What the proposed Discretionary Trust tax changes mean for ordinary Australians
Introduction
The 2026 Australian Federal Budget has introduced one of the most significant proposed tax changes to discretionary trusts in decades and it will reshape how many Australian families, investors and small business owners structure their financial and family affairs.
While much of the media attention has focused on housing and negative gearing reforms, the trust changes may ultimately have a broader impact across professional services, family businesses and investment structures.
What has changed?
The government has proposed introducing a 30% minimum tax on discretionary trust distributions from 1 July 2028.
In simple terms, this would reduce the effectiveness of using family trusts to distribute income to beneficiaries who are on lower marginal tax rates.
The primary objective of the policy is to curb what is known as ‘income splitting’ which is the practice of distributing trust income to family members in lower tax brackets (like adult children or spouses) to reduce a household's overall tax bill.
Why discretionary trusts have been popular
Discretionary trusts, commonly called family trusts in Australia are widely used by small and medium business owners because they provide:
• asset protection;
• estate planning flexibility;
• investment structuring benefits; and
• effective tax planning opportunities.
Traditionally, trustees of the discretionary trust could distribute income across family members in tax-effective ways. For example:
• a business owner may distribute income to a lower-income spouse;
• investment income may be allocated to adult children at university; and
• profits may be streamed to a corporate beneficiary (i.e. ‘bucket company’).
These arrangements are legal and have been a standard part of Australian tax planning for generations.
What the Federal Government is targeting
Treasury argues that discretionary trusts disproportionately benefit higher-income households and are frequently used to minimise tax liabilities. The proposed reforms aim to:
• reduce income splitting;
• increase tax integrity;
• improve perceived fairness in the tax system; and
• raise additional government revenue.
The policy forms part of a broader ‘intergenerational equity’ agenda announced in the budget.
Who will be affected?
The proposed changes will impact:
• small business owners including mum and dad retail shops;
• ‘tradies’ such as electricians, plumbers, carpenters, bricklayers, painters, tilers, plasterers and landscape gardeners;
• medical and professional practices;
• farming families;
• property investors;
• high-income households; and
• family investment groups.
Many Australians who use discretionary trusts are not wealthy, they are ordinary business owners who have operated legally through discretionary trust structures for decades.
This is why the proposal has already generated strong reactions from accounting and business groups immediately following the Federal Budget announcements.
What happens to bucket companies?
One of the biggest questions surrounds ‘bucket companies’.
Currently, trusts often distribute surplus income to a corporate beneficiary taxed at the company tax rate rather than higher personal tax rates. If a 30% minimum trust tax applies:
• some existing bucket company strategies may lose effectiveness;
• there may be increased complexity around accounting for franking credits and retained earnings; and
• some structures could face unintended double taxation outcomes.
The final legislation will determine how significant the impact on bucket companies becomes.
Are there any exemptions?
Based on early announcements, potential carve-outs may include the following trust frameworks:
• Fixed and Widely Held Trusts: Frameworks where beneficiaries have fixed, locked-in entitlements (including fixed testamentary trusts);
• Complying Superannuation Funds;
• Deceased Estates;
• Special Disability Trusts: Designed to support individuals with severe disabilities;
• Charitable Trusts; and
• Existing Discretionary Testamentary Trusts: Income derived from assets held within a testamentary trust (wills) that existed prior to the budget night announcement (12 May 2026) is grandfathered and exempt.
Why this matters beyond tax
These reforms are not just about tax minimisation. This is a fundamental change to business structuring because discretionary trusts are deeply embedded in how many Australian families:
• run businesses;
• hold investments;
• protect assets; and
• effectively manage succession planning.
Any major changes to the taxation of discretionary trusts are likely to trigger widespread family business restructuring within the accounting, legal and financial planning industries over the next few years.
What should trustees and beneficiaries consider now?
At this stage, the changes are still proposals, not law.
That means trustees should avoid rushing into major restructuring decisions before legislation is released. However, now is the right time to:
• review and understand existing trust structures;
• understand exposure to proposed rules changes;
• model future tax outcomes; and
• speak with your accountants and corporate advisors early.
The transition period before 2028 may become critical for future corporate and tax planning for your family business.
The bigger picture
The discretionary trust reforms sit alongside:
• negative gearing changes;
• capital gains tax reforms; and
• tighter integrity rules across the tax system.
Taken together, the budget signals a definite shift away from long-standing tax planning strategies commonly used by investors and small business owners.
Whether the reforms ultimately pass in their current form remains uncertain, particularly given political opposition and lobbying from business groups.
One thing is certain: discretionary trusts are now firmly in the government’s tax reform spotlight.
Can we help your business?
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Disclaimer
This content of this blog post is not accounting advice. The information provided is opinion and for general purposes only and is not a substitute for personalised accounting advice.