift from refundable to non-refundable credits:
 

• Currently, excess franking credits may be refundable to low-income beneficiaries
• Under the proposed rules, credits available would be non-refundable

This could significantly affect:
 

• Retirees
• Lower-income beneficiaries
• Trusts relying on franking credit refunds

Proposed capital gains tax changes and the “dual tax floor”

Separate to trust taxation, the Government also proposed a 30% minimum tax on net capital gains for individuals, trusts and partnerships from 1 July 2027, replacing the current 50% CGT discount.

Combined with the proposed trust tax, this effectively introduces a “dual tax floor”:
 

• A minimum tax on ordinary income
• A minimum tax on capital gains

The combined effect could substantially increase the overall tax burden for individuals, investors and business owners operating through discretionary trusts.

Proposed restructuring rollover relief (2027–2030)

To support structural changes, the Government announced expanded rollover relief for a three-year period from 1 July 2027 to 30 June 2030.

This may allow taxpayers to restructure from discretionary trusts into:
 

• Companies
• Fixed trusts

However, suitability will depend on factors such as:
 

• Retained earnings
• Franking account balances
• Succession planning objectives
• Asset protection needs
• Stamp duty implications

Importantly, no legislation has yet been released, and major restructuring decisions should not be made based solely on preliminary announcements.

What trust owners and investors may want to review now

Although not yet law, the proposed measures provide an opportunity for early-stage review and planning.

Key considerations may include:
 

• Identifying affected trust structures
• Modelling the impact of a 30% minimum tax
• Reviewing existing bucket company arrangements
• Assessing potential double taxation exposure
• Considering the future relevance of rollover relief (2027–2030)
• Reviewing investment portfolios, particularly exposure to franked dividends

Given the complexity and uncertainty, professional tax advice will be important before making structural decisions.

How H&R Block Tax Experts can help

The proposed trust tax changes may affect a wide range of taxpayers, including:
 

• Family trust owners
• Investors
• Small business owners
• Professionals operating through discretionary trusts
• Taxpayers using bucket company structures
• Trusts with franked investment portfolios

H&R Block Tax Experts can help you:
 

• Understand how the proposed changes may impact your specific circumstances
• Review your trust structure and distribution strategies
• Model potential tax outcomes under different scenarios
• Assess the implications for franking credits and investment income
• Consider future restructuring options when legislation is finalised

With over 400 offices nationwide, H&R Block makes it easy to access expert tax advice wherever you are. Book online to speak with a Tax Expert at your local office today.