On 12 May 2026 the Albanese Labor Government delivered the Federal Budget.  They propose to impose of a thirty (30) percent minimum tax on discretionary trusts, commencing 1 July 2028.  This article addresses the proposed rate and scope and identifies what remains unclear, particularly how and when the tax will be collected based on the information released to date.

What the 2026 Federal budget says

The Albanese Government has announced the minimum thirty (30) percent tax but has not confirmed how it will be implemented.  Discretionary trusts typically distribute income to multiple beneficiaries who are commonly family members and associated entities, meaning a large number of trustees, their spouses, children, and other beneficiaries will be affected.  The question is “Will our discretionary trust continue to work for us, or against us”?

What we know and don’t know about the tax on discretionary trusts

The proposed new tax on discretionary trusts will, by the Australian Taxation Office’s (ATO) most recent data (Taxation statistics 2022-23 financial year) adversely affect around thirteen (13) percent of small businesses, particularly affecting family-run companies, startups, and mum and dad property investors operating through these structures, along with around 400,000 family trusts.

What we know is from 1 July 2028, the trustee of a discretionary trust is to pay thirty (30) cents in every dollar of income to the ATO first, before any distributions are made.  Individual beneficiaries will receive a credit for the payment against their personal tax liability but cannot claim a refund if their personal tax rate would have been lower than thirty percent (30%). 

Corporate beneficiaries receive no credits for tax already paid by the trustee, rendering the “bucket company” strategy, (whereby trustees distribute income to a company set up specifically to access the lower corporate tax rate) pointless.

The exceptions

The following entities are excluded from this new tax:

• fixed trusts – commonly referred to as unit trusts;
• widely held trusts;
•  complying superannuation funds (SMSFs);
• charitable trusts;
• special disability trusts; and
• deceased estates under administration.

How will the proposed changes affect testamentary trusts made in a Will?

For testamentary trusts, the exclusion applies only to trusts established under will made before12 May 2026.  Testamentary trusts imbedded in a will signed after that date will be treated like standard discretionary trust and will be subject to the new regime.

Some specific income streams will be excluded such as; primary production (farming) income and certain income relating to vulnerable minors.  Distributions to overseas beneficiaries already subject to non-resident withholding tax are also excluded, consistent with the non-double taxation principle.

Beneficiaries already paying tax at or above thirty (30) per cent will see no change to their net distributions minimum tax simply matches what they were already paying.

Asset protection

The asset protection function of a discretionary trust rests on the principle that the trustee holds legal interest in the trust’s assets and beneficiaries have no fixed entitlement to them; as a result, those assets are generally beyond the reach of a beneficiary’s creditors: see Fordyce v Ryan & Anor; Fordyce v Quinn & Anor [2016] QSC 307 (Fordyce v Ryan).  Nothing in the details released to date suggests that this principle, or the resulting asset protection, will be disturbed.  However, the proposed change destroys the tax effectiveness of a discretionary trust.

Rollover relief into a company

Comparing to the incoming trust tax rate, a company paying the small business rate pays twenty (25) percent under section 23 of the Income Tax Rates Act 1986 (Cth).  The tax saving of a company is real, but the protection of trust owned assets does not extend to company shareholdings.  Shares are property with value attached and are treated the same as other personal assets for legal purposes.  Restructuring into a company to solve the tax problem will dismantle asset protection. 

Additionally, those using discretionary trusts are able to transfer control (not ownership) of assets and to pass them to the next generation by simply changing the appointor and trustee.  This succession process is exempt from Capital Gains Tax (CGT) and stamp duty.  The trust continues and the family retains the assets in the same protective structure.

A company does not work this way.  Passing control of a company to the next generation means transferring shares.  That transfer triggers a CGT disposal under section 104:10 of the Income Tax Assessment Act 1997 (Cth).

The determinative question is one of purpose, for what end was the trust created and does that purpose survive the reform via restructuring?

Wills and Estate Planning turned on its head

Testamentary trusts, created by a will made before 12 May 2026 will not lose the ability to distribute income to beneficiaries at marginal rates and will not attract the same penalty rates that normally apply to children’s investment income.

This exclusion creates an immediate and significant estate planning consideration.  If you made your will with a testamentary trust before 12 May 2026, and you currently have assets sitting inside a discretionary trust, you need to consider how to achieve the best long-term outcomes for the beneficiaries of your estate.

            “You can’t gift what you don’t own“: your will cannot deal with trust assets, other than the power to appoint a trustee of a trust and, in the case of corporate beneficiaries acting as the trustee, its shares can be gifted, thus vesting control in the recipient.

This principle was confirmed in Public Trustee v Smith [2008] NSWSC 397 (Public Trustee v Smith). 

What the planned “rollover” relief actually means

The mooted rollover relief is designed to facilitate restructuring out of discretionary trust structures.  The programme defers, but does not wave, the CGT that would ordinarily arise on transferring assets out of a discretionary trust.  The relief window runs from 1 July 2027 to 30 June 2030.  One gap that is not in the budget papers is that it does not extend to state-based transfer duty

Is restructuring an inevitable necessity of the 2026 Federal Budget?

The short answer to this is that – it depends.  Restructuring may cause more harm than it avoids, particularly where the trust is used for asset protection.  The minimum tax is predictable; creditor risk is not.

Trustees using trusts primarily for income distribution face the greatest potential disruption and are the most likely candidates for restructuring, but options need to be modelled against asset protection and succession outcomes, not tax alone.

Those with complex estate plans should not restructure without reviewing their will, trust deed, and appointor succession arrangements.

Will this actually become law?

The measure has met strong resistance from the Opposition and outrage from the general public  Liberal Party Leader Angus Taylor has criticised it as a punitive overreach affecting small businesses and family investors.  See the full transcript of Angus Taylor MP’s public statement via Hansard here: Doorstop interview: Angus Taylor MP.

Until the legislative position is clear, the prudent approach is to plan early, model the options, and remain ready to restructure only if necessary.

Key takeaways

The proposed regime does not undermine the asset protection function of a discretionary trust; it alters the tax payable on the payment of dividends through it.

Dundas Lawyers is watching this space carefully and will publish more information about the proposed changes as soon as they come to hand.

Links and further references

Legislation

Income Tax Rates Act 1986 (Cth). section23 and 26

Income Tax Assessment Act 1997 (Cth) section 104:10 and 115-100 and 295-385

Cases

Fordyce v Ryan & Anor; Fordyce v Quinn & Anor [2016] QSC 307

 Public Trustee v Smith [2008] NSWSC 397,

Other material

Australian Taxation Office (ATO) Taxation statistics 2022-23 financial year

Taxation statistics 2022-23 financial year

Transcript of Angus Taylor MP’s public statement via Hansard

Doorstop interview: Hon Angus Taylor MP.

Federal Government budget fact sheets 2026-27: https://budget.gov.au/content/factsheets/download/tax-explainers-minimum-tax-discretionary-trusts.pdf

2026–27 Federal Budget Fact Sheet: Negative Gearing and Capital Gains Tax Reform;

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Further information

If you need advice on restricting a discretionary trust, a will, or estate plan please contact us for a confidential and obligation‑free discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances

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