A trust is a relationship where a trustee holds assets for beneficiaries, not a separate legal entity. Tax usually follows present entitlement. The big change: the 2026-27 Federal Budget announced a 30% minimum tax on discretionary trusts from 1 July 2028, paid by the trustee. It is not yet law, but trustees should start planning now.
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.
A trust is a legal relationship in which a trustee holds assets under a trust deed and manages them for the beneficiaries. It is not a separate legal entity like a company. The trustee holds legal title, the beneficiaries can benefit from income or capital, and the deed sets the rules.
The key players are:
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.
A trust is a relationship, not a separate legal entity. Control sits with the trustee and appointor.
Most Australian business trusts are discretionary trusts or unit trusts. A discretionary (family) trust lets the trustee decide each year which beneficiaries receive income or capital. A unit trust gives fixed entitlements by units, similar to shares. The right choice depends on flexibility versus fixed ownership.
The most common types in practice are:
Trust tax usually follows present entitlement. A beneficiary who is presently entitled to a share of trust income is generally taxed on that share at their own marginal rate. If no beneficiary is presently entitled, or a distribution fails, the trustee is taxed instead, often at the top marginal rate.
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.
Trusts do not have a single flat rate. Where beneficiaries are presently entitled, they pay at their own marginal rates. Where the trustee is assessed under section 99A, the outcome is commonly the top marginal rate. The real question is who is assessed, on what amount, and whether it was documented.
For Australian residents aged 18 and over, the 2025-26 marginal rates (excluding the Medicare levy) are:
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.
The 2026-27 Federal Budget announced a 30% minimum tax on discretionary trusts from 1 July 2028. The trustee pays the minimum tax on the trust's taxable income. Non-corporate beneficiaries who are presently entitled receive a non-refundable credit for that tax. The measure is announced but not yet law.
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:
Illustrative of the announced mechanism. Final detail is subject to consultation and legislation.
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.
Illustrative only, using 2025-26 resident marginal rates and excluding the Medicare levy. Actual outcomes depend on the final law.
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.
| Measure | Proposed start | Status |
|---|---|---|
| 30% minimum tax on discretionary trusts | 1 July 2028 | Announced, not yet law |
| Restructure rollover relief (3 years) | 1 July 2027 | Announced, not yet law |
| CGT: 50% discount replaced by indexation, 30% minimum | 1 July 2027 (prospective) | Announced, not yet law |
| Negative gearing limited to new builds | 1 July 2027 | Announced, not yet law |
Source: Australian Government, Budget 2026-27 tax reform; ATO new legislation guidance. Measures remain subject to consultation and legislation.
Source: Australian Government, Budget 2026-27; ATO new legislation guidance.
Trustees should review their structure now, model the 2027-28 and 2028-29 outcomes, and decide whether restructuring is commercially justified before the rollover window closes. Do not assume the current distribution strategy will remain optimal beyond 2027-28.
A practical pre-2028 checklist:
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.
Trust distributions must follow the deed and be documented on time, usually by a valid resolution before 30 June. Good practice means the beneficiary who is made entitled actually benefits, with cash paid or a properly recorded loan account. Entitlement, benefit, and records should line up.
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.
Most trust problems come from timing and documentation, not aggressive planning.
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.
With major trust reforms proposed from 2028, now is the time to review your distributions, bucket company, and structure. We can help you plan with confidence.
Contact Us Today →If a beneficiary is made presently entitled but the cash is not paid, the unpaid amount becomes an unpaid present entitlement. It must be recorded as a beneficiary loan account or liability. Where a company is the beneficiary, Division 7A and sub-trust rules can apply, so documentation and actual cash flows matter.
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:
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.
Section 100A is an anti-avoidance rule for reimbursement agreements. It can apply where one beneficiary is made entitled to trust income but someone else receives the real benefit, and reducing tax is part of the arrangement. The ATO sets out its approach in TR 2022/4 and PCG 2022/2.
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:
Trusts offer distribution flexibility; companies support profit retention at the company tax rate and clearer governance. With the proposed 30% minimum tax on discretionary trusts from 1 July 2028, that flexibility will need to be reassessed. Many groups use both, such as a trust holding shares in a trading company.
| Issue | Discretionary trust | Company |
|---|---|---|
| Profit retention | Less clean; trustee-rate issues possible | Cleaner retention at company tax rates |
| Distribution flexibility | High, but integrity rules apply | Lower; dividends follow share ownership |
| Budget 2026-27 impact | Proposed 30% minimum tax from 1 July 2028 | Not directly subject to the discretionary trust minimum tax |
| Succession | Appointor and trustee control critical | Shareholder and director control critical |
| Asset protection | Useful but not absolute | Useful, but guarantees still matter |
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.
Annual trust compliance includes a current deed, a valid trustee resolution (usually by 30 June), accurate beneficiary reporting, lodgement of the trust tax return, and records showing who benefited. Most trust problems come from weak documentation and timing, not aggressive planning.
A practical annual checklist:
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.
We will review your trust, model the proposed 2027-28 and 2028-29 outcomes, and help you decide whether to restructure before the rollover relief window closes.
Schedule a meeting →Disclaimer: This article is general information only and does not constitute specific tax, legal, or financial advice. The 2026-27 Budget measures described are announced but not yet law and remain subject to consultation and legislation. Trust outcomes depend on the deed, the facts, and current law. We recommend seeking advice tailored to your circumstances before acting. 42 Advisory is a CPA firm and Registered Tax Agent.
It is a proposed measure from the 2026-27 Federal Budget. From 1 July 2028, the trustee of a discretionary trust would pay a minimum 30% tax on the trust's taxable income. Non-corporate beneficiaries who are presently entitled would receive a non-refundable credit. It is not yet law.
No. Trust tax depends on who is presently entitled. Beneficiaries are generally taxed at their own marginal rates. Where the trustee is assessed under section 99A, the outcome is commonly the top marginal rate. From 1 July 2028, a 30% minimum tax is proposed for discretionary trusts.
If no beneficiary is made presently entitled by a valid resolution in time, the trustee may be assessed on some or all of the net income under ITAA 1936 ss 99 or 99A. Section 99A commonly produces a top marginal-rate outcome, so timing and documentation are critical.
Section 100A is an anti-avoidance rule for reimbursement agreements. It can apply where a beneficiary is made entitled to trust income, but another person effectively receives the benefit and the arrangement is connected to reducing tax. The ATO explains its approach in TR 2022/4 and PCG 2022/2.
Possibly, but not automatically. Rollover relief is proposed for three years from 1 July 2027 to move assets out of discretionary trusts. Any restructure should be commercially justified and weighed against CGT, stamp duty, Division 7A, financing, and succession consequences. Seek advice first.