Understanding the Proposed Trust Tax Changes

Trusts have long played an important role in family business, investment and wealth planning in Australia.

Their flexibility, asset protection features and succession planning benefits have made them one of the most widely used structures for families and business owners. However, proposed changes announced in the 2026–27 Federal Budget is looking to reshape how trust income is taxed in the future.

While these measures are not yet law, trustees and beneficiaries should understand what is being proposed and consider whether existing structures remain appropriate.

What Was Announced?

The Government has proposed introducing a minimum 30% tax rate on certain trust distributions.

The proposed changes are expected to commence from 1 July 2028, giving trustees and family groups time to review their arrangements before any new rules take effect.

Under the proposal:

• A 30% minimum tax rate would apply to certain trust income at the trustee level
• Individual and other non-corporate beneficiaries would receive a non-refundable tax credit for tax paid by the trustee
• Corporate beneficiaries, often referred to as bucket companies, would not be eligible to receive the tax credit

Common Types of Trusts

Not all trusts operate in the same way, and the proposed changes are not expected to apply equally across all structures.

Common trust types include:

• Unit trusts, where beneficiaries hold fixed units that determine their ownership proportion
• Discretionary trusts, where trustees have flexibility to decide how and when income is distributed
• Testamentary trusts, which are created through a Will and take effect after death
• Special disability trusts, which are designed to provide long-term financial security for family members with disability

The proposed changes appear to be primarily directed at discretionary trusts, commonly used in family business and investment structures.

Why Trusts Are Popular

Trusts can provide several important benefits, including:

• Flexibility — trustees can adapt income distributions each year based on beneficiaries’ circumstances
• Asset protection — trust assets are legally separated from individual ownership, which may offer protection from certain creditors
• Succession planning — trusts can assist with transferring wealth between generations
• Tax planning — income may be distributed to beneficiaries in a way that reflects their circumstances and tax position

How Could the New Rules Work?

Under the proposed model, the trustee would pay tax at a minimum rate of 30% on affected trust income.

Individual and other non-corporate beneficiaries would then receive a non-refundable tax credit for their share of tax already paid by the trustee.

This means the final tax outcome would depend on each beneficiary’s personal tax position.

Where a beneficiary’s average tax rate is below 30%, some of the credit may effectively be lost.

Worked Example

Assume a trust has taxable profit of $200,000 and distributes this equally to Mum and Dad.

Under the new rules, the trustee pays tax at 30% = $60,000

Each individual receives $100,000 and a non-refundable tax credit of $30,000.

This assumes no other income or deductions.

In this example, each would forgo $7,212 of the tax credit.

Why Average Tax Rates Matter

A common assumption is that once income exceeds $45,000, the 30% trustee tax rate may make little difference.

However, this can be misleading.

What matters is not just the marginal tax rate on the next dollar of income, but the average tax rate across total income.

In the example above, even though each beneficiary receives $100,000, their average tax rate is still below 30%. This is why part of the non-refundable credit is lost.

Advisor Insight: Trust Planning May Need a Fresh Look

If the proposed rules proceed, some family groups may need to revisit how trust income is distributed and whether existing structures remain fit for purpose.

For example, where a trust distributes income to individuals with lower average tax rates, the proposed 30% minimum tax may reduce the effectiveness of that strategy.

In some cases, paying wages to family members who genuinely work in the business may be worth considering. However, this can bring other obligations, including superannuation and WorkCover considerations, so the trade-offs need to be assessed carefully.

The right approach will depend on the trust’s purpose, income sources, beneficiaries and broader family or business objectives.

Who May Not Be Affected?

The proposed changes include a number of exclusions.

Based on the current announcement, the following are not expected to be caught:

• Fixed trusts
• Special disability trusts
• Fixed testamentary trusts
• Deceased estates
• Certain primary production income

Primary producers should note that while primary production income is proposed to be excluded, other income such as rent, contract income or interest may still potentially be affected.

There may also be other categories of income that fall outside the scope of the new rules, but further detail is yet to be released.

Questions Worth Considering

If you currently use a trust structure, it may be useful to consider:

• What type of trust do you have?
• What types of income does the trust receive?
• Who are the current and likely future beneficiaries?
• Are distributions being made to individuals, companies or both?
• Would the proposed rules affect the tax efficiency of the structure?
• Are you currently planning a business restructure or succession plan?
• Should wages, ownership structure or distribution strategies be reviewed?

What Happens Next?

These measures remain proposals and are not yet law.

There is still a significant amount of detail to be worked through, and the final rules may change before legislation is introduced.

With a proposed start date of 1 July 2028, trustees and family groups have time to consider the potential impact. However, those currently setting up a new structure, reviewing a business arrangement or working through succession planning should seek advice early.

Need Advice?

Trusts remain valuable structures for many families and businesses, but the proposed changes may alter how some arrangements are managed in future.

If you would like to discuss how the proposed trust tax changes may affect your structure, tax position or succession planning, please contact your trusted Murray Nankivell adviser.