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Asset protection. Succession planning. Flexibility. Family wealth management.
And, yes, tax planning.
The Government has decided that last one deserves a closer look.
From 1 July 2028, it has proposed introducing a minimum 30% tax on certain discretionary trusts.
A discretionary trust is the ultimate vehicle for asset protection and succession planning, and it also gives flexibility around which beneficiaries receive trust income.
Depending on the trust deed and tax rules, income can be distributed between family members or other related entities.
For many family groups, this flexibility is a major attraction. The ability to split income between family members generally results in less tax.
But this flexibility is also clearly what caught the Government’s attention.
Apparently discretionary trusts have been doing a little too much yoga around tax time, and Canberra would now like everyone back in a nice neutral position.
Let's start with how trusts get taxed now.
Broadly speaking, trusts don’t pay tax under the current system. The profits of the trust get distributed to the beneficiaries, and the beneficiaries then pay tax in their own tax return.
If the beneficiary is an individual, they pay tax at their marginal tax rate.
If the beneficiary is a company, the company pays tax at the company tax rate.
Under the proposed changes, the trust would pay 30% tax on its income.
That can sound like the trust pays 30%, then the beneficiary gets taxed all over again.
Thankfully, it’s not quite that enthusiastic.
For an individual beneficiary, they would still be taxed on their share of the trust’s income at their normal marginal rates.
However, they would then receive a non-refundable credit for the tax already paid by the trust. The credit can reduce income tax, but it can’t be refunded, carried forward or used to reduce the Medicare levy.
So, using a simple example:
Trust taxable income: $150,000
Minimum tax paid by trust at 30%: $45,000
Beneficiary is taxed on: $150,000
Individual income tax before Medicare levy: $36,302
Beneficiary receives a non refundable tax credit: $45,000
The really important words here are non-refundable.
The beneficiary can use $36,302 of the $45,000 offset to wipe out their income tax liability.
But the remaining $8,698 doesn’t come back as a refund.
It doesn’t roll forward.
And it can’t be used against the Medicare levy.
It simply vanishes - into the government's pocket so they can spend wisely.
So compared with the current system, the family group has effectively paid an additional $8,698 of income tax on that trust income.
And that’s where the sting is. 😓 The proposal is specifically designed to ensure discretionary trust income bears at least 30% income tax.
Possibly.
And for plenty of families, probably.
The key question becomes:
Who is receiving the trust income, and what tax would they otherwise pay on it?
If the individuals receiving the trust income are already paying tax at more than 30%, the minimum tax itself may make relatively little difference.
Where the pain starts is when the beneficiary’s income tax rate is less than 30%.
The point where income tax broadly reaches 30% is around $229,000. So if your income is below this, then consideration needs to be given to whether the other benefits of a discretionary trust are worthy of the additional tax.
So no, family trusts aren’t suddenly dead.
Don’t start feeding the trust deed into the shredder. 🚨
The structures most worth reviewing are likely to be those where tax planning through lower-rate beneficiaries has been a major part of the strategy.
And then there’s the trust that has existed since 1997 because “our old accountant set it up”.
This may finally be a useful time to work out why it’s still there.
This is where the proposal gets considerably less friendly.
Many family groups currently distribute trust income to a company, commonly called a bucket company.
That can be useful where individuals are paying tax at rates of up to 47%, because income can instead be taxed in the company at the company tax rate.
But the proposed minimum tax wipes out this strategy.
Under the proposal, company beneficiaries won’t receive the tax credit.
So if you distributed trust income to a company, the trust would pay the 30% minimum tax and then the company would pay tax again, but without receiving a credit. This would result in total tax of up to 60%.
That’s a fairly significant change to the maths.
Potentially.
The Government has flagged rollover relief to restructure out of affected discretionary trusts and into other vehicles such as fixed trusts or companies.
Rollover relief ensures you don’t pay any capital gains tax on the transfer of assets to the new entity. Relief is expected to be available for three years from 1 July 2027.
That tells you something.
If they’re offering a way out, they clearly expect some people to take a good hard look at the structure.
But restructuring isn’t just a tax decision.
You may need to think about:
• stamp duty
• legal ownership
• asset protection
• finance arrangements
• existing loans
• estate planning
• succession consequences.
So this isn’t a “change the entity in Xero and call it done” exercise.
There can be a lot sitting underneath a trust structure that has been in place for years.
And unfortunately, “but we’ve always done it this way” still isn’t recognised as formal restructuring advice.
No.
The Government has indicated that the minimum tax won’t apply to every type of trust.
Fixed trusts (aka Unit Trusts), disability trusts, testamentary trusts, deceased estates are expected to sit outside the measure, and primary production income is also intended to be exempt.
That’s another reason not to make broad assumptions about your structure before looking at the detail.
“Trust” covers a lot of territory.
The tax system, naturally, intends to make sure we visit most of it.
This is important.
The minimum tax on discretionary trusts is still proposed.
Treasury released its implementation consultation in July, with submissions closing on 31 July 2026. The Government is still working through how the tax will operate, how credits will be treated, how company beneficiaries will interact with the new rules and which trusts or income types will sit outside the regime.
So there is still detail to come.
Which is very on-brand for tax reform.
Big headline first.
Small forest of detail later.
That means we wouldn’t recommend restructuring purely because of the announcement.
We would recommend understanding what your current trust is doing for you.
Start with a simple question:
Is it:
• paying less tax
• protecting assets
• estate and succession planning
Then look at how the proposed rules affect those priorities.
👉 If your distributions are already going to people paying more than 30%, you may find there is no tax impact.
👉 If your strategy relies heavily on people paying less than 30%, there’s probably more work to do.
And if you’ve got a bucket company sitting in the middle of it all, the calculator definitely needs to come out.
Once the final rules become clearer, you can compare the additional tax cost of keeping the trust against the asset protection, succession and other benefits you’d be giving up by changing it.
Family trusts aren’t dead.
But some of the tax benefits people have relied on for years may change significantly.
For families already distributing income to beneficiaries paying more than 30%, the practical tax impact may be relatively limited.
For families relying heavily on lower-tax beneficiaries or bucket companies, it could be a very different story.
That means existing structures deserve a proper review before 1 July 2028.
Not necessarily a restructure.
A review.
Understand why the trust exists, where the money currently goes and whether the structure still stacks up once the proposed rules are applied.
Calm, informed and slightly suspicious remains the correct setting.
If you operate through a discretionary trust, speak with the PAL team.
We can review how your structure works today, model the proposed changes and help you work out whether anything actually needs to change.
Ideally before everyone wants the same meeting in the last week of June.
Disclaimer: This article is here to give you general info only, not professional advice specific to your unique situation. While efforts are made to ensure accuracy, the content may change over time. We can’t take responsibility for any decisions based on the contents of this article, so be sure to chat with your accountant or advisor first!
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