Federal Budget 2026: Trusts Under Pressure

The 12 May 2026 Federal Budget introduced one of the most significant shifts to the taxation of discretionary trusts in decades.

At its core, the Government is moving away from treating trusts as “flow-through” structures and instead imposing a minimum level of tax at the trustee level.

For many private groups, particularly those using family trusts and bucket companies, this will fundamentally change how structures are used going forward (if these measures are legislated).

While the announcements are significant, they are high-level and not yet law. Many of the mechanics, including how the minimum tax is calculated, how credits flow, and how existing arrangements are treated, have not been fully articulated.

Below is our practical breakdown of what’s been announced, what it may mean in practice, and the actions we recommend taking now.

 

1. A 30% Minimum Tax on Discretionary Trusts

The headline measure is the introduction of a 30% minimum tax on discretionary trust income, applying from 1 July 2028.

Trusts would no longer operate as a purely flow-through vehicle. The trustee would be subject to tax of 30% on the trust’s taxable income.

Individual beneficiaries would receive a non-refundable tax credit for the tax paid by the trust. If the individual’s marginal tax rate is below 30%, the excess credits are lost, unlike franking credits from company dividends.

The effectiveness of distributing to low-income beneficiaries will be significantly reduced.

Where a beneficiary has at least $45,000 in other income (e.g. from wages), a trust distribution of unfranked income (e.g. trading income) with a 30% minimum tax rate, won’t impact their overall tax payable.

2. Franking Credits – No Longer a Planning Tool in Trusts

The Budget also directly targets how franking credits are used within trust structures.

Trustees that received franked income will be required to apply franking credits against the 30% minimum tax. This could mean that franking credits may no longer flow through to beneficiaries in a refundable form.

There is no information as yet on how excess franking credits can used.

Streaming franked income to certain beneficiaries to access refund or offsets will no longer be a viable strategy. Franking credits would seem to be effectively ‘trapped’ to meet the minimum tax first.

3. Corporate Beneficiaries (“Bucket Companies”) Under Pressure

One of the clearest policy targets is the use of corporate beneficiaries to cap tax at 25% or 30%.

Corporate beneficiaries may not receive any credit for tax paid by the trustee. This is a key area requiring clarification as it is particularly concerning that corporate beneficiaries could end up paying double tax on distributions received. Under the current announcements it appears as though the trust would pay 30% at the tax level, and then the corporate beneficiary would have to pay another 25%/30%.

In many cases, structures relying on corporate beneficiaries will need to be reconsidered entirely.

4. Excluded Trusts and Income – Who Is Not Impacted?

The measure doesn’t apply universally to all trusts. The 30% minimum tax will not apply to fixed trusts, widely held trusts (e.g. managed funds), complying superannuation funds, special disability trusts, deceased estates or charitable trusts

Most family and SME discretionary trusts are impacted, these exclusions largely apply to institutional or specific-purpose trusts.

Excluded categories of income

Certain income streams are also carved out, including:

• Primary production income
• Income relating to vulnerable minors
• Non-resident withholding income
• Existing testamentary trust income (at Budget night)

 

5. Rollover Relief – The “Carrot” for Restructuring

To support the transition, the Government has included time-limited rollover relief.

This will apply from 1 July 2027 for a period of three years to enable small businesses and others to restructure their discretionary trust into a company, fixed trust or other type of entity.

There has not been any detail released on how this will operate, or what ‘other’ types of entities can access this rollover relief.

Even with tax rollover relief, restructuring may still trigger stamp duty, financing issues, contract complications, licence transfer issues and more.

 

6. Key Strategic Implications

While these measures are not yet law and consultation is expected, the direction of travel is clear.

Short-term actions:

• Review current trust structures and distribution strategies
• Identify reliance on:
  • Bucket companies
  • Franking credit streaming
  • Low-income beneficiaries
• Model future tax outcomes under a 30% baseline

Medium-term actions (pre-2028):

• Consider restructuring options
• Assess eligibility for rollover relief
• Review asset ownership and risk position
• Review wills that include testamentary trusts

 

Final Thoughts

These reforms (if legislated) represent a major shift in how trusts are taxed in Australia.

While the Government’s policy appears to be framed around high-wealth individuals, in practice this will impact most family businesses and SME structures.

The next few years could be a critical window to reassess distribution strategies, franking planning, and structure design before the proposed start date of 1 July 2028 (with proposed rollover relief from 1 July 2027 for three years).

If your structure includes a discretionary trust, it will be important to model the impact and consider your options.

---