Federal Budget Discretionary Trusts Measures: What’s Changed In September 2026?
The federal budget discretionary trusts measure now has draft legislation behind it, and affected trusts have three pathways instead of two.
The biggest addition is an election. A trust that exists on 1 July 2028 can choose to make fixed distributions to pre-nominated beneficiaries and fall outside the minimum tax, with no restructure needed. That option didn’t exist in the July consultation paper.
The draft also confirms expanded roll-over relief for three years from 1 July 2027, refunds for excess franking credits, a wider list of excluded trusts and income, and a new definition of fixed trust. The September draft gives the budget family trust tax changes announced in May a much clearer legislative framework.
Here’s how the measure has moved since the Budget:
| Date | What happened |
|---|---|
| 12 May 2026 | The 30% minimum tax announced in the 2026-27 Budget |
| 8 July 2026 | Treasury consultation paper released |
| 31 July 2026 | Submissions on the consultation paper closed |
| 3 September 2026 | Exposure draft legislation and explanatory materials released |
| 18 September 2026 | Consultation on the exposure draft closed |
| 1 July 2027 | Proposed roll-over relief window opens, running for three years |
| 1 July 2028 | Proposed start of the 30% minimum tax |
Is The 30% Minimum Tax Law Yet?
No. It’s exposure draft legislation, and the ATO’s own summary of the measure states plainly that this measure is not yet law. Nothing in it binds a trustee today.
Consultation closed on 18 September, and the drafts now sit with the Treasury while submissions are considered. Professional bodies and law firms have already flagged unresolved issues, so changes before a bill reaches Parliament are likely.
Treasury has also been clear that this is only the first tranche. Administrative and integrity arrangements are expected in later releases, along with the rules covering how the minimum tax interacts with other parts of the tax system. The separate measure on unpaid present entitlements, announced in the 2018 Budget but never enacted, is being progressed on its own.
So the architecture is settled enough to plan around, but not to act on. What clients can rely on today is the shape of it: a 30% floor at trustee level from 1 July 2028, three pathways for trusts that are caught, a three-year roll-over window from 1 July 2027, and a list of exclusions that has grown with each round of consultation.
That gap between “settled shape” and “final detail” is why 2027 is the year for decisions, not this one. Deed reviews and modelling can start now, but signing anything before the rules are law risks doing the work twice.
What Is The Proposed 30% Minimum Tax On Discretionary Trusts?
The tax is paid by the trustee rather than the beneficiary. From 1 July 2028, the proposal would operate as a 30% minimum, or top-up, tax at trustee level on relevant trust income, applied before any distribution reaches a beneficiary. Where the trustee is already taxed at 30% or higher on that income, there is no additional minimum tax liability.
That’s the structural change. Today, trust income is generally taxed in the hands of the beneficiary presently entitled to it, at that beneficiary’s marginal rate. Under the proposal, tax is collected first, at trustee level, and the beneficiary’s position is worked out afterwards.
The proposed offset is intended to stop the trustee-level tax becoming a second layer of tax on the same income. The ATO confirms that non-corporate beneficiaries would claim a non-refundable income tax credit for tax the trustee has already paid on their share. Corporate beneficiaries would not receive that offset, which matters for bucket company structures and is covered below.
A minimum tax is not a cap, and that’s the point worth making clearly with clients. A beneficiary on the top marginal rate still pays the top rate, with the credit reducing what’s left to pay. The 30% only sets a floor.
So the groups affected are the ones distributing to beneficiaries taxed below 30%: adult children on low incomes, a spouse not working full-time, or a corporate beneficiary. Where distributions already go to non-corporate beneficiaries on marginal rates of 30% or higher, the direct increase in tax may be limited, though the timing and the paperwork still shift. The overall result still needs modelling, particularly where franking credits, capital gains or corporate beneficiaries are involved.
One term is worth keeping straight when you explain this. The tax applies to the trust’s minimum tax income, which the draft arrives at by starting with the trust’s net income and then excluding specified categories. Treasury has also flagged further tranches covering administration, integrity and how the measure interacts with the rest of the tax system.
Why Is The Government Targeting Discretionary Trusts And Income Splitting?
The stated reason is alignment. The Treasury describes the measure as better aligning the tax rate on trust income with tax rates paid by workers, and as helping fund tax cuts for workers.
The mechanism it targets is familiar to anyone who prepares trust distributions. A discretionary trust can vary who receives income each year, so a family group can direct income to beneficiaries on lower marginal rates, or to a company taxed at 25% or 30%. Two households with the same income can end up paying very different amounts of tax.
Clients often conflate two separate things here, and it helps to pull them apart. Searches around an ATO income splitting rule change are really about a Treasury proposal, and the ATO doesn’t set tax rates.
The ATO focus on discretionary trusts is a different matter, and it applies now. Its section 100A guidance and its work on distributions to adult children who never receive the money are current compliance activity, unaffected by anything in the exposure draft.
That distinction matters for how you frame client conversations. A distribution arrangement can be sound under today’s rules and still be worth reviewing for 2028, and an arrangement that already sits in the ATO’s sights needs attention regardless of what happens to this measure.
Which Trusts And Income Are Excluded From The Proposed Minimum Tax?
A long list, and it grew with the September draft. Treasury’s exposure draft explainer confirms exclusions for:
Charitable trusts, along with all distributions to registered charities and deductible gift recipients. Distributions to other income tax-exempt entities, such as sporting clubs, are also excluded up to a cap still to be finalised.
Special disability trusts and complying superannuation entities. Fund trustees sit outside the regime entirely. That exclusion covers the fund itself, not every trust the fund has an interest in, so where a self-managed superannuation fund holds units in a family trust, that trust still needs testing against the rules, separately from the fund’s own SMSF compliance work.
Deceased estates and testamentary trusts. Genuine testamentary trusts are proposed to be excluded, but the draft carries integrity rules covering property introduced after Budget night and trusts established from 1 July 2028. The exclusion has to be tested against the trust’s assets, beneficiaries and history rather than assumed from the type of trust.
Primary production income, and certain income relating to vulnerable minors.
Fixed and widely held trusts. A new definition of fixed trust supports this, turning on whether a trust has material discretionary elements, so bare trusts, managed investment trusts and other widely held trusts aren’t caught.
The distinction between an excluded trust and excluded income decides how much work a file needs. A complying super fund sits outside the regime entirely. A trading trust earning primary production income stays inside it, with that income treated differently.
Clients with testamentary discretionary trusts are the easiest conversation, since testamentary discretionary trust budget changes amount to confirmation that nothing changes for them, provided the trust was genuinely established for testamentary purposes.
The new fixed trust definition deserves its own look. The draft replaces the fixed trust test in section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936, treating a trust as fixed where beneficiaries hold fixed entitlements to all income and capital, or where there are no material discretionary elements affecting their entitlements or rights.
Two things make that worth checking on real files. The draft does not define “material discretionary elements”, giving a non-exhaustive list of indicators and a power for the Minister to determine more, and those determinations have not yet been made. The definition also sits in the general definitions provision, so it would apply across the income tax law rather than only to this measure.
The practical consequence is that a trust carrying minor administrative discretions in its deed may not qualify as fixed, and a trust treated as non-fixed today could sit differently once the definition changes. The explanatory materials indicate that widely held trusts, managed investment trusts, bare trusts and employee share trusts should remain outside.
What Is An Excluded Election Trust And How Does The Election Work?
An Excluded Election Trust (EET) is a discretionary trust that elects to make fixed distributions to pre-nominated beneficiaries and, as a result, falls outside the minimum tax. The election does not convert the trust into a fixed trust. It imposes fixed beneficiary proportions as a condition of sitting outside the regime, and the trust remains a discretionary trust throughout. It’s the new pathway in the September draft, and the one most likely to interest clients who don’t want to restructure.
A trust in existence on 1 July 2028 can nominate individuals and entities capable of benefiting under it on that date, including eligible companies and trusts. Treasury’s explainer puts no limit on how many beneficiaries can be nominated.
Two features make it attractive. No restructure is needed, and Treasury says the election is not expected to result in state and territory stamp duties, which is the gap roll-over relief was never going to cover.
The trade-off is flexibility, and in practice it’s close to permanent. Nominated beneficiaries can only be added or changed later if one dies or there is a family breakdown. A new grandchild, a son-in-law joining the business or a beneficiary moving overseas won’t reopen the list.
The automatic revocation rule is where the risk sits. An election runs until the trustee revokes it, or until a distribution inconsistent with the election revokes it automatically. On revocation, the trustee is taxed at the highest marginal rate plus Medicare levy for that income year, with the minimum tax applying in later years.
That makes the election a poor fit for clients whose circumstances move around, and a strong fit for settled family groups with a stable set of beneficiaries. The modelling needs to cover a realistic run of years, not next year alone.
How Would The Proposed Tax Affect Bucket Companies And Corporate Beneficiaries?
Harder than most other arrangements, which is why these files need reviewing first. A bucket company is a corporate beneficiary that receives trust distributions and pays tax at the company rate, capping the tax on income a family doesn’t need to draw personally.
The credit for trustee-paid tax goes to non-corporate beneficiaries. A corporate beneficiary would not receive it, so income routed to a bucket company carries the trustee’s 30% first, then the company’s own treatment on top. That reshapes the discretionary trust bucket company tax position for a lot of family groups. A second development affects the same structures, and the Bendel decision covered below has to be read alongside this one.
The election offers a way through for some. A trust can nominate an eligible company among its fixed beneficiaries, with the income then taxed as income of that company, which is the outcome most bucket company arrangements were built for in the first place.
Whether that works depends on the rest of the structure. Existing loans, unpaid entitlements, who actually needs the cash and what the company already holds all change the answer, and none of that shows up in a distribution schedule.
Two related pieces sit outside this draft, and one of them moved this year. In Commissioner of Taxation v Bendel [2026] HCA 18, handed down on 10 June 2026, the High Court dismissed the Commissioner’s appeal five to two and rejected the argument that the extended definition of loan in section 109D(3) of the Income Tax Assessment Act 1936 reaches a beneficiary who does not insist on being paid an unpaid present entitlement.
The reasoning turns on the deed and the resolutions. On those facts the resolutions set the entitlements aside without distributing them, the amounts were then held on separate trusts, and no debtor and creditor relationship arose. CA ANZ’s summary notes that Taxation Determination TD 2022/11 will be withdrawn, that entitlements placed on complying loan terms are still loans, and that Subdivision EA and section 100A can still apply.
Unpaid present entitlements are separately being handled through the 2018-19 Budget measure the government has said it will progress on its own. Treat the two as related but distinct. Bendel changes how existing entitlements are characterised, while the minimum tax changes how future trust income is taxed. The rules covering franking, foreign income tax offsets and international provisions are expected in later tranches.
Franking takes a different route for trusts holding shares. Treasury’s explainer confirms that after the trustee has offset its income tax liabilities, it can obtain refunds for franking credits that remain and relate to income subject to the minimum tax, and that the treatment of distributions not relating to that income is unaffected.
What changes is where the credit is used. For income caught by the minimum tax, the credit is applied at trustee level first, so franking credits would no longer flow through to individual beneficiaries in the way they do now. For the rest of the trust’s income, nothing changes.
What Are The Three Pathways For Affected Trusts?
Accept the tax, make the election, or restructure. Every affected client group ends up choosing between those three, and the right answer is a modelling exercise rather than a rule of thumb.
| Pathway | What it involves | What it locks in |
|---|---|---|
| Accept the minimum tax | Keep the trust as it is and pay 30% at trustee level from 1 July 2028 | Full distribution flexibility, with a tax floor on trust income |
| Make the election | Nominate beneficiaries and fix their entitlements, so the minimum tax doesn’t apply | Fixed distributions, changeable only on death or family breakdown |
| Restructure | Move assets out of the trust into a company or fixed trust using roll-over relief | A new structure, with duty, commercial and succession consequences |
Roll-over relief runs for three years from 1 July 2027. Treasury’s explainer confirms it gives relief from income tax consequences, including capital gains tax, for clients restructuring out of a discretionary trust into another arrangement. It’s built for a full restructure, with a targeted exception for primary production assets. Family trust distribution tax relief is also proposed for roll-over transfers.
The tax cost is only part of the bill. Duty is a state matter and roll-over relief doesn’t touch it, and a restructure brings financing, commercial and succession consequences that no tax model captures on its own. Compare the projected tax cost of staying put against the full cost of moving, across a realistic run of years.
Scale is worth mentioning to anxious clients. Treasury estimates around 350,000 active small businesses operated through a discretionary trust in 2022-23, fewer than 15% of all active small businesses, and says more than 90% of Australia’s 2.7 million active small businesses won’t be affected in any given year.
Which Client Files Should You Flag Now?
The start date is nearly two years out, but the work that decides each client’s outcome happens well before it. A practical order of attack:
Run the list. Identify every client with a discretionary trust, then narrow to those distributing to beneficiaries taxed below 30%, to corporate beneficiaries, or to adult children.
Check the deeds. Whether a trust can make fixed distributions, and who is capable of benefiting on 1 July 2028, decides whether the election is even available.
Map the assets. Land, goodwill and business assets drive duty and CGT on any restructure, so they move the numbers more than annual income does.
Model the options. Compare three to five years under each pathway, using the client’s real distribution history rather than an average year. Firms carrying a heavy trust load often shift tax compliance work across while this modelling runs, so the reviews don’t stall the lodgement program.
Diarise the dates. The roll-over window opens 1 July 2027, the minimum tax starts 1 July 2028, and the election depends on the trust existing on that date.
Say something to clients now. A short note explaining that nothing needs signing yet and that you’re reviewing their structure helps clients understand that the proposal is still draft legislation and gives them a clear next step.
Keep the file notes framed as scenario work under proposed rules. None of this is advice on settled law, and the drafts can still change before a bill reaches Parliament.
Bucket company clients deserve to be first in the queue. They face the clearest change, the most moving parts, and the longest lead time if a restructure turns out to be the answer.
What Do The Trust Tax Changes Mean For Your Firm’s Workload?
Most of the discretionary trust tax changes land as work for the accountant, not the client. Family trust tax changes of this size rarely stay on the client’s side of the desk.
Deed reviews, distribution modelling, restructure costings and the conversations that follow all take hours, and they arrive on a calendar already carrying BAS quarters and the lodgement program. Spread across a trust-heavy client base, it adds up to a meaningful block of work between now and 2028.
Modelling and structuring conversations are advisory work rather than compliance. Those reviews should be planned into the firm’s workflow rather than treated as additional work to fit around lodgement deadlines.
Capacity is usually what decides whether a firm can take that work on, in a market where hiring experienced accountants is already difficult.
One practical answer is to move repeatable compliance work off the desks of the people who should be having the trust conversations. Year-end financials, including trust financial statements and distribution schedules, can be prepared externally and come back ready for your review and sign-off.
Free up your senior people for the trust conversations that matter. Send us one job, a set of trust financials, a BAS or one tax return, and see what review-ready work looks like before you commit to anything.
