Proposed Trust Tax Changes in the 2026 Federal Budget: What You Need to Know

The 2026–2027 Federal Budget has introduced proposed changes to the taxation of discretionary (family) trusts. If implemented, these reforms could significantly impact how trust income is taxed from 1 July 2028 (2029 financial year).

Important: These measures are proposals only. They are not yet law and must receive Royal Assent before taking effect. They may change, be delayed, or not proceed.

What Are the Proposed Changes to Trust Taxation?

The Government has proposed introducing a minimum 30% tax on discretionary trust income.

Under the current system, trust income is typically distributed to beneficiaries and taxed at their personal tax rates. However, under the proposed changes:

• The trustee would pay tax upfront at 30% on taxable income
• Beneficiaries would then receive their share of trust income along with a non-refundable tax credit for tax already paid
• Company beneficiaries (bucket companies) would not receive a tax credit

This change could fundamentally alter how family trusts are used for tax planning.

Which Trusts and Income Types Will Be Executed?

Certain trusts and income types are expected to be excluded from the proposed rules, including:

Excluded Trust Types

• Fixed trusts and widely held trusts (eg. managed investment trusts)
• Complying superannuation trusts
• Special disability trusts
• Deceased estate charitable trusts
• Fixed testamentary trusts

Excluded Income Types

• Primary production income
• Income allocated to vulnerable minors
• Payments to non-residents subject to withholding tax
• Income from assets held in a testamentary trust existing at Budget night

How Will These Changes Affect Discretionary (Family) Trusts?

If enacted, these reforms could reduce the tax advantages traditionally associated with discretionary trusts.

1. Reduced Effectiveness of Income Splitting

Distributing income to family members on lower tax rates may no longer deliver the same benefits:

• Beneficiaries earning under $45,000 will effectively face a 30% tax rate on trust income
• This replaces the current lower marginal rates (0%-14% based on projected tax rates)

2. Impact on Low-Income Beneficiaries

• The common strategy of income splitting to family members in lower tax brackets will be largely eliminated

3. Bucket Companies May Lose Their Advantage

Using a corporate beneficiary may become less beneficial because:

• Companies will not receive credits for tax already paid at the trust level
• This could result in higher overall tax outcomes

4. Potential Cash Flow Implications

Trusts may be required to:

• Lodge and pay quarterly Instalment Activity Statements (IAS)
• Do so even if they are not registered for GST or PAYG withholding

This could create cash flow pressure for some trusts.

Should You Consider Restructuring Your Trust?

While discretionary trusts will continue to offer asset protection and flexibility, these proposed tax changes may reduce their effectiveness for tax planning.

The Government has indicated it will introduce:

• Expanded rollover relief for up to 3 years from 1 July 2027
• Designed to support restructuring into alternative entities such as:
  • Companies
  • Fixed trusts

However, details of this relief are still unclear, and further announcements are expected.

What Should You Do Now?

Although no immediate action is required, it’s important to stay informed and prepared.

Recommended Next Steps

• Review your trust distribution strategy with your advisor
• Assess whether your current structure still meets your:
  • Tax planning goals
  • Asset protection needs
  • Succession objectives
• Monitor developments from the Government and ATO
• Seek advise on possible restructuring options if changes proceed
• Consider whether certain investments may be better held in a self-managed super fund (SMSF), depending on your circumstances

Final Thoughts

The proposed 30% minimum tax on discretionary trust income represents one of the most significant potential changes to trust taxation in recent years. While these reforms are not yet law, they could have a material impact on family trust structures and tax planning strategies from 2028 onwards.

Staying proactive and reviewing your arrangements early will ensure you’re well positioned if these changes are implemented.

Need Advice on Your Trust Structure?

If you’d like to discuss how these proposed changes may affect you, contact our team for tailored advise and planning strategies.