Partial Government Back-down on Discretionary (Family) Trust Changes
Minimum 30% tax on family trusts: Government backdown gives existing family trusts another option
The original trust tax proposal would have left many existing discretionary (family) trusts choosing between a 30% minimum tax and a potentially costly restructure. New draft legislation now offers a third option, although it comes at the cost of locking in future beneficiary entitlements.
Discretionary trusts are not used only to reduce tax. They are also used to protect family businesses and investments, manage succession, protect vulnerable beneficiaries and respond to changes in family circumstances.
The draft legislation released last week is therefore welcome.
What was originally proposed?
From 1 July 2028, affected discretionary trusts are proposed to pay tax at a minimum rate of 30%.
The trustee would generally pay the tax, with credits potentially available to some beneficiaries. The proposal would significantly reduce the tax benefits of distributing income to low-income adult beneficiaries and would make conventional “bucket company” arrangements much less attractive.
The minimum 30% tax remains part of the Government’s policy.
What has changed?
The Government now proposes three broad pathways for existing discretionary trusts.
A trust may:
- remain fully discretionary and enter the 30% minimum-tax regime
- make a new fixed distribution election, or
- restructure during a proposed three-year rollover period.
The new election is the major change.
An existing trust may be able to nominate the beneficiaries who will share in future trust income and capital and fix each beneficiary’s percentage entitlement.
If the trust then follows those fixed percentages, the 30% minimum trust tax would not apply.
What does “fixed” mean?
It means more than simply preparing a list of approved beneficiaries. For example, a trust might nominate:
- one family member for 60%
- another family member for 25%, and
- a family company for 15%.
Those percentages would generally apply to both income and capital and would be difficult to change later.
The trustee would no longer have the usual ability to determine each year which family member should receive the trust income.
This means the election may suit some established family structures, but may be inappropriate where family circumstances, business ownership or succession plans are likely to change.
Are testamentary trusts affected?
Genuine testamentary trusts, deceased estates, special disability trusts and certain other trusts are intended to remain outside the proposed minimum-tax regime.
There are nevertheless important conditions concerning the source of testamentary trust assets and the entities that can benefit. Estate planning documents should be reviewed once the legislation is finalised.
What about Primary Production (Farming)?
Income in discretionary trusts originating from a primary production business is still exempt from all of these changes as per the original proposal back in May.
Should trusts restructure now?
For most clients, no.
The legislation is still in draft, consultation remains underway and further legislative tranches are expected.
A restructure can also create costs and consequences that are not solved by a federal tax rollover, including:
- state stamp duty
- land tax
- refinancing
- changes to contracts and licences
- asset-protection consequences, and
- succession issues
What should trust clients do?
The appropriate step now is to review rather than restructure.
Trust clients should begin considering:
- who is likely to benefit from the trust over the long term
- whether fixed percentages of income and capital would be acceptable
- whether future children, spouses or entities may need to be included
- whether the trust owns assets that would be difficult to transfer, and
- the comparative tax and non-tax effects of each available pathway.
The September announcement is a genuine improvement. It may mean that many trusts do not need to be dismantled or dramatically restructured.
But it is not a complete backdown. Families choosing the new election would be giving up much of the flexibility for which their trusts were originally established.
For now, our recommendation is straightforward: do not panic, do not undertake an irreversible restructure based solely on draft legislation, and ensure your trust arrangements are reviewed well before the proposed 1 July 2028 commencement date.
If you would like to discuss your circumstance in more detail, and how the proposed changes will impact you, please contact our office.
– Brad Sheaves
7/09/2026
This article is compiled as a helpful guide for your private information and is subject to copyright. We suggest that you do not act solely on the basis of material contained in this article because items are of general nature only and may be liable to misinterpretation in particular circumstances. We recommend that our advice be sought before acting on any of these crucial areas.
