Budget 2026-27 announced a minimum 30% tax at the trustee level on discretionary trust income from 1 July 2028. There is no grandfathering — existing family trust structures are captured. Beneficiaries receive a non-refundable credit for the tax the trustee paid. Beneficiaries on rates above 30% pay top-up; beneficiaries below 30% may lose excess credit. This post is the practitioner's walk-through of who is affected, what the mechanics look like, and the structural decisions to think about now.
How it works
Trustee-level tax
At present, discretionary trusts pay no tax themselves if all income is distributed to beneficiaries by 30 June. Each beneficiary then pays tax on their share at their personal marginal rate. From 1 July 2028 the trustee pays 30% on trust income first, and the after-tax amount is distributed (Treasury, Budget 2026-27 tax reform page).
Non-refundable credit for beneficiaries
Each beneficiary receives a non-refundable tax credit for their share of the 30% trustee tax already paid. The beneficiary then settles up at their personal marginal rate:
- Marginal rate above 30% — beneficiary pays the difference. Effective rate ends up at their marginal rate (same as today).
- Marginal rate at 30% — no top-up, no refund. Effective rate equals marginal rate (same as today).
- Marginal rate below 30% — credit is non-refundable. The excess is lost. Effective rate is 30%, higher than the beneficiary's marginal rate.
Bucket-company strategies (distributing to a $0-other-income corporate beneficiary taxed at 25-30%) still work mechanically but lose much of the arbitrage. The corporate beneficiary already paid the company rate; now the trustee pays 30% first, so the family-group effective rate floor is 30% before any company-level optimisation.
No grandfathering
Critically, the rules apply to all discretionary trusts — new and existing — from 1 July 2028. Treasury explicitly ruled out grandfathering. Trusts established in the 1990s for inter-generational asset holding are captured the same way as trusts set up last week. This makes the structural review urgent — you cannot avoid the new regime by sitting tight.
What is not affected
- Fixed trusts and unit trusts — the new rules target discretionary trusts specifically. Unit trusts continue under existing flow-through treatment.
- Family Trust Elections for streaming franked dividends — the underlying franking-credit mechanics continue; the 30% minimum operates on the trust income flow-through path.
- Testamentary trusts for minor beneficiaries — not explicitly addressed in the Budget papers. The s 102AG concessional rate for testamentary trusts is a separate regime; we expect carve-outs in drafting but cannot confirm until the bill is introduced.
- Trusts inside super funds — super funds operate under their own regime; the 15% super contribution / earnings rate continues.
Mechanical impact on common scenarios
Scenario A — high-income family streaming to low-income spouse
Today: $80,000 of trust income distributed to a spouse on $20,000 of other income. Spouse's marginal rate on the slice is roughly 30% (depending on offsets); family group pays around $24,000 on the distributed amount.
From 1 July 2028: Trustee pays 30% first ($24,000). Spouse receives $56,000 distribution with a $24,000 non-refundable credit. Spouse's personal liability on the gross $80,000 still around $24,000 after credit — no change. The numbers are roughly the same because the marginal rate was at the trustee floor anyway.
Scenario B — streaming to an adult child on a low income
Today: $30,000 distributed to an adult child with no other income. Child's personal liability after tax-free threshold is ~$2,200.
From 1 July 2028: Trustee pays $9,000 (30% of $30,000). Child receives $21,000 distribution with a $9,000 non-refundable credit. Child's personal tax on the gross $30,000 is ~$2,200. Credit exceeds liability by $6,800 — non-refundable, so $6,800 is lost. Effective family-group cost: $9,000 instead of $2,200.
Scenario C — bucket company at 25% rate
Today: $100,000 streamed to a corporate beneficiary taxed at 25% (base rate entity). Group pays $25,000.
From 1 July 2028: Trustee pays 30% first ($30,000). Corporate beneficiary receives $70,000 distribution with $30,000 credit. The corporate-level mechanics need to be settled in the legislation — whether the credit refunds against company tax, or remains non-refundable. The Budget papers do not yet resolve this. Either way the family-group floor moves up at least $5,000 per $100,000 of income.
What to do now
Map your trust's distribution profile
Three years of historical distributions tell you whether the new floor bites. If every beneficiary was already above 30%, the change is mechanical — no effective rate movement. If you have been streaming to sub-30% beneficiaries (adult children at university, low-income spouse), model the effective-rate lift and the dollar cost.
Consider entity-structure review
Operating businesses currently held under a discretionary trust may be better held under a company. Companies are not affected by the 30% minimum — they have always paid the corporate rate. The cost is restructure tax (CGT roll-over relief is available in many cases under Subdivision 122-A or 122-B) plus admin overhead.
Investment trusts holding appreciating assets
Trusts holding rental property or share portfolios face this change AND the CGT reform from 1 July 2027 AND the negative-gearing limits on established residential property. The combined model is what matters — CGT reform increases the realised gain tax; trust 30% increases the income-distribution tax; the negative-gearing rules change which losses you can deduct against what. Review them together with your tax agent.
Testamentary trust planning
For estate-planning purposes, testamentary trusts have offered concessional minor-beneficiary tax treatment under s 102AG. The Budget papers do not explicitly address testamentary trusts. If your will sets up a testamentary discretionary trust, flag this for the next solicitor review — the interaction needs confirmation in the enabling legislation.
Sources
- Budget 2026-27 tax reform page (budget.gov.au/content/04-tax-reform.htm)
- Treasurer's 2026-27 Budget speech (ministers.treasury.gov.au)
- SmartCompany — New 30% minimum tax rate for discretionary trusts
- King & Wood Mallesons technical note — Funds / Trusts