Budget 2026: Primary Production Carve-Out and Family Farm Trust Succession

The Budget 2026 announcement on Tuesday 12 May 2026 at 7:30 PM AEST has created a clear advisory priority for accounting firms with rural, grazing, horticulture and viticulture clients: do not treat the new discretionary trust minimum tax as a blanket attack on family farm trusts.

The most important Budget 2026 fact for rural family groups is the explicit carve-out for primary production income from the 30% discretionary trust minimum tax commencing 1 July 2028. Primary production income will retain discretionary trust flow-through treatment. That is a material concession, and it reflects the practical reality that many Australian farms rely on discretionary trusts for asset protection, intergenerational succession and income distribution within family groups.

However, the carve-out is not a free pass for every dollar earned inside a family farm trust. Off-farm income, investment income, non-farm rental income, share trading gains and some farm-adjacent activities may still fall within the 30% minimum tax regime. Accountants should now be preparing trust-by-trust income mix reviews, deed reviews and succession planning updates before the 1 July 2028 commencement date.

What Budget 2026 changed for family farm trusts

The 30% discretionary trust minimum tax is scheduled to commence from 1 July 2028. Under the Budget 2026 framework, discretionary trust income that falls within scope will be subject to a 30% minimum tax. The key carve-out is that primary production income is excluded and continues to flow through under existing discretionary trust treatment.

For accountants advising primary producers, this distinction is critical. A family farm trust may remain an effective structure for income distribution and succession, but only where income streams are properly classified, recorded and supported.

The carve-out is especially significant because the National Farmers' Federation and other rural stakeholders argued that discretionary trusts are not merely tax planning vehicles in the agricultural sector. For many family farms, they are the operating backbone of multi-generational ownership, landholding, succession and risk management. Removing or substantially weakening the structure would have jeopardised hundreds of thousands of family farm businesses.

The primary production carve-out: what accountants need to focus on

The Budget materials make the broad policy position clear: primary production income is carved out. The technical challenge is determining what is, and is not, primary production income for each client.

Practitioners should revisit the definition of primary production under ITAA 1997 s 995-1 for every affected client. In many cases, the answer will be straightforward: cropping, grazing, horticulture, viticulture and animal husbandry activities will generally sit within the primary production framework. But rural groups increasingly have diversified income streams, and this is where risk arises.

Activities that require closer review

• Agricultural tourism, including farm stays, cellar door experiences and paid tours.

• Value-added produce processing, such as bottling, curing, packaging or branded retail sales.

• Contract farming services provided to neighbouring properties.

• Agistment arrangements, particularly where the activity may not be sufficiently connected to the client's own primary production business.

• Rental of non-farm property, including rural commercial premises or residential dwellings not used in the farming business.

• Investment portfolios, share trading income and managed fund distributions held within the farm trust.

The practical issue is not just classification. It is evidence. From 1 July 2028, accountants should expect the ATO to scrutinise how trustees identify and allocate income between primary production and non-primary-production sources.

Worked example: mixed-income family farm trust

Consider a family farm trust with the following income for the 2028-29 income year:

• $300,000 of net income from cattle grazing and cropping activities.

• $80,000 of net income from a rural commercial rental property held in the same trust.

Assume the grazing and cropping income is clearly primary production income under ITAA 1997 s 995-1, while the rural commercial rental income is not primary production income.

From 1 July 2028, the $300,000 primary production component should retain ordinary discretionary trust flow-through treatment. The trustee may continue to distribute that income to eligible beneficiaries in accordance with the deed and the usual trust law and tax rules. The 30% minimum tax floor does not apply to that primary production component.

The $80,000 non-primary-production rental component is different. It falls within the discretionary trust minimum tax regime and attracts the 30% trustee tax floor. At 30%, that equates to a $24,000 minimum tax outcome on that component, subject to the final legislative mechanics.

The advisory lesson is that the trust's income streaming and distribution records must be able to support the distinction. If the deed, accounts and trustee resolutions simply refer to trust income as a single blended pool, the client may face allocation disputes with the ATO.

Decision framework for accountants: classify before you restructure

Before recommending restructuring, accountants should apply a structured review. A useful decision framework is:

1. Identify each trust and each activity

Start by listing every entity in the rural family group and the activities conducted by each. Include the family farm trust, landholding trusts, bucket companies, self-managed super funds, personal names and any separate trading entities.

2. Split income into primary production and non-primary-production categories

For each discretionary trust, map the income mix. A trust with $1.2 million of wool and livestock income may be low risk if that is its only source of income. A trust with $700,000 of vineyard income, $150,000 of cellar door hospitality income and $60,000 of Airbnb-style farm stay income requires a more careful review.

3. Test edge cases against ITAA 1997 s 995-1

Do not assume all farm-adjacent income is primary production income. The label used by the client is not determinative. Accountants should document the factual basis for classification, including who performs the activity, where it occurs, what assets are used and whether the activity is sufficiently connected to primary production.

4. Review deed wording and income streaming capacity

Trust deed wording becomes more important after 1 July 2028. The deed should support clear identification, allocation and streaming of different income categories where permitted. If the deed does not distinguish income classes or gives insufficient trustee powers, consider deed amendment advice before the new rules commence.

5. Prepare distribution resolutions with greater precision

Post-1 July 2028, generic distribution resolutions may create unnecessary risk. Resolutions should identify the relevant income streams, the beneficiaries presently entitled to each component and the treatment of any non-primary-production income subject to the 30% minimum tax floor.

Three traps for rural accounting firms

Trap 1: trust deeds that do not clearly distinguish income streams

Many older family farm trust deeds were drafted when the distinction between primary production and non-primary-production income had fewer consequences. If the deed does not allow clean allocation or streaming, the trustee may struggle to evidence that the $300,000 farm income in the example above is separate from the $80,000 rental income.

Trap 2: informal distribution resolutions

Rural family groups often operate with high trust and informal processes. That will not be enough under the new regime. Distribution resolutions should be more rigorous from the 2028-29 year onward, with working papers that reconcile accounting profit, taxable income and income character.

Trap 3: assuming the carve-out is broader than it is

The phrase primary production carve-out may sound expansive, but the technical definition still matters. Agricultural tourism, value-added processing, contract services and agistment can sit close to the boundary. These activities should be reviewed before clients rely on carve-out treatment.

Succession planning implications for rural family groups

The carve-out preserves much of the existing logic for family farm trusts, but succession plans still need urgent attention.

The Budget 2026 changes interact with testamentary trust planning. Estate plans involving testamentary trusts established under wills signed before 12 May 2026 retain favourable treatment indefinitely under the grandfathering rules. New testamentary trusts arising from a will signed after 12 May 2026 do not receive the same grandfathered treatment.

For accountants, this creates a practical file review priority. Identify primary producer clients whose succession plan relies on testamentary trusts, particularly where farmland, water rights, livestock, trading entities or family farm trust interests pass through the estate. If the will was not signed before 12 May 2026, or if it needs amendment after that date, the client should be referred for specialist legal advice.

The issue is not only tax. Family farm succession often involves unequal distributions between on-farm and off-farm children, staged control transfers, asset protection for the farming child, and provision for surviving spouses. The new trust rules make it even more important that accountants, lawyers and financial advisers work from the same succession model.

Farm Management Deposits remain unchanged

Farm Management Deposits, or FMDs, were unchanged in Budget 2026. They remain an important cash flow and income-smoothing tool for primary producer clients.

That matters even though true primary production income is carved out of the 30% discretionary trust minimum tax. Seasonal volatility does not disappear simply because the trust rules preserve flow-through treatment. FMDs can still help clients manage drought years, commodity price swings and timing mismatches between income and expenditure.

They may also become more valuable where a client has income near the carve-out boundary. For example, where a family farm trust has both primary production income and non-primary-production income, FMD planning can help manage the primary production component while the adviser separately addresses the 30% floor exposure on non-primary-production income.

Do not ignore the other Budget 2026 reforms

The primary production carve-out does not shelter every rural asset or every rural client structure from the broader Budget 2026 tax changes.

Negative gearing on established residential property is quarantined for acquisitions after 7:30 PM AEST on 12 May 2026, with effect from 1 July 2027. This may affect personally held rural residential land, lifestyle blocks, farm-adjacent residential rentals or accommodation assets held outside the primary production structure.

The 50% CGT discount is also replaced from 1 July 2027 by cost base indexation plus a 30% minimum tax floor for individuals, partnerships and trusts. Rural property investments held outside the farming business should be reviewed before clients make assumptions about after-tax sale proceeds.

Finally, expanded rollover relief runs from 1 July 2027 to 30 June 2030 for trust restructures. This may provide a window to separate non-primary-production assets from operating farm trusts, but restructuring should be driven by commercial purpose, succession objectives and legal risk, not tax alone.

Practitioner action items before 1 July 2028

• Audit every primary producer trust client. Identify the income mix in each trust and separate primary production income from non-primary-production income.

• Re-examine ITAA 1997 s 995-1 classifications. Document the basis for treating each activity as primary production or otherwise.

• Review mixed-activity trusts. For trusts earning farm and non-farm income, model the 30% minimum tax exposure on the non-primary-production portion only.

• Update trust deeds and resolutions. Ensure deed wording and annual distribution resolutions can support clean income streaming and allocation.

• Review wills and succession plans. Pay particular attention to testamentary trusts and whether relevant wills were signed before 12 May 2026.

• Continue FMD planning. Use Farm Management Deposits as part of income smoothing and cash flow planning for eligible primary producers.

• Check rural property investments outside the farm structure. Negative gearing and CGT reforms may still apply to rural residential or lifestyle assets.

Tools like Fedix can help practices manage the compliance workload by turning bank statements and source documents into reconciled working papers, which is useful when separating primary production and non-primary-production income streams for trust review. The advisory judgement remains with the accountant, but better source-data organisation will matter as the 1 July 2028 rules approach.

The bottom line for accountants advising primary producers

The Budget 2026 primary production carve-out is a significant win for rural family groups. It preserves the core role of the family farm trust for genuine primary production income and avoids forcing many farms into disruptive structural change.

But the carve-out also raises the standard of documentation. From 1 July 2028, accountants will need to prove what is primary production income, what is not, and how each component has been distributed or taxed. The firms that act early on deed reviews, income classification, FMD planning and succession documentation will be best placed to protect their primary producer clients from unexpected 30% minimum tax outcomes.

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.