Budget 2026: 30% Minimum Tax on Discretionary Trusts

The Federal Budget 2026-27 has put discretionary trusts back at the centre of SME tax planning. For accountants advising family groups, professional services firms and investment trusts, the key structural change is clear: from 1 July 2028, trustees of in-scope discretionary trusts will pay a 30% minimum tax on trust taxable income.

The measure is significant not because 30% is always the highest available rate, but because it changes the value proposition of discretionary distribution planning. Low-income adult beneficiaries, family members below the tax-free threshold, and bucket company distributions will no longer produce the same outcomes. The Budget estimates the measure will raise $4.5 billion over five years, with the ATO receiving $66 million for implementation.

For practitioners, the next two years are not a waiting period. They are a review, modelling and restructuring window. Expanded rollover relief will run from 1 July 2027 to 30 June 2030 for certain restructures from discretionary trusts to companies or fixed trusts, but it will not solve every tax, duty or commercial issue.

What the Budget 2026 discretionary trust measure does

From 1 July 2028, trustees of in-scope discretionary trusts will be liable for a 30% minimum tax on trust taxable income. Non-corporate beneficiaries will receive a non-refundable credit for the minimum tax paid. Corporate beneficiaries will receive no credit.

That distinction is critical. A non-corporate beneficiary on a marginal tax rate above 30% will broadly top up to their marginal rate. A beneficiary below 30% may not be able to fully use the credit because it is non-refundable. A company beneficiary, including a common bucket company, receives no credit at all, which can produce an effective tax outcome of approximately 45% to 51% depending on the company tax rate and subsequent extraction strategy.

Trusts excluded from the 30% minimum tax

The Budget materials identify the following exclusions:

• Fixed trusts
• Widely held trusts
• Complying superannuation funds
• Charitable trusts
• Special disability trusts
• Deceased estates
• Testamentary trusts existing at 12 May 2026

Income excluded from the measure

Certain income categories are also excluded from the minimum tax base:

• Primary production income
• Vulnerable minor income
• Amounts already subject to non-resident withholding

Accountants should not assume that a trust is excluded merely because it has a particular asset class or family purpose. The first workstream should be trust-by-trust classification: discretionary, fixed, hybrid, testamentary, deceased estate, charitable, special disability or other.

Worked example: $100,000 discretionary trust income

The following simplified example assumes an in-scope discretionary trust has $100,000 of taxable income for the year ending 30 June 2029. The trustee pays a 30% minimum tax of $30,000. For non-corporate beneficiaries, a non-refundable credit is available. For a corporate beneficiary, no credit is available. Medicare levy and detailed offsets are ignored for simplicity.

Scenario	Beneficiary position	Trustee minimum tax	Beneficiary/company tax outcome	Total tax cost	Planning observation
1	Adult beneficiary at 0% marginal rate	$30,000	$0 tax liability; $30,000 credit cannot be refunded	$30,000	Low-income beneficiary loses value because the credit is non-refundable
2	Adult beneficiary at 32.5% marginal rate	$30,000	$32,500 tax less $30,000 credit; $2,500 top-up	$32,500	Outcome broadly equals marginal rate
3	Adult beneficiary at 47% marginal rate	$30,000	$47,000 tax less $30,000 credit; $17,000 top-up	$47,000	No benefit compared with high marginal rate distribution
4	Corporate beneficiary or bucket company	$30,000	No credit. If taxed at 25% on the post-floor amount of $70,000, company tax is $17,500	$47,500, before shareholder extraction	Effective rate is approximately 45% to 51%; bucket company strategy must be remodelled

The most important practical message is that beneficiaries earning less than $45,000 may lose significant value. The non-refundable credit means the family group cannot simply treat the 30% trustee payment as a refundable prepayment. Once the beneficiary’s personal tax liability is below the credit amount, the excess value is lost.

Why bucket company planning changes materially

Many SME family groups use discretionary trusts to distribute retained business or investment profits to a corporate beneficiary taxed at the company rate. For small business entities with aggregated turnover under $50 million, the company may access the 25% corporate tax rate on base rate entity income. Historically, that allowed deferral of top-up personal tax until dividends were paid.

From 1 July 2028, that model needs to be rebuilt. Because corporate beneficiaries receive no credit for the 30% trust minimum tax, the bucket company distribution may bear both the trustee-level impost and company tax. Even where the corporate rate is 25%, the combined immediate tax cost may be around 47.5% in a simplified example. Where the company rate is 30%, the outcome may approach 51%.

This does not necessarily mean every bucket company should be abandoned. It does mean accountants should model:

• Whether profits are genuinely retained for working capital or investment
• Whether the family group needs asset protection through a trust
• Whether shareholders will ultimately extract profits as franked dividends
• The Division 7A profile of existing unpaid present entitlements and loans
• The impact of the Bendel decision on Division 7A treatment of UPEs and the need to revisit legacy positions as guidance evolves

Decision framework: four restructure paths

Expanded rollover relief will be available from 1 July 2027 to 30 June 2030 for qualifying restructures from discretionary trusts to companies or fixed trusts. The relief is expected to cover income tax and CGT consequences, but it does not override state stamp duty. That distinction should sit at the top of every advice file.

1. Convert to a Pty Ltd company

This path may suit trading groups that retain earnings, reinvest profits and do not need annual discretionary streaming. A company can offer a clear tax rate, potentially 25% for SBE groups under the $50 million turnover threshold, plus easier profit retention.

However, advisers must consider shareholder access, Division 7A, asset protection, financing covenants, payroll tax grouping, and whether transferring assets triggers duty. A company structure may solve the discretionary trust minimum tax problem but create new issues around dividend extraction and control.

2. Convert to a fixed trust

A fixed trust may preserve flow-through treatment while moving outside the in-scope discretionary trust category. This may suit investment trusts where family members or related entities can tolerate fixed economic entitlements.

The trade-off is flexibility. Many family groups value discretionary trusts precisely because they can allocate income based on changing family circumstances, asset protection concerns and beneficiary tax profiles. A fixed trust may also need careful review for land tax, foreign surcharge rules, financing and succession planning.

3. Wind down the discretionary trust and transfer assets to a company directly

Where the trust is nearing the end of its commercial life, a controlled wind-down may be cleaner than converting it. This may be relevant for professional services firms transitioning to incorporated practice models, or investment trusts holding assets that are intended to be retained within a company.

The major risk is transaction cost. Commonwealth rollover relief may assist with income tax and CGT, but state duty, refinancing, contract novation, employee transfer obligations and commercial consents must be costed before implementation.

4. Stay in the discretionary trust and pay the floor

Some groups will deliberately keep the discretionary trust and accept the 30% minimum tax. This may be appropriate where the trust holds high-risk assets, where family succession requires discretion, where the income is largely excluded income, or where state duty makes restructuring uneconomic.

For those clients, the advice should document why the trust continues to serve a non-tax purpose, how distributions will be made from 1 July 2028, and whether the trustee can manage permanent quarantining of any relevant losses and credits.

Practice timeline for accounting firms

FY26: audit and tag every trust client

By 30 June 2026, firms should run a trust register review. Tag every client as discretionary, fixed, deceased estate, testamentary, charitable, special disability, widely held or other. Identify family groups with bucket companies, Family Trust Elections, unpaid present entitlements, Division 7A loans and trust-owned property.

FY27: model and decide

During the year ending 30 June 2027, model the after-tax outcome under the current structure versus the four restructure paths. Include trustee minimum tax, beneficiary marginal rates, company tax, future dividend extraction, land tax, duty and professional costs. For professional services firms, also consider PSI, Everett assignments, service entities and commercial licensing issues.

FY28 to FY30: execute restructures

The rollover window runs from 1 July 2027 to 30 June 2030. This is the execution period. Prioritise groups with high annual income, low-rate adult beneficiaries, large bucket company distributions, trust-held land, or succession events. Do not leave duty rulings, valuations and finance approvals to the final quarter of FY30.

From FY28: track losses and credits permanently

From 1 July 2028, firms should build permanent tracking for minimum tax paid, non-refundable credit use, lost credit value and any quarantined losses. Trust distribution minutes, tax reconciliations and working papers will need more granular evidence than many firms currently maintain.

Three traps accountants should flag now

1. Commonwealth rollover relief does not override state stamp duty

This is the biggest practical trap. The Budget rollover covers income tax and CGT, but not state taxes. For property-rich groups, NSW landholder duty and Victorian economic entitlement rules are likely to be the most dangerous. Accountants should involve duty specialists early and avoid giving tax-only restructure advice.

2. Family Trust Elections may stop earning their keep

Many discretionary trusts have made a Family Trust Election to access losses, franking credit streaming or trust loss concessions. Post-1 July 2028, the benefit of an FTE may be reduced if discretionary distribution flexibility no longer delivers the same tax value. Every FTE should be reviewed, including family group boundaries, interposed entity elections and exposure to family trust distribution tax.

3. Section 100A scrutiny will intensify

Expect trustees to accelerate distributions before the floor commences. That creates obvious Section 100A risk where entitlements are created for beneficiaries but the economic benefit is retained elsewhere. The ATO’s additional implementation funding suggests compliance activity will not be passive. Advice files should clearly evidence commercial purpose, payment flows, beneficiary knowledge and the absence of reimbursement agreement features.

Practitioner action items

• Create a Budget 2026 discretionary trust review code in your practice database.
• Identify all trusts with annual income above $100,000, bucket company distributions or low-income adult beneficiaries.
• Review every Family Trust Election and interposed entity election before 30 June 2027.
• Prepare a standard model comparing discretionary trust, company, fixed trust and wind-down options.
• Obtain duty advice before relying on the 1 July 2027 to 30 June 2030 rollover window.
• Update distribution minute templates for Section 100A, credit tracking and beneficiary cash flow evidence.
• Revisit Division 7A and UPE positions in light of Bendel and any subsequent ATO or legislative response.

Using technology to manage the transition

The compliance burden will sit heavily in working papers, trust registers and client segmentation. Tools like Fedix can help practices identify affected trust clients, reconcile bank activity and maintain AI-assisted working papers for Division 7A, BAS and GST checks during restructure projects. The value is not replacing advice; it is giving accountants cleaner data for better advice.

Final view

The Budget 2026 introduction of a 30% minimum tax on discretionary trusts is not just a rate change. It is a structural reset for family trust planning. For SME family groups, professional services firms and investment trusts, the answer will not be uniform. Some will convert to companies, some to fixed trusts, some will wind down, and some will stay where they are.

The firms that will add the most value are those that start now: classify the trust population in FY26, model options in FY27, execute during the FY28 to FY30 rollover window, and maintain defensible Section 100A, FTE, Division 7A and duty analysis throughout.

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Disclaimer: This article is for general informational purposes only and does not constitute professional financial or tax advice. Always consult a qualified accountant or tax professional for advice specific to your situation. Fedix.ai provides tools to assist accounting professionals but does not replace professional judgement.