The family discretionary trust is not dead. But the 2026 Budget has permanently changed the tax maths that made it so attractive for decades. Here is what you need to know.
TL;DR
- From 1 July 2028, discretionary trusts would pay a 30% minimum tax on all taxable income distributed to beneficiaries (announced, not yet legislated).
- The ability to income-split to lower-earning family members would be materially curtailed – this was the core advantage for most families.
- Individual beneficiaries would get non-refundable credits only. If your marginal rate is below 30%, the excess credit would be lost.
- Corporate beneficiaries (bucket companies) would receive no credit at all – likely resulting in double taxation.
- No grandfathering is proposed. Every existing discretionary trust would be captured from 1 July 2028.
- A three-year CGT rollover window is proposed to open 1 July 2027, to restructure out of trusts without a tax hit (announced, not yet legislated).
- Widely held trusts, SMSFs, testamentary trusts, and farming income would be exempt.
- The measure is announced but not yet legislated. Seek professional advice before restructuring – do not act prematurely.
In This Article
01 — Background
What Is a Discretionary Trust?
A discretionary trust (usually called a family trust) is a legal structure where a trustee controls a pool of assets and decides each year how income from those assets is distributed to a nominated group of beneficiaries. Those beneficiaries typically include a spouse, adult children, and sometimes a related company.
The power in the structure has always been the trustee’s discretion. Each year, the trustee can direct more income to family members in a lower tax bracket, reducing the total tax the family pays on the same pool of income. A family earning $200,000 through a trust can pay significantly less tax than a salaried worker earning the same amount, simply by splitting the distributions across multiple beneficiaries at lower marginal rates.
This is precisely what the 2026 Budget is targeting.
02 — The Core Change
What Exactly Changed: The 30% Minimum Tax Explained
From 1 July 2028, every distribution of taxable income from a discretionary trust is taxed at a minimum of 30% at the trustee level. This tax is paid by the trustee before distributions are made, regardless of what the beneficiary’s marginal rate actually is.
Individual beneficiaries receive a non-refundable credit for the tax paid by the trustee. The word “non-refundable” is doing a lot of work here. It means:
- If your marginal rate is above 30%, you pay top-up tax to reach your rate. The credit offsets what the trust already paid.
- If your marginal rate is exactly 30%, no additional tax is due. The credit washes out.
- If your marginal rate is below 30% (i.e. you earn under roughly $45,000 before the distribution), the excess credit is simply lost. You cannot claim a refund. You end up paying more tax than if the income had been earned directly.
That last point eliminates income-splitting to low-earning family members entirely. The whole point of directing income to a non-working spouse or a student adult child was to access their zero or low rate. Under the new rules, the trust pays 30% regardless, and the beneficiary cannot claw back the difference.
The bottom line: the minimum tax makes it impossible to benefit from distributing income to anyone with a marginal rate below 30%. For families who relied on trusts primarily for this purpose, the core economic rationale is gone from 1 July 2028.
Before and after: a simple example
Consider a hypothetical example: an investor earns $200,000 in investment income through a family discretionary trust and distributes it across themselves, a non-working spouse, and two adult children.
Before (current rules)
Income distributed across four beneficiaries
- The investor: $80,000 at 32.5% = $26,000
- Spouse (no income): $45,000 at ~19% = ~$8,550
- Adult child 1: $45,000 at ~19% = ~$8,550
- Adult child 2: $30,000 at 19% = ~$5,700
Total family tax: ~$48,800 on $200,000
After (from 1 July 2028)
Same distributions, 30% minimum applied
- Trustee pays 30% on full $200,000 first
- Lower-income beneficiaries: credits non-refundable
- Excess credits for those under $45k: lost
- Net result: 30% minimum regardless of split
Minimum tax: $60,000 on $200,000 – no splitting benefit
03 — Who Is Affected
Who Loses the Most
The change does not affect all trust holders equally. The severity depends on why the trust was set up and how it has been used.
| Trust holder profile | Primary use of trust | Impact from 1 July 2028 | Severity |
|---|---|---|---|
| Family with non-working spouse | Splitting investment income to spouse at 0% / 19% | 30% tax locked in; excess credit for spouse lost | High |
| Family distributing to adult students | Splitting to adult children at 0–19% marginal rate | Same – non-refundable credit wipes out splitting benefit | High |
| Business owner distributing to self only | Single high-income beneficiary at 45% | Trust pays 30%; top-up of 15% at personal level. Similar to current effective rate. | Moderate |
| Bucket company strategy | Retaining income in company at 25–30% | No credit passed to corporate beneficiary – potential double tax | High |
| Asset protection trust (no income splitting) | Holding property and assets for succession | 30% on distributed income; asset protection benefits unaffected | Moderate |
| Farming / primary production trust | Agricultural income distribution | Primary production income is explicitly excluded | Exempt |
04 — Bucket Companies
The Bucket Company Problem
One of the most widely used strategies alongside a family trust is directing some annual income into a “bucket company” – a corporate beneficiary that receives distributions and pays tax at the flat corporate rate of 25–30%. The logic was simple: instead of distributing all income to individuals in a given year, park some of it in the company to retain and reinvest at a lower rate, then pay it out as franked dividends later.
The 2026 Budget has specifically targeted this arrangement. Corporate beneficiaries will not receive a credit for the 30% minimum tax paid at the trustee level. This is a deliberate design choice. The result in practical terms is that the same income is taxed twice – once at the trustee level (30%), and again at the corporate level when the company receives the distribution – without any offsetting credit.
Double taxation risk: under the current design of the measure, routing trust income to a bucket company from 1 July 2028 could result in effective double taxation. The trustee pays 30% minimum tax, and the company pays its own corporate rate on the received income with no credit for what the trustee already paid. This makes the bucket company strategy significantly less viable and warrants close attention as the legislation develops.
It is worth noting that the precise mechanics of the corporate beneficiary treatment have not yet been legislated, and there is some commentary suggesting the final rules may be refined. Do not assume the current announced design is final. It is worth beginning to model what your structure looks like with no bucket company offset, since that outcome is a live possibility.
05 — Exemptions
Who Is Exempt: Trusts the Changes Don’t Touch
Not every trust is in the crosshairs. The government has announced a number of carve-outs, and they matter.
| Trust / income type | Status under new rules |
|---|---|
| Widely held trusts (most managed investment trusts) | Exempt Not a discretionary trust structure |
| Superannuation funds (including SMSFs) | Exempt Explicitly excluded |
| Fixed trusts (unit trusts) | Exempt Fixed beneficiary entitlements, not discretionary |
| Discretionary testamentary trusts existing at 12 May 2026 | Exempt Income from assets of existing testamentary trusts is excluded |
| Special disability trusts | Exempt Excluded by the government |
| Deceased estates | Exempt Excluded |
| Charitable trusts | Exempt Excluded |
| Primary production (farming) income | Exempt Specific exclusion for agricultural income |
| Income relating to vulnerable minors | Exempt Specific exclusion applies |
| Non-resident withholding tax income | Exempt Separate withholding regime applies |
| Standard family discretionary trust (investment / business income) | Captured No grandfathering for existing structures |
The most notable point in that table: there is no grandfathering for existing discretionary trusts. If your family trust was set up 20 years ago and has been running smoothly ever since, it is still fully captured by the 30% minimum from 1 July 2028. The government made this explicit.
06 — The Exit Window
The Restructuring Window: Your Three-Year Runway
Alongside the minimum tax, the government announced a CGT rollover relief window running from 1 July 2027 to 30 June 2030. This is the mechanism that allows you to restructure out of a discretionary trust without triggering an immediate capital gains tax liability on the transfer of assets.
Without this relief, transferring assets out of a trust would normally constitute a CGT event – the asset would be deemed to have been sold at market value, and any accrued gain would be taxable. The rollover relief defers that CGT event, allowing assets to move to a different structure (company or fixed trust) with the cost base carried across.
- 12 May 2026 — Budget announcement
30% minimum trust tax and rollover window announced. Not yet legislated.
- 1 July 2027 — Rollover relief window opens
Three-year CGT rollover window begins. Assets can move out of discretionary trusts without triggering CGT. This is the earliest point at which restructuring would typically be considered.
- 1 July 2028 — 30% minimum tax takes effect
All discretionary trust distributions are subject to the 30% minimum tax at the trustee level. No grandfathering for existing trusts.
- 30 June 2030 — Rollover relief window closes
Three-year restructuring window closes. After this date, moving assets out of a trust without a CGT event becomes significantly more complex.
Do not move early. Acting before 1 July 2027 could trigger stamp duty and CGT costs that the rollover window is specifically designed to avoid. (Seek specific advice on your structure before taking any action.) The window exists for a reason. Restructuring in 2026 to “get ahead” of the changes would likely cost more in immediate tax than waiting for the relief to open. Plan now, act in the window, and do so with professional advice.
07 — Honest Assessment
Is the Trust Still Worth Keeping?
The honest answer is: it depends on why you have it.
If your trust was set up primarily to income-split to family members at lower marginal rates, and that is the main economic benefit you have been extracting, then the economic case weakens significantly from 1 July 2028. The minimum tax floor eliminates the benefit of splitting to low earners, and the bucket company route is potentially double-taxed. The trust becomes expensive to maintain for the same after-tax outcome.
But a discretionary trust has never been a single-purpose structure. Income splitting was one lever – there were others that remain intact:
| Trust benefit | Survives the changes? | Notes |
|---|---|---|
| Asset protection from creditors | Yes | Trust-held assets are generally protected from personal creditors. This is unchanged. |
| Estate planning and succession | Yes | Trusts allow controlled transfer of wealth across generations. Still a valid reason to maintain one. |
| Income splitting to high-rate beneficiaries | Partially | If all beneficiaries have marginal rates above 30%, the credit is usable. Top-up tax is still payable – but the trust is not penalised relative to direct holding. |
| Income splitting to low-rate beneficiaries | No | Non-refundable credit makes this strategy economically ineffective from 1 July 2028. |
| Distributing to a bucket company | At risk | No credit passed to corporate beneficiary under announced design – double tax risk. |
| Retaining income in the trust | No (same as now) | Undistributed income is taxed at the top marginal rate (47%) – no change here. |
For families where asset protection and estate planning are the primary motivations, maintaining the trust structure past 2028 remains a reasonable position – it simply comes at a higher price for those benefits. For families where income splitting was the sole driver, the restructure window is likely worth exploring with an adviser.
08 — Action
What to Do Right Now
The minimum tax does not start until 1 July 2028, and the rollover window that makes restructuring affordable does not open until 1 July 2027.
The work that happens between now and mid-2027 is preparation work. It involves understanding what you actually have, what it costs to keep it, and what alternatives look like under the new rules. The suggestions below are general in nature and should be discussed with your adviser before you act.
| Your situation | What to consider now | When to act |
|---|---|---|
| Trust used primarily for income splitting to low earners | Modelling the cost difference may be worth exploring with your adviser before 2027. | Start now |
| Trust used with a bucket company | The bucket company strategy warrants fresh review. Consider seeking advice on whether the strategy remains viable under the announced framework. | Urgent review |
| Trust held for asset protection / succession | Review whether the ongoing cost of the 30% floor is worth the non-tax benefits. No structural changes needed immediately. | Review by mid-2027 |
| Planning to restructure out of trust | Avoid acting before 1 July 2027. Waiting for the rollover window to open helps avoid unnecessary CGT and stamp duty. | Wait for window |
| Trust holds pre-CGT or long-held assets | Getting a formal market valuation completed before 1 July 2027 may help lock in pre-2027 CGT treatment on accrued gains. | Plan now |
| Reviewing your Will or estate plan | Testamentary trusts in existing Wills may be worth reviewing with your adviser. Existing testamentary trusts as at 12 May 2026 are exempt – new ones may not be. | Review |
The family trust is not dead. But the 2026 Budget has fundamentally changed what it costs to run one, and the strategies that made trusts so valuable for income management in this country for decades are no longer viable in their current form. The families who come out ahead will be the ones who use the planning window deliberately, with professional guidance, rather than reactively.
That conversation starts now.
Wondering what the trust changes mean for your family?
Speak with the AllianceCorp team about your structure, your income profile, and the options available before the proposed rollover window opens.
Book a Free ConsultationThis article is intended for general informational purposes only and does not constitute financial, tax, or legal advice. The information reflects publicly announced Budget proposals as at June 2026, several of which are not yet legislated. Individual circumstances vary significantly. You should seek independent professional advice tailored to your specific trust structure, income profile, and long-term goals before making any restructuring or investment decisions.