Proposed 30% Trust Tax: Keep, Elect or Restructure?

Since the May Budget, family trust owners have weighed two options: restructure, or accept a 30% minimum tax on discretionary trusts from 1 July 2028. On 3 September 2026 Treasury added a third. A trust that exists on 1 July 2028 can elect to fix who benefits, and in what proportions, and remain outside the minimum tax.

The election fixes capital as well as income, it is hard to unwind, and it changes how a business passes to the next generation. Trustees of affected trusts should assess all three paths together. This article explains how each would work under the exposure drafts, where the costs sit, and what we are asking clients before anyone signs anything. The trust reform measures are proposals and section references are to proposed provisions; the article also refers to enacted law and a High Court decision, which are identified as such.

How would the 30% minimum tax on discretionary trusts work?

The provisions are proposed ss 101AA to 101AG, inserted into Division 6 of Part III of the Income Tax Assessment Act 1936 after s 101, with the rate imposed through the Income Tax Rates Act 1986. The ATO's new-legislation page confirms the measure is not yet law and that the offset is available only to non-corporate beneficiaries.

For a beneficiary already taxed at 30% or more the change is mostly timing and cash flow: the trustee pays first, the beneficiary pays the balance. The floor bites where income has gone to beneficiaries taxed below 30%, because the unused offset is lost, and where it has gone to companies, which get no offset at all. Franking credits attached to minimum tax income are applied first against the trustee's liability, with any remainder refundable to the trustee.

Keeping discretion and paying the tax is a legitimate answer. Discretion may still support asset protection and the ability to respond to a divorce, a death or a downturn, and it keeps the other two paths open. Whether that is worth the annual cost depends on the trust's distribution pattern, which is where the worked example below starts. The Budget tax explainer and Budget Paper No. 2 set out the policy case; our Federal Budget 2026-27 summary covers the original announcement.

What is an excluded election trust?

The regime is proposed Division 6F (ss 102UYA to 102UYH). Making the election and notifying the ATO are separate steps: the election must be made by the end of the 2028-29 income year, and the Commissioner notified by the earlier of lodging that year's trust return and its due date (proposed s 102UYB(4) and (5)). The Treasurer's media release presents the election as a way to avoid restructuring and says it is not expected to trigger state duty. Only one election can be made, and a trust created after 1 July 2028 cannot make one.

Nominated beneficiaries must be able to benefit under the deed at 1 July 2028; they need not be family, but partnerships and complying superannuation funds cannot be nominated. Once two beneficiaries are nominated, everyone else in the deed's class is in practice shut out. Trustees owe duties to that wider class and should take legal advice on whether the election is a proper exercise of their powers.

Capital is where the election reaches furthest. Proposed s 102UYD(2) requires the nominated shares to be conferred as present entitlements to income and to capital each year. That is not an obligation to sell or physically distribute every asset annually, but what it means for capital the trustee wants to retain, and how it sits with a deed that permits accumulation, is an interpretation question for the trust's lawyer. Changes to the nomination are narrow: substitution on the death of a nominated beneficiary, subject to conditions, and adjustments between two already-nominated individuals on a relationship breakdown (proposed s 102UYE). Neither lets a new child or grandchild in.

For a trading trust that reaches into the business. Fix a 60:40 split today and the child who later runs the business can still be paid a salary, but cannot receive a larger share of trust profit or capital, and the proceeds of a future sale are split 60:40 regardless of who built the value. We recommend testing the proposed split against retirement, sale and succession before comparing tax; an independent business valuation gives that modelling a real number.

Which trusts and income would be excluded?

The fixed trust definition matters for commercial structures. Treasury intends widely held trusts, managed investment trusts, bare trusts and employee share trusts to sit outside the regime where there are no material discretionary elements. Many unit trusts should qualify; a trust labelled a unit trust does not automatically pass, and hybrid trusts need case-by-case review.

On testamentary trusts, the income exclusion is not confined to trusts funded before Budget night. The 12 May 2026 date operates against unrelated property injected after that date, and further beneficiary conditions apply to testamentary trusts established from 1 July 2028. Early press coverage was imprecise here; deceased-estate clients should rely on the drafts, not the headlines.

Would a bucket company still be useful?

Treasury's July paper illustrated the layering with $100,000 appointed entirely to a company taxed at 30%: $30,000 of trustee tax, then $30,000 of company tax, before shareholders receive anything. That does not support the 63% to 70% "effective rates" circulating in the press; the ultimate cost depends on the shareholder's rate, franking and when dividends are paid. Nor is the 25% base rate entity rate automatic. Under the Income Tax Rates Act 1986 (enacted) the company needs aggregated turnover below $50 million and no more than 80% base rate entity passive income, with trust distributions traced to their character in the trust. A company living on passive trust income pays 30%. Our post on share classes versus a discretionary trust works through the dividend gross-up and offset mechanics.

One question the drafts leave open. In Commissioner of Taxation v Bendel [2026] HCA 18 the High Court held that the particular unpaid present entitlements before it were not loans or financial accommodation under s 109D(3) of the ITAA 1936, so an unpaid entitlement to a company does not automatically fall within Division 7A; the actual arrangements still have to be examined. The Treasurer has said UPE legislation will be progressed separately. Groups carrying historical UPEs to bucket companies, and any EET nominating a company, remain exposed to whatever that later bill says.

What happens if the election ends?

Two points of precision. The 47% outcome is a trustee assessment on the year's net income, with the nominated beneficiaries treated as not presently entitled; it is not a charge on the market value of the trust's assets. And in our reading, how a voluntary decision to cease the election from a future year interacts with that assessment is not clear on the face of proposed ss 102UYF to 102UYH. That is our interpretation question, not an ambiguity Treasury has accepted, and it is one we expect submissions to raise before 18 September. Until it is clarified, do not plan on the basis that leaving the regime is cost-free.

What does restructuring involve?

The drafts include a transitional roll-over (proposed Subdivision 126-C of the Income Tax (Transitional Provisions) Act 1997) for eligible transfers out of a discretionary trust between 1 July 2027 and 30 June 2030. Under proposed s 126-430 all of the trust's relevant assets, subject to specified exclusions, must be transferred; moving the business while the trust keeps the property generally will not qualify. The recipient must be an eligible entity (a company, a fixed trust, individuals or a partnership, depending on the transfer), continuity and residency conditions apply, and relief can be lost if material discretionary elements exist in the recipient before the end of the fourth income year after the year of the final transfer. A trust cannot use both the roll-over and the election.

The roll-over defers tax rather than removing it: continuity is preserved asset by asset under the relevant provisions, and the draft specifically addresses the small business 15-year exemption. Large unrealised gains are exactly where the relief is most valuable, provided the transaction costs and the tax on an eventual disposal are weighed against it. Nothing in the drafts requires a trust to wind up or a business to incorporate, and a later change of structure may itself trigger tax and duty and would need separate assessment. Our note on the 2026 CGT reform and small business carve-outs covers the CGT changes that run alongside.

Income tax is one line on the checklist. Before a business moves entity we work through GST on the transfer, bank facilities and guarantees, contracts, licences, existing Division 7A loans and UPEs, carried-forward losses, the franking account, insurance and succession documents. And federal roll-over says nothing about state duty. The Victorian State Revenue Office's guidance on variations to discretionary trusts and duty and trusts treats a change in beneficial ownership of dutiable property as dutiable at transfer rates; some transfers to beneficiaries can qualify for exemption, but the conditions are restrictive. Any structure holding Victorian land needs a transaction-specific duty review.

Which path suits which trust?

The table assumes a company as the restructure destination because that is the common case; a fixed trust, a partnership or individuals can also be eligible recipients, with different outcomes. It is a starting point, not a verdict.

Worked example: a Melbourne wholesale business with $200,000 of trust income

A family-owned wholesale distribution business trades through a discretionary trust. Both parents work in it and draw salaries, deducted before the trust's net income of $200,000. The profit is income from a business structure, not personal services income attributed to an individual under s 86-15 of the ITAA 1997, so the trustee can allocate it.

Assumptions, so the figures can be reproduced: 2028-29 resident rates as legislated in Schedule 7 of the Income Tax Rates Act 1986 (nil to $18,200; 14% to $45,000; 30% to $135,000; 37% to $190,000; 45% above), subject to future amendment; salaries are taxable employment income after deductions; the low income tax offset and the Working Australians Tax Offset (up to $250, enacted, from 2027-28) are included and other offsets and concessions excluded; Medicare levy at 2% shown separately, ignoring the low-income phase-in; the company is a base rate entity with aggregated turnover under $50 million receiving trading income, so it pays 25%. Figures are additional family tax relative to the salary-only baseline, rounded to $50, and demonstrate mechanics, not a forecast.

Scenario A: keep discretion, original allocation

The extra $19,000 comes entirely from the child, whose income tax on the distribution is below the 30% floor, and the company, which receives no offset. The top-rate parent is unaffected.

The five arrangements compared

The decisive test is a like-for-like comparison. Parent 2 earns $60,000. Distributing $100,000 to each parent costs $43,800 for Parent 1 and $33,850 for Parent 2 (income tax $31,850 including the $100 of LITO lost, plus Medicare $2,000).

The message is plain. In this example, changing the distribution pattern while keeping discretion produces the same annual tax as electing. The election saves nothing extra and gives up the ability to bring the child, a new grandchild or a future spouse back in. It therefore needs a commercial justification of its own, and in a family with beneficiaries below the 30% floor there may be none. The company path is cheaper only while profit is retained; its advantage is deferral, bought with transaction costs, potential duty and the roll-over's continuing conditions.

A caution for medical, legal, engineering and consulting practices. Where the income is personal services income, the trustee's freedom to allocate it is limited before any of this applies: if the entity fails the personal services business tests the income is attributed to the practitioner under s 86-15, and even where it passes, TR 2022/3 (paragraphs 160 to 162) explains that Part IVA can still apply to splitting arrangements. Where a professional firm earns income through a genuine business structure, PCG 2021/4 sets out the ATO's compliance approach to how profits are allocated to the practitioners; it is a risk guideline, not an attribution rule, but allocations in its higher-risk zones invite review. For those clients the minimum tax analysis sits on top of that position. Our medical and allied health accountants page covers how we approach practice structures.

What should trustees do now?

Nothing needs to be elected before 30 June 2029, the drafts may change, and administrative and integrity rules are still to come. We would not recommend restructuring solely in response to an unlegislated proposal. We do recommend a proportionate review of every discretionary trust now, with the most work on trusts that spread income among several adults, distribute to a bucket company, carry on a business, hold assets with large unrealised gains or receive significant franked income.

• Read the deed: accumulation and capital powers, vesting date and any limits on varying beneficiaries.
• List every beneficiary who received a distribution in the last five years and every corporate beneficiary's shareholders.
• Value the assets and identify Victorian land or landholder interests.
• Model the arrangements above over five years for your own family, including a sale or succession event.
• Keep meeting the existing rules: 30 June resolutions, section 100A, Division 7A and Division 6AA for minors.

On the last point, TR 2022/4 and PCG 2022/2 remain the ATO's position on section 100A, and the proposed election is distinct from an existing family trust election. This is the ordinary trust work in our small business tax compliance engagement; the modelling sits within business advisory and forecasting, and the annual distribution decisions within tax planning.

Key takeaways

Frequently asked questions