Key takeaways
Labor's proposal remains an exposure draft and has not yet become law.
From 1 July 2028, affected discretionary trusts would generally face a 30 per cent minimum tax at the trustee level.
Existing trusts could avoid that tax by making a one-off election to distribute fixed percentages of income and capital to pre-nominated beneficiaries.
That election preserves the trust structure but removes much of the flexibility that makes a discretionary trust useful.
Breaking the elected distribution pattern would trigger tax at the top marginal rate plus Medicare levy for that year, followed by the 30 per cent regime in later years.
Trustees should review their structure and deed well before 2028, although major decisions should wait until the final legislation is known.
Labor has retreated from one of the most contentious parts of its 2026 federal budget tax package, although Australians who use discretionary trusts shouldn’t mistake the change for a return to business as usual.
The original proposal in the Federal Budget would have imposed a 30 per cent minimum tax on the taxable income of affected discretionary trusts from 1 July 2028.
That caused immediate concern among family businesses, investors and professional advisers because it threatened the tax flexibility of these structures and could have forced many families into expensive restructures.
Following a strong backlash and consultation with industry, the government has now offered another pathway.
Existing discretionary trusts may be able to escape the minimum tax by making an election that locks in their beneficiaries and the percentage of income and capital each beneficiary will receive.
This is a meaningful concession because it could avoid capital gains tax and state stamp duty costs associated with restructuring. However, the price of taking this option is the loss of discretion, which has always been one of the main reasons families use discretionary trusts in the first place.
It is also important to remember that these measures are contained in exposure draft legislation. Consultation closes on 18 September 2026, and further administrative and integrity provisions are expected in later tranches, so the final rules may still change.
What did Labor originally propose?
Under the budget announcement, the trustee of an affected discretionary trust would pay a minimum tax of 30 per cent on the trust's taxable income.
Individual and other non-corporate beneficiaries would generally receive a non-refundable credit for tax paid by the trustee.
Where a beneficiary's tax liability was already 30 per cent or more, the measure might change cash flow and compliance without necessarily increasing the family's overall tax bill.
The greatest impact would be felt where income was distributed to beneficiaries on tax rates below 30 per cent, who would, under the proposed rules, have to the income they receive is taxed at 30% in the trust
The treatment of corporate beneficiaries, commonly called “bucket companies”, created an even bigger concern.
A company would not receive the trustee-level credit, so distributing income to a company could produce another layer of company tax and potentially a very high effective tax burden (possibly 70%) once profits were ultimately paid as dividends.
The government argued that the reform would better align tax on trust income with tax paid by wage earners. Treasury says Australia has about 840,000 discretionary trusts and that families using them have, on average, faced tax rates around four percentage points lower than comparable families without trusts.
Those figures help explain the policy intent, although they don’t capture the many commercial reasons trusts are used, including asset protection, succession planning and holding family investments across generations.
What has Labor changed?
The revised exposure draft introduces an electable regime for discretionary trusts that exist on 1 July 2028.
A trustee could nominate beneficiaries and specify the fixed percentage of the trust's income and capital that each will receive every year.
If the election is made correctly and the trust follows those percentages, the 30 per cent minimum tax would not apply. Distributions to individuals would continue to be taxed at their marginal rates, while an eligible corporate beneficiary could be taxed only once at the relevant company rate.
The election must allocate 100 per cent of both income and capital, and each beneficiary's percentage of income must match their percentage of capital. A trust could not, for example, direct all income to one family member while reserving all capital for another.
There is no stated limit on the number of nominated beneficiaries, although they must have been capable of benefiting under the deed at 1 July 2028. Eligible companies and some trusts may be nominated if they existed at that date and satisfy the proposed rules.
The election would need to be made in the 2028-29 income year, with the ATO notification due by the earlier of the trust tax return lodgment date or the date the return is actually lodged.
Trusts established after 1 July 2028 would not have access to this concession under the current draft.
The concession comes with a very long lock-in
A family may be asked in 2028 to decide how trust income and capital should be shared many years into the future. Yet family and financial circumstances rarely remain static for that long.
A spouse may return to work, an adult child may build a successful career, another beneficiary may need more support, grandchildren may be born, relationships may change, and succession plans may evolve.
The proposed election leaves very little room to respond to those ordinary events.
The draft permits changes following the death of a nominated beneficiary or the breakdown of a relationship between nominated beneficiaries.
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However, it does not presently offer a general ability to add future children or grandchildren, or to adjust percentages simply because a family's circumstances have changed.
If a trustee makes distributions that do not match the nomination, the election would be automatically revoked. The trustee would then be assessed at the highest marginal rate plus the Medicare levy for that year, currently a total of 47 per cent, and the trust would move into the 30 per cent minimum tax regime for future years.
A trustee could voluntarily revoke the election, although once it has been revoked it cannot be remade.
In practical terms, these changes mean that families would be trading annual tax flexibility for structural continuity and relief from the minimum tax.
This is a backdown, although only a partial one
The new option should spare some small businesses and investment families from the immediate cost and disruption of moving assets into a company or fixed trust.
Treasury says around 350,000 active small businesses operated through discretionary trusts in 2022-23, with about 140,000 of them not expected to pay extra tax or need to restructure in any given year.
For families whose intended ownership and distribution pattern is already stable, the election may provide a workable answer. It could also preserve access to a bucket company where that company and its ownership arrangements satisfy the proposed definition of an eligible company.
However, turning a discretionary trust into a structure with fixed economic outcomes removes much of its practical discretion. The legal trust may remain in place, but its tax treatment would depend on the trustee following a predetermined formula year after year.
There is also an uncomfortable policy tension here. Families are being offered relief from restructuring costs if they make decisions that could shape the distribution of capital decades from now, even though nobody can reliably predict future marriages, deaths, careers, care needs or family disputes.
What other choices will trustees have?
An affected trust could remain discretionary and accept the 30 per cent minimum tax.
That may be reasonable where distributions already go mainly to adults paying tax at 30 per cent or more, although cash flow and the treatment of corporate beneficiaries still require careful modelling.
Another possibility is restructuring into a company or fixed trust. The government proposes three years of income tax rollover relief from 1 July 2027 to 30 June 2030, including relief from capital gains tax where the detailed requirements are satisfied.
Rollover relief does not automatically remove every cost. State and territory stamp duty, land tax consequences, finance arrangements, asset protection, Division 7A issues and the commercial terms of loans and contracts may all affect the outcome.
The election and rollover are alternatives under the draft. A trustee that chooses the rollover cannot later use the election for the same trust, even if not every asset is transferred, so this is an area where acting too quickly could have lasting consequences.
Which trusts and income are outside the proposal?
The draft excludes several structures, including fixed trusts without material discretionary elements, widely held and managed investment trusts, bare trusts, complying superannuation funds, special disability trusts and charitable trusts.
Primary production income and certain income relating to vulnerable minors are also excluded.
Deceased estates and discretionary testamentary trusts established for genuine testamentary purposes are intended to sit outside the minimum tax, while distributions to registered charities and deductible gift recipients would also be exempt.
The boundaries matter because a trust can hold several assets and earn different types of income. Families should avoid assuming that an exemption applying to one stream of income necessarily excludes the whole trust.
What should families do now?
There is no need for a rushed restructure while the legislation remains in draft form, but there is every reason to begin a careful review. Trustees should identify why their trust exists, who can benefit under the deed, where income is currently distributed, which assets are held in the structure and how succession is expected to work.
They should also model several scenarios rather than looking only at the next tax year. Paying the 30 per cent minimum, making the fixed election, moving to a company or fixed trust, and retaining different assets in different structures may produce very different results over ten or twenty years.
For property investors, the review needs to include more than income tax, and you will need specific advice for your personal circumstances.
My view is that Labor's concession makes the proposal less disruptive, although it remains a major change to the way family trusts have operated for decades.
If a trust is part of your broader wealth strategy, and the best response will depend on your family's business, property, succession and asset-protection objectives.
The sensible approach is to use the time before 2028 to obtain coordinated legal, tax and financial advice, then decide once Parliament has settled the final rules.
The structure that saves tax this year can become an expensive constraint later if it no longer serves the family's wider plan.
Important note
This article provides general information only. The proposals are contained in exposure draft legislation and may change before becoming law. Trustees should obtain advice from a qualified tax adviser and lawyer based on their own circumstances before changing a trust deed, making an election, transferring assets or restructuring.
