Trusts in Australia: How They Work and What's Changing

Trusts remain one of the most common structures in Australian business and investment. The ATO Taxation Statistics recorded 1,022,229 trust tax returns for 2022-23, with total business income of about $489 billion across the trust population. That scale is why trustees need to get the fundamentals right, and why the 2026-27 Federal Budget changes matter so much.

This guide explains how trusts work in practice, who pays the tax, and what trustees must do each year. It also covers the proposed 30% minimum tax on discretionary trusts from 1 July 2028, the related capital gains tax and negative gearing measures, and a practical checklist for the years ahead. Whether you run a family trust or a unit trust, the same fundamentals apply. We work through these issues every day as part of tax planning for family groups.

Sources: ATO Taxation Statistics 2022-23 (trust statistics); ATO new legislation guidance.

What is a trust structure in Australia?

The key players are:

• The trustee holds legal title to the assets and carries the legal obligations.
• The beneficiaries are the people or entities who can benefit from income or capital.
• The trust deed defines who can benefit, what counts as income, and how decisions must be documented.
• The appointor (or principal) usually controls who the trustee is. That control matters for succession.

In most commercial settings a corporate trustee is used, because trustees can be personally liable for trust debts. A corporate trustee helps ring-fence that liability, though it does not eliminate risk where personal guarantees are given.

What types of trusts are commonly used in Australia?

The most common types in practice are:

• Discretionary trusts (family trusts): the trustee chooses which eligible beneficiaries receive income or capital each year. Common for founder-led family groups.
• Unit trusts: fixed entitlements by units. If you hold 50% of units, you are generally entitled to 50% of distributions. Common in joint ventures and property.
• Family trusts (tax meaning): a trust that has made a Family Trust Election. This can help with trust loss, franking credit, and family group integrity rules, but it restricts who can benefit.
• Service trusts: used for staffing, leasing, or equipment arrangements, often in professional services firms. They need genuine commercial support.

Who pays tax on trust income?

The central concept is present entitlement. If a beneficiary is made presently entitled to trust income, they generally pay tax on that share under section 97 of the ITAA 1936.

If no beneficiary is presently entitled, or a distribution is not effective, the trustee is taxed instead. That happens under section 99 or section 99A of the ITAA 1936. Section 99A usually applies the top marginal rate. That is why a missed resolution can be an expensive mistake.

A Family Trust Election can help with trust loss, franking credit, and family group integrity rules. The trade-off is Family Trust Distribution Tax. Distributions outside the family group are taxed at 47%, the top marginal rate plus the Medicare levy. The Commissioner has no discretion to reduce it, so an FTE needs care.

What are the trust tax rates for 2025-26?

For Australian residents aged 18 and over, the 2025-26 marginal rates (excluding the Medicare levy) are:

• $0 to $18,200: nil
• $18,201 to $45,000: 16c per $1 over $18,200
• $45,001 to $135,000: $4,288 plus 30c per $1 over $45,000
• $135,001 to $190,000: $31,288 plus 37c per $1 over $135,000
• $190,001 and over: $51,638 plus 45c per $1 over $190,000

That flexibility, distributing income to beneficiaries on lower rates, is exactly what the 2026-27 Federal Budget proposes to limit. Trustees will need to reassess current strategies in light of the proposed 30% minimum tax on discretionary trusts from 1 July 2028.

2026-27 Federal Budget update: 30% minimum tax on discretionary trusts

On 12 May 2026, as part of the 2026-27 Federal Budget, the Government announced it will introduce a 30% minimum tax on discretionary trusts from 1 July 2028. The ATO has confirmed the measure is not yet law.

The key mechanics, as announced, are:

• The minimum tax applies at the trustee level, regardless of how income is distributed.
• Non-corporate beneficiaries who are presently entitled receive a non-refundable credit for the tax paid by the trustee.
• Corporate beneficiaries are not entitled to that credit, which changes the maths on bucket company strategies.
• Expected exclusions include fixed trusts, widely held trusts, complying superannuation funds, charitable trusts, special disability trusts, and deceased estates.

The intent is to reduce the benefit of distributing income to lower-rate beneficiaries and to align discretionary trust income more closely with the tax on wage income. The measure is estimated to raise about $4.5 billion over five years. The chart below shows the effect in simple terms.

Other 2026-27 Budget measures relevant to trusts

Three further measures affect how trusts are used. Each is announced but not yet law.

Restructure rollover relief. The Government will provide time-limited rollover relief for three years from 1 July 2027 to help small businesses and others move assets out of discretionary trusts into other entities, such as a company or a fixed trust. This is directly relevant if you currently trade through a family trust. A business valuation often forms part of that planning.

Capital gains tax reform. From 1 July 2027, the 50% CGT discount is proposed to be replaced by cost base indexation, with a minimum effective 30% tax rate on capital gains. The change is prospective, so gains accrued to 30 June 2027 are assumed to keep the existing discount. This affects trusts holding business assets, property, and shares. We cover the detail in our guide to the 2026 CGT reform and small business carve-outs.

Negative gearing. From 1 July 2027, negative gearing is proposed to be limited to new builds. Established residential properties acquired after 7:30pm AEST on 12 May 2026 are affected, while properties held before Budget night are preserved. This matters where a family trust holds residential investment property. See the ATO summary of the negative gearing and CGT reforms, and consider specialist property tax advice.

Source: Australian Government, Budget 2026-27 tax reform; ATO new legislation guidance. Measures remain subject to consultation and legislation.

What should trustees do before 2028?

A practical pre-2028 checklist:

• Confirm whether the trust is discretionary, fixed, or unit-based
• Identify whether the trust distributes to low-rate beneficiaries
• Review bucket company arrangements, given corporate beneficiaries will not receive the credit
• Model 2027-28 and 2028-29 tax outcomes under current and proposed rules
• Consider whether restructuring into a company or fixed trust is commercially justified
• Review CGT, stamp duty, Division 7A, financing, and succession consequences before any restructure

Because the measures are not yet law, the right move for most trustees is to prepare, not to react. We help clients model the outcomes as part of business advisory and forecasting, so any restructure is driven by commercial logic, not headlines.

How do trust distributions work, and what is good practice?

A sound distribution matches the deed's rules, the group's real cash needs, the beneficiaries' tax positions, and the integrity rules. The cleanest approach is to distribute to beneficiaries who genuinely benefit.

The worst approach is leaving trust decisions to late June with incomplete accounts. Good outcomes need an estimate of taxable profit, clarity on income types such as capital gains and franked dividends, and enough time to confirm beneficiary eligibility. We build this into each client's tax compliance calendar.

What happens if a trust distributes income but does not pay it?

Unpaid present entitlements (UPEs) are one of the most common practical issues for SME trusts. The trust creates an entitlement, but the cash stays in the business for working capital. That is allowed, but it must be managed deliberately.

Key points to manage:

• Record the entitlement clearly as a beneficiary loan account or liability, not as a vague note.
• Plan how the beneficiary's tax bill will be funded if the cash is retained.
• For company beneficiaries (bucket companies), review Division 7A, sub-trust arrangements, loan documentation, and actual cash movements before distributions are made.

Bucket companies can be useful, but they are not a set-and-forget tool. The proposed 30% minimum tax adds another reason to review them, because corporate beneficiaries are not expected to receive a credit for the trustee-paid minimum tax. Sound accounting and bookkeeping support keeps these loan accounts clean and audit-ready.

What is Section 100A and when does it matter?

Section 100A of the ITAA 1936 targets reimbursement agreements. In simple terms, it looks at whether the person named in the distribution is the person who really benefits. The ATO's view is in Taxation Ruling TR 2022/4, and its compliance approach is in Practical Compliance Guideline PCG 2022/2. Most ordinary family arrangements are fine. Risk rises when entitlements and real benefits do not match.

Treat these as review triggers:

• Adult children are appointed income but do not receive or control the funds.
• Trust money consistently pays another person's expenses.
• There is an informal understanding that entitlements will be handed back or redirected.
• Records do not clearly show who benefited and how.

Trust vs company: how should you choose?

There is no single right answer. It depends on risk, growth plans, and who needs access to profits. For a deeper comparison, see our guide to the company structure in Australia, and for founders, our view on choosing the right business structure.

What trust compliance applies each year?

A practical annual checklist:

• The trust deed and any variations are current, signed, and stored.
• A valid trustee resolution is made by 30 June (or earlier if the deed requires), consistent with the deed.
• The trust has its own TFN and lodges an annual trust tax return.
• Beneficiary reporting is accurate and consistent with the resolutions.
• Records support the outcome: signed minutes, financial statements, bank movements, and loan accounts where entitlements are unpaid.

The bottom line

Trusts remain powerful structures, but they are not set-and-forget. The fundamentals still apply: present entitlement, valid resolutions by 30 June, genuine distributions, and clean records. What has changed is the horizon. The proposed 30% minimum tax on discretionary trusts from 1 July 2028, alongside the CGT and negative gearing reforms from 1 July 2027, means current strategies should be tested now while the rollover window is open.

These measures are announced but not yet law, so the sensible step is to model the outcomes and prepare, not to act on headlines. We help family groups do exactly that.

Frequently Asked Questions