Share Classes vs Discretionary Trust: Distributing Company Profits

Updated 5 September 2026 to reflect Treasury's exposure draft legislation (3 September 2026) and the High Court's decision in Commissioner of Taxation v Bendel [2026] HCA 18.

For years, the discretionary (family) trust has been the default vehicle for distributing business profits tax-effectively in Australia. That position is now under direct challenge. The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trusts from 1 July 2028, and on 3 September 2026 Treasury released exposure draft legislation with consultation closing 18 September 2026. Business owners are asking a question we hear weekly: should profits flow through a trust, or through a company using different classes of shares?

This guide compares both structures for distributing company profits. It explains how company share classes work, how they differ from trust distributions, what the draft legislation (including the new fixed-distribution election) means, and the company law and Australian Taxation Office (ATO) rules that apply to each. The trust measures are in exposure draft form, not yet law, and the detail may change before enactment, so the planning window is open now.

Why is the trust vs company question being asked now?

The core appeal of a discretionary trust has been the ability to decide each year who receives income, often directing it to family members on lower marginal rates. The proposed minimum tax removes much of that rate advantage where beneficiaries are taxed below 30%, because the credit is non-refundable and any excess is lost. Treasury's Budget analysis put Australia's trust population at more than 1 million, with around 350,000 active small businesses operating through a discretionary trust in 2022-23, and expects fewer than 10% of Australia's 2.7 million active small businesses to be affected in any given year. A three-year restructure rollover from 1 July 2027 is proposed to help groups move assets out of discretionary trusts into companies or fixed trusts. Our full breakdown sits in our Federal Budget 2026-27 trust and CGT guide, and if you are still weighing how a trust operates, our explainer on how trusts work in Australia is a useful starting point. The ATO's new legislation page tracks the measure's status.

What is the proposed fixed-distribution election for discretionary trusts?

This election changes the comparison in this article. Before the draft, the only ways to avoid the minimum tax were to accept it, distribute to beneficiaries taxed at 30% or more, or restructure. Under the draft, the trustee can instead nominate beneficiaries (individuals, trusts and certain companies, but not partnerships or complying superannuation funds), each of whom must take the same fixed proportion of both income and capital. The trust remains a discretionary trust for other purposes.

The trade-off is flexibility. Nominations can generally only change on the death of a beneficiary or a relationship breakdown. If the election is revoked, or fails because the trustee does not distribute as nominated, the draft treats the beneficiaries as never having been entitled and assesses the trustee on all net income at the top marginal rate. In practice, an election converts a discretionary trust into something close to a fixed trust for tax purposes, which is why it should be weighed against share classes rather than assumed to be the better answer. Detail may change after consultation closes on 18 September 2026, and further tranches covering administration and integrity are expected.

What are share classes in a Pty Ltd company?

Share classes give a company a measure of dividend flexibility, but it is narrower than a trust's. The rights attach to the class, not to a person chosen each year, so the flexibility is fixed at the time the shares are issued. The table below shows a typical structure. The rights for each class are whatever the constitution and the terms of issue say they are, so the drafting matters a great deal.

Share classes vs discretionary trust: how do they compare?

The comparison below sets out the broad trade-offs. Company profits are taxed at the 25% or 30% company tax rate. The 25% rate applies only to a base rate entity: aggregated turnover under $50 million and no more than 80% of assessable income from base rate entity passive income such as dividends, interest, rent and trust distributions traceable to passive sources. A passive holding or bucket company will often fail the 80% test and pay 30%. Related-party loans and payments from a company can also raise separate Division 7A issues.

A worked example shows why the headline rates mislead. Take $100,000 of profit in a base rate entity company. The company pays $25,000 tax and can pay a $75,000 fully franked dividend. A shareholder on the 45% bracket (47% with the 2% Medicare levy) grosses the dividend up to $100,000, is assessed $47,000, claims the $25,000 franking offset and pays $22,000 top-up: $47,000 in total. A shareholder on the 30% bracket (32% with Medicare levy) is assessed $32,000, claims $25,000 and pays $7,000: $32,000 in total. Run the same $100,000 through a discretionary trust under the draft minimum tax and the trustee pays $30,000. A beneficiary on 32% is assessed $32,000, credits $30,000 and pays $2,000: again $32,000 in total. A beneficiary whose marginal rate is below 30% cannot recover the excess credit, so the total tax stays at $30,000. The company's advantage is not its 25% rate; it is the ability to retain profit at 25% and defer the top-up until a dividend is paid.

In our experience advising professional-services firms, the common structure is a blend: a trading company, a holding company, a discretionary trust as a shareholder, carefully drafted share classes and a shareholders' agreement. The draft legislation does not make trusts redundant, since asset protection and small business CGT concession access may remain relevant and the fixed-distribution election is now available, but it does change the maths, particularly where a bucket company sits under the trust and would receive no credit for the minimum tax. Our business tax team models both structures before any change, and for sector-specific groups our professional services accounting page sets out our approach.

What does the Corporations Act require before a company's dividend is paid?

For a proprietary company, dividend rights are governed by the terms on which the shares were issued, the constitution if there is one, and otherwise the replaceable rules. The Act itself gives every company the power to issue shares of different classes (section 254A), and the replaceable rule in section 254W(2) lets the directors of a proprietary company pay dividends as they see fit, subject to the terms of issue. A constitution can restrict or displace that rule, so the first step is to check which document actually governs. The Corporations Act 2001 adds the three section 254T conditions above, with assets and liabilities measured under accounting standards. A clean set of accounts matters here, which is where reliable bookkeeping and up to date financial statements earn their keep.

Can a share class create a right to fully franked dividends?

The company must comply with the benchmark franking rules in Division 203 of the Income Tax Assessment Act 1997. Broadly, the first frankable distribution in a franking period sets the benchmark percentage, and later distributions in that period must match it. For private companies, the franking period is usually the income year. Section 205-45 recognises that a company can frank a distribution before the matching credit has arrived, for example before the year's tax is paid, but a franking account in deficit at 30 June triggers franking deficit tax equal to the deficit, and the offset for that tax can be reduced by 30% where the company over-franks by more than 10%. The dividend imputation system, in place since 1987, only credits shareholders for tax the company has actually paid. Good tax planning keeps these decisions defensible.

When do share classes or trust distributions raise ATO concerns?

On the company side, multiple share classes do not automatically create a problem. The dividend streaming rules in the Income Tax Assessment Act 1997 target franking credits being channelled to shareholders who benefit most, while others receive a lesser benefit. Dividend access shares attract particular attention under Taxpayer Alert TA 2012/4, especially where a new class is issued to an associate after profits have accumulated. The factors below push a share-class arrangement from lower to higher risk.

On the trust side, the integrity focus is different. The ATO scrutinises section 100A reimbursement agreements, where income is distributed to a low-rate beneficiary but the economic benefit passes to someone else. Division 7A also remains relevant, but its reach narrowed on 10 June 2026 when the High Court decided Commissioner of Taxation v Bendel [2026] HCA 18. The Court held that a corporate beneficiary simply leaving its present entitlement unpaid does not provide financial accommodation and is not a loan under section 109D, so no deemed dividend arises from the unpaid entitlement alone. The ATO's decision impact statement accepts the decision and is withdrawing TD 2022/11. Division 7A still applies to actual loans, payments and debt forgiveness, and Subdivision EA can apply where the trust lends or pays trust funds to a shareholder or associate while the company's entitlement remains unpaid. These are live compliance areas now, separate from the proposed minimum tax. Staying ahead of the key ATO due dates matters for both structures.

What should you check before choosing or changing structure?

Whether you are setting up, adding share classes, weighing the proposed fixed-distribution election, or considering moving out of a trust, work through the following:

1. Commercial rationale. There should be a genuine purpose, such as succession, asset protection, investor participation, growth or control planning, not tax alone.
2. Constitution, replaceable rules and share terms. Confirm which document governs dividends, that class-specific dividends are permitted, and that each class's rights are clearly drafted in the terms of issue.
3. Shareholders' agreement or trust deed. Check the existing documents do not restrict the intended arrangements, and whether the deed would permit the nominations a fixed-distribution election requires.
4. Timing. Create share classes before material profits accumulate. If moving out of a trust, weigh the proposed rollover window from 1 July 2027 to 30 June 2030; if staying, note the election is only available to trusts in existence on 1 July 2028 under the draft.
5. Franking and solvency. Manage the franking account and benchmark rules, and satisfy the three section 254T conditions before declaring dividends.
6. Integrity rules. Review for dividend streaming, dividend access shares (TA 2012/4), section 100A, and Division 7A on actual loans, payments and Subdivision EA arrangements.
7. Asset protection, CGT and duty. Test any restructure against the small business CGT concessions, your asset protection objectives, and state stamp duty, which the proposed rollover does not cover.

Getting the structure right from the outset is far easier than retrofitting it later. Our CPA accountants and business advisors handle structuring with these issues in mind, supported by ongoing tax compliance and forward modelling through our business advisory and 3-way forecasting service.

Key takeaway

A discretionary trust and a company with share classes both allow flexible profit distribution, but they work differently and are taxed differently. Treasury's exposure draft of 3 September 2026 confirms the 30% minimum tax on discretionary trusts from 1 July 2028 and adds a fixed-distribution election that avoids the tax at the cost of the trust's flexibility. That gives most groups three paths rather than two: keep the trust and accept the minimum tax, keep the trust and elect, or move to a company using share classes. Neither structure is automatically better. The right answer depends on your profit profile, family group, asset protection needs and exit plan, and any arrangement must be set up for genuine commercial reasons and reviewed against company law and the ATO integrity rules before profits are distributed.

Frequently asked questions

Sources: Treasury, exposure draft legislation, minimum tax on discretionary trusts (3 September 2026) and Budget 2026-27 Budget Paper No. 2; ATO, Tax reform: introducing a minimum tax on discretionary trusts; Commissioner of Taxation v Bendel [2026] HCA 18 and ATO decision impact statement; Corporations Act 2001 ss254A, 254T, 254W; Income Tax Assessment Act 1936 ss99A, 100A, Division 7A (including s109D and Subdivision EA); Income Tax Assessment Act 1997 Divisions 203, 205 and 207, s204-30; ATO Taxpayer Alert TA 2012/4; ATO company tax rate, franking deficit tax and dividend imputation guidance.