A discretionary trust and a company with multiple share classes are the two common ways to distribute business profits flexibly. The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trusts from 1 July 2028, which narrows the trust advantage and renews interest in company share-class structures. Neither is automatically better. The right choice depends on your profit profile, family group, asset protection needs and exit plan, and any structure must be set up for genuine commercial reasons.
For years, the discretionary (family) trust has been the default vehicle for distributing business profits tax-effectively in Australia. That position is now under review. The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trusts from 1 July 2028, prompting many owners to ask 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 proposed trust tax change means, and the company law and Australian Taxation Office (ATO) rules that apply to each. The measures discussed are announced, not yet law, so the planning window is open now.
Why is the trust vs company question being asked now?
The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trusts from 1 July 2028, applied at the trustee level. This reduces the tax benefit of distributing trust income to beneficiaries taxed below 30%. It is announced, not yet law, but it has put company share-class structures back on the table for many business owners.
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%. A three-year restructure rollover from 1 July 2027 is proposed to help groups move out of trusts where appropriate. Our full breakdown of the changes 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.
What are share classes in a Pty Ltd company?
Share classes, often called alphabet shares, are different categories of shares issued by one company, such as A, B and C class. Each class can carry different rights to dividends, voting, capital and proceeds on winding up. Where the constitution allows, directors can pay a dividend on one class without paying the others.
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 class | Possible holder | Typical rights |
|---|---|---|
| Ordinary | Founder or holding entity | Voting, capital and residual rights |
| A class | Individual, trust or related entity | Dividend rights set by class terms |
| B class | Another shareholder or entity | Dividend rights set by class terms |
| C class | Future shareholder or investor | Dividend, voting or capital rights as drafted |
Share classes vs discretionary trust: how do they compare?
A discretionary trust offers the highest year-by-year flexibility over who receives income, but faces the proposed 30% minimum tax from 2028. A company with share classes offers more limited, pre-set flexibility, a 25% or 30% tax rate on retained profits, and direct access to franking credits. The right structure depends on the commercial goal, not tax alone.
The comparison below sets out the broad trade-offs. Company profits are taxed at the 25% or 30% company tax rate depending on the entity, while related-party loans from a company can raise separate Division 7A issues.
| Feature | Company with share classes | Discretionary trust |
|---|---|---|
| Annual distribution flexibility | Limited; fixed to classes on the issue | High; trustee discretion each year |
| Tax on retained profit | 25% or 30% company rate | Generally, must distribute; proposed 30% minimum tax from 2028 |
| Access to franking credits | Direct, via the company franking account | Flows through where the trust holds shares |
| Income splitting to the family | Only to existing shareholders by class | Broad, but value reduced by the proposed minimum tax |
| Key risk and integrity areas | Dividend streaming, TA 2012/4, section 254T | Section 100A, Division 7A, trust resolutions |
| Restructure relief | n/a | Proposed 3-year rollover from 1 Jul 2027 |
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 proposed trust tax does not make trusts redundant, since asset protection and concession access may remain relevant, but it does change the maths. Our business tax team models both structures before any change, and for sector-specific groups our professional services accounting page sets out our approach.
Unsure whether a trust or company suits your group?
We can model both structures against the proposed trust tax and your profit profile before you decide.
Contact usWhat does the Corporations Act require before a company's dividend is paid?
A company may issue different classes of shares and set their rights. Before paying any dividend, it must satisfy section 254T of the Corporations Act 2001: net assets must exceed liabilities with enough excess for the dividend, the payment must be fair and reasonable to shareholders as a whole, and it must not materially prejudice the company's ability to pay creditors.
For a proprietary company, dividend rights are generally governed by the constitution and the terms on which shares are issued. The Corporations Act 2001 (section 254T) sets the solvency and fairness tests above. Dividend flexibility should always be tested against the balance sheet, constitution, share terms and any shareholders' agreement first. 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?
No. A share class does not create franking. A company can only pay fully franked dividends if it holds sufficient franking credits, which generally arise when it pays Australian income tax. The class structure decides who receives a dividend; the franking account decides how much of it can be franked.
The company must also 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 must generally match it. For private companies, the franking period is usually the income year. 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?
Both structures have integrity rules. For companies, the ATO watches dividend streaming and dividend access shares. For trusts, it focuses on section 100A reimbursement agreements and Division 7A loans. In each case, risk rises when an arrangement looks tax-driven rather than commercial, and the Commissioner can apply anti-avoidance provisions.
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, and Division 7A, where unpaid present entitlements to a bucket company are treated as loans. 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, or considering moving out of a trust, work through the following:
- Commercial rationale. There should be a genuine purpose, such as succession, asset protection, investor participation, growth or control planning, not tax alone.
- Company constitution and share terms. The constitution must permit different classes and class-specific dividends, and each class's rights must be clearly drafted.
- Shareholders' or trust deed terms. Check the existing documents do not restrict the intended arrangements.
- Timing. Create share classes before material profits accumulate, and weigh the proposed 1 July 2027 trust rollover window if moving out of a trust.
- Franking and solvency. Confirm sufficient franking credits and satisfy section 254T before declaring dividends.
- Integrity rules. Review for dividend streaming, dividend access shares (TA 2012/4), section 100A and Division 7A.
- Asset protection and CGT. Test any restructure against the small business CGT concessions and your asset protection objectives.
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. The proposed 30% minimum tax on discretionary trusts from 1 July 2028 narrows the trust's traditional advantage and makes the company share-class structure worth a fresh look. Neither is automatically better. The right structure 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.
General information only. This article provides general information current as at the date of publication and does not constitute personal tax, financial or legal advice. The trust, CGT and related measures described were announced in the 2026-27 Federal Budget and are not yet law; the detail may change before legislation is finalised. The rules referred to (including the Corporations Act 2001 and the Income Tax Assessment Act 1997) are complex and apply differently to each entity. Forty Two Advisory Pty Ltd trading as 42 Advisory (a CPA practice and Registered Tax Agent) recommends you obtain advice tailored to your facts before acting.
Frequently asked questions
Is a company with share classes better than a discretionary trust?
It depends on the goal. A company with share classes offers limited, pre-set dividend flexibility, a 25% or 30% tax rate and direct franking access. A trust offers higher yearly flexibility but faces the proposed 30% minimum tax from 2028. The best fit depends on your profit profile, family group and exit plan.
What is the proposed 30% tax on discretionary trusts?
The 2026-27 Federal Budget proposed a 30% minimum tax on discretionary trusts from 1 July 2028, applied at the trustee level. Non-corporate beneficiaries get a non-refundable credit. It mainly affects distributions to beneficiaries taxed below 30%. It is announced, not yet law.
Can a Pty Ltd company pay a dividend to only one class of shares?
Only if the constitution and the terms of issue allow directors to declare a dividend on one class without paying the others. If the documents are silent or require equal treatment, selective dividends may not be valid, so the wording must be checked first.
Should I move my family trust into a company now?
Not automatically. The measures are announced, not law, and trusts still offer asset protection and concession access. A proposed three-year rollover from 1 July 2027 may assist a restructure where appropriate. Model both structures against your facts before acting.
Do alphabet shares guarantee fully franked dividends?
No. Share classes decide who can receive a dividend, not whether it is franked. A dividend can only be fully franked if the company has enough franking credits, which usually build up as the company pays Australian income tax.
Sources: Australian Government, Budget 2026-27 (Treasury) minimum tax on discretionary trusts; Corporations Act 2001 s254T; Income Tax Assessment Act 1997 Division 203 (benchmark franking), s204-30 (streaming), s100A (reimbursement agreements); ATO Taxpayer Alert TA 2012/4 (dividend access shares); ATO Division 7A, dividend imputation and company tax rate guidance.
Need advice on company or trust structuring?
42 Advisory helps business owners compare share classes and trusts, and plan tax-effective profit distribution before the proposed changes start. We review your structure, constitution and risks before implementation.Sergiy Kucherenko
Sergiy Kucherenko is the founder and director of 42 Advisory and a member of CPA Australia. His professional career has been built in public practice and business advisory — working alongside business owners to simplify financial complexity, strengthen structure, and support growth at every stage. Originally trained as an engineer with a background in computer science, Sergiy brings an analytical and systems-oriented mindset to accounting and advisory — one that translates directly into the practice's emphasis on automation, process design, and technology-driven client solutions. It is the foundation behind 42 Advisory's cloud-first operating model and its ability to serve technically complex businesses with precision. Throughout his advisory career, Sergiy has served clients across medical technology, telecommunications, SaaS and technology businesses, construction and trades, and healthcare — including general practice and dental groups. That depth of sector exposure informs advice that is commercially grounded, not generic — calibrated to the specific operating realities of each industry. He has supported businesses at every stage of the growth cycle — from incorporation and early-stage structuring through to acquisition, restructure, and exit — with particular depth in service trust structures for medical practices, SaaS revenue recognition, and construction industry cash-flow management.