Budget 2026: Professional Services, Trusts, PSI Rules and Partner Planning

The Federal Budget 2026-27, handed down at 7:30 PM AEST on Tuesday 12 May 2026, creates a structural break in tax planning for professional services firms. For accountants advising lawyers, doctors, dentists, architects, consultants and other high-income professionals, the key message is simple: the discretionary trust income-splitting model is entering its final planning window.

The reform that matters most for professional services is the 30% minimum tax on discretionary trusts from 1 July 2028. In practice, this substantially neutralises the long-standing strategy of distributing professional income to lower-rate spouses, adult children or other family beneficiaries. When combined with the existing Personal Services Income (PSI) rules, the Personal Services Business (PSB) tests, and the ATO’s PCG 2025/5 released on 1 December 2025, the room for income splitting is now structurally narrow.

Accountants should treat FY2026, FY2027 and FY2028 as a transition period for client segmentation, tax modelling, service entity reviews and partner restructure planning.

What changed in Budget 2026 for professional services firms?

The Budget reforms affect professional services practices in three main ways:

• From 1 July 2028: a 30% minimum tax applies to discretionary trusts, materially reducing the tax benefit of distributions to low-rate family members.
• From 1 July 2027: the 50% CGT discount is replaced by cost base indexation plus a 30% minimum tax floor for individuals, partnerships and trusts.
• From 1 July 2027 to 30 June 2030: expanded rollover relief is available for trust restructures, creating a defined window to move trust-based practice vehicles into alternative structures.

For professional services partners, the most immediate concern is not just the headline 30% trust tax. It is the interaction between that new floor and existing anti-avoidance frameworks that already limit income splitting from personal exertion.

Why this matters for lawyers, doctors, architects and consultants

Professional services income is often generated primarily from the personal skill, reputation and labour of the practitioner. That makes the sector highly exposed to PSI and PSB analysis. A barrister, surgeon, dentist, architect, engineer or management consultant may operate through a trust, company or partnership, but the tax outcome still depends on who is actually earning the income and whether the structure has commercial substance.

Historically, many professional services partners used discretionary trusts to distribute income to spouses or adult children on lower marginal tax rates. In some cases, this was combined with service entities, bucket companies, family trust elections and partner-level investment structures. Budget 2026 does not abolish trusts, but it significantly weakens the tax arbitrage that made those arrangements attractive.

For accounting firms, this is a client communication issue as much as a technical tax issue. Many partners will have built personal cash flow, school fee planning, mortgage serviceability and investment strategies around annual trust distributions. Those assumptions need to be recalibrated before 1 July 2028.

The PSI and PSB rules remain the first filter

PCG 2025/5, released by the ATO on 1 December 2025, tightened the compliance lens on Personal Services Business arrangements. The core PSI rule remains that income is likely to be PSI where more than 50% of the income is a reward for the personal efforts or skills of an individual.

Where PSI is present, accountants must then test whether the client qualifies as a Personal Services Business. A client can satisfy PSB status by passing any one of the following tests:

• Results test: the client is paid to produce a result, supplies tools or equipment where required, and is liable to rectify defects.
• Unrelated clients test: services are provided to two or more unrelated clients as a direct result of making offers to the public or a section of the public.
• Employment test: the entity engages employees or contractors to perform at least 20% of the principal work, or has apprentices for at least half the income year.
• Business premises test: the entity maintains exclusive business premises that are physically separate from the home and the client’s premises.

However, the important practical point from PCG 2025/5 is that passing a PSB test does not create an unlimited licence to split income. The ATO’s position is that Part IVA may still apply where income splitting produces a tax benefit and the arrangement lacks sufficient commercial justification.

For accountants advising professional services partners, the compliance baseline should now be:

• pay a market-rate salary or equivalent return to the actual professional earner;
• ensure distributions to non-practitioner beneficiaries are commercially defensible and proportionate;
• document why the structure exists beyond tax outcomes; and
• avoid last-minute distribution patterns that appear designed to exploit the period before 1 July 2028.

Budget overlay: the end of the income-splitting playbook

The 30% minimum tax on discretionary trusts from 1 July 2028 effectively ends the income-splitting playbook that has underpinned professional services partner tax planning for decades. Even where the PSB rules allow income to be retained in, or distributed through, a discretionary trust, the trustee minimum tax neutralises much of the benefit of distributing to a low-rate spouse or adult child.

This matters especially for partners who currently distribute significant taxable income to family members whose marginal tax rates are below the professional earner’s rate. While a 30% floor may still be lower than the top marginal rate, it removes the advantage of streaming large amounts to beneficiaries on very low or nil taxable incomes. It also narrows the gap between trust planning and company structures, particularly where a company may access the 25% small business entity rate, assuming aggregated turnover is below $50 million and other eligibility criteria are satisfied.

Worked example: solo specialist using a discretionary trust

Consider a solo medical specialist operating through a discretionary trust. The practice generates $400,000 of taxable professional income. The specialist is the main income-producing individual. Under the current arrangement, the trust distributes:

• $200,000 to the specialist;
• $200,000 to the specialist’s spouse, whose marginal tax rate is 32.5% before Medicare levy and other adjustments.

Depending on the full family tax profile, this may currently save approximately $20,000 to $30,000 per year compared with allocating most of the income to the specialist at higher marginal rates.

From 1 July 2028, the 30% trustee minimum tax means the trust tax outcome is floored across the discretionary trust income. The benefit of distributing $200,000 to a lower-rate spouse is materially reduced or eliminated. At the same time, PCG 2025/5 and Part IVA risk continue to require a market-rate return to the specialist as the actual income generator.

A restructure to a Pty Ltd company may produce a better long-term result if the practice qualifies for the 25% small business company tax rate, has genuine business assets and staff, and can manage Division 7A, retained earnings and eventual extraction of profits. It will not suit every client, but it should now be modelled as part of partner planning.

Service entities need a fresh review

Many legal, medical, dental and architectural practices use service entities to employ staff, lease premises, hold equipment, manage administration and charge service fees to practitioner entities. These arrangements are not automatically problematic, but they are often connected to family trust distribution strategies.

Where a service trust distributes profits to lower-rate beneficiaries, the same 30% minimum tax issue arises from 1 July 2028. Accountants should review whether service fees remain commercially priced, whether mark-ups are supported by benchmarking, and whether the entity still makes sense once the income-splitting benefit is reduced.

The review should also consider payroll tax exposure, GST treatment, related-party loan accounts, Division 7A implications where bucket companies are involved, and whether the service entity creates administrative complexity without a commensurate commercial benefit.

CGT changes: partner exits and goodwill sales before and after 1 July 2027

The replacement of the 50% CGT discount from 1 July 2027 is a major issue for practice equity. For partners in law firms, medical practices, dental groups, architectural firms and consulting partnerships, the affected assets may include:

• partnership interests;
• units in a practice trust;
• shares in a practice company;
• goodwill associated with a professional practice;
• interests in service entities or related property structures.

For practices with succession or sale planned within the next two to three years, accountants should prioritise 30 June 2027 goodwill valuations. The objective is to preserve evidence of the pre-1 July 2027 portion of the gain that may still access the outgoing CGT discount treatment, subject to the final legislation and transitional rules.

This is particularly important for partners approaching retirement, practices negotiating merger terms, and firms admitting younger partners under staged buy-in arrangements.

Decision framework for accountants advising professional services partners

A practical review can be structured in four stages.

1. Classify the current structure

Map each client by operating structure: sole trader, company, discretionary trust, unit trust, partnership, incorporated practice, service entity or hybrid structure. Identify who earns the income, who receives distributions, and where profits are retained.

2. Determine PSI and PSB status

Apply the PSI 50% personal effort threshold, then test PSB status using the results, unrelated clients, employment and business premises tests. Record the evidence. Do not assume that a professional practice automatically qualifies as a PSB simply because it has an ABN, staff or a company.

3. Model FY2029 outcomes

Model the post-1 July 2028 effective tax rate under the existing structure. Compare it with alternatives, including a company taxed at 25% where turnover is under $50 million, direct partnership allocation, or simplified service entity arrangements. Include Medicare levy, Division 7A, retained earnings, superannuation, state taxes and cash extraction costs.

4. Use the rollover window deliberately

Where a trust-based practice vehicle no longer has a strong commercial rationale, consider whether the 1 July 2027 to 30 June 2030 rollover relief window can support a restructure into a company or other structure. The analysis should include asset protection, professional indemnity, regulatory constraints, partner admission and exit mechanics, and future sale plans.

Three traps during the transition period

• Part IVA risk increases before 1 July 2028: aggressive distributions designed to “use the trust while it still works” may attract greater scrutiny, especially where the professional earner is not paid a market-rate amount.
• Bucket-company strategies can create a 45-51% effective rate trap: tax-deferred profits may later be extracted as dividends, loans or payments that produce higher combined tax costs, particularly where Division 7A is not actively managed.
• Family trust elections may no longer be worth the constraint: if the 30% floor removes the main distribution benefit, the family group restriction and family trust distribution tax risk may outweigh the commercial benefit.

Practitioner action items for FY2026 to FY2029

• By 30 June 2026: build a register of all professional services clients using discretionary trusts, service trusts or family distribution strategies.
• During FY2027: complete PSI and PSB reviews under PCG 2025/5, including market-rate remuneration analysis for the professional earner.
• By 30 June 2027: obtain goodwill and practice equity valuations for clients with likely exits, mergers or partner admissions.
• From 1 July 2027: assess whether the expanded rollover relief should be used to restructure trust-based vehicles before 30 June 2030.
• Before 1 July 2028: brief affected partners on the 30% discretionary trust minimum tax and provide side-by-side tax modelling.
• For FY2029 tax planning: revisit distribution minutes, service entity pricing, Division 7A loan management and partner remuneration policies.

Where technology can support the review process

For firms managing large client bases, the challenge will be identifying affected structures quickly and maintaining evidence. Tools like Fedix can help accountants reduce the administrative load by using ATO integration for client data, lodgement tracking and AI working papers for tax calculations and reconciliations, leaving more time for advisory modelling and partner conversations.

Final message for advisers

Budget 2026 does not remove the need for professional services structuring. It changes the purpose of that structuring. The focus is shifting away from family income splitting and toward commercial alignment, partner succession, retained earnings management, asset protection and defensible remuneration.

For accountants advising doctors, lawyers, dentists, architects and consultants, the opportunity is to lead the transition early. Clients who wait until FY2029 may find that their existing structures still carry the complexity, but no longer deliver the tax outcome that justified them.

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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.