On 12 May 2026, the Federal Government announced one of the most significant changes to trust taxation in a generation.
From 1 July 2028, trustees of discretionary trusts will pay a minimum 30% tax on the trust’s taxable income – a fundamental departure from the long-standing flow-through treatment that has underpinned family trust planning in Australia for decades.
The announcement has triggered immediate questions from clients who hold business interests, investment portfolios, or estate planning arrangements through discretionary trusts. It also raises pointed questions for families who use testamentary trusts (trusts created inside a will that activate on death) as a core part of their succession planning.
This article sets out what the measure does, who it affects, how the numbers work in practice, and what families and business owners should be thinking about between now and 1 July 2028.
What the measure does
Under the current law, a discretionary trust is taxed as a flow-through vehicle. The trust itself generally pays no tax. Instead, income is distributed to beneficiaries who are presently entitled to it, and each beneficiary pays tax on their share at their own marginal rate. This is the mechanism that allows families to “split” income across multiple beneficiaries (typically a working spouse, a non-working spouse, and adult children) to reduce the household’s overall tax bill.
The announced measure changes this in three core ways:
- The trustee will pay a minimum tax of 30% on the taxable income of the trust. This is paid at the trustee level, before any distribution.
- Non-corporate beneficiaries (individuals) who receive a distribution will be given a non-refundable credit for their share of the trustee’s tax. If the beneficiary’s marginal rate is above 30%, they pay top-up tax on the difference. If the beneficiary’s marginal rate is below 30%, the excess credit is lost.
- Corporate beneficiaries (the “bucket companies” that have become a standard feature of discretionary trust structures) will not receive any credit at all. They are instead assessed on the trust income to which they are entitled. This produces two layers of tax on the same income, with no relief between them. The design is plainly intended to discourage bucket company structures.
The Government has indicated a three-year restructure rollover (running from 1 July 2027) to assist families and businesses in restructuring before the measure takes effect.
What is excluded
The measure does not apply to every trust. The carve-outs include:
- Fixed trusts and widely held trusts (including fixed testamentary trusts)
- Complying superannuation funds
- Charitable trusts
- Special disability trusts
- Deceased estates (during the administration period)
- Testamentary trusts in existence on 12 May 2026
Specific income categories are also carved out, including primary production income, certain income derived by vulnerable minors, and amounts already subject to non-resident withholding tax.
What this means for testamentary trusts
The testamentary trust position requires careful attention, because the announced carve-out is narrower than headline summaries suggest.
A fixed testamentary trust appears excluded on the basis of its character – fixed trusts are excluded generally. A discretionary testamentary trust appears excluded only if it was already in existence on 12 May 2026.
Several questions remain unresolved on the materials available so far:
- The treatment of discretionary testamentary trusts created after 12 May 2026 (for example, trusts that will arise under wills already executed but where the testator dies after the announcement date).
- Whether amendments to an existing will, or the execution of a new will after 12 May 2026, will affect the grandfathered status of the resulting trust.
- How the existing s 102AG concessional rate for “excepted trust income” distributed to minors from testamentary trusts will interact with (or be preserved alongside) the 30% minimum tax for trusts that fall within the new regime.
These questions cannot be answered with confidence until exposure draft legislation is released. They are, however, the questions every family with an existing will or estate plan should be asking now.
Worked examples
The examples below assume Australian-resident adult beneficiaries with no other income, no franking credits, no CGT discount amounts, and no excluded income categories. Medicare levy is excluded for simplicity. The calculations use the 2024–25 resident individual tax rates as a working proxy – the rates and thresholds applicable in the 2028–29 income year are not yet known.
Example 1 – Trust with one adult beneficiary, $100,000 of income
| Component | Amount |
|---|---|
| Trust taxable income | $100,000 |
| Trustee minimum tax (30%) | $30,000 |
| Beneficiary assessable income | $100,000 |
| Beneficiary’s tax on $100,000 | $20,788 |
| Non-refundable credit for trustee tax | $30,000 |
| Top-up tax payable | nil |
| Excess credit (lost) | $9,212 |
| Total tax borne on the $100,000 | $30,000 |
| Effective rate | 30.00% |
Under current law, the same individual would pay $20,788. The new measure adds $9,212 of tax to this arrangement, because the excess credit cannot be refunded.
Example 2 – Trust with three adult beneficiaries, $100,000 split equally
| Component | Per beneficiary | Total (3) |
|---|---|---|
| Assessable income | $33,333 | $100,000 |
| Beneficiary’s tax | $2,421 | $7,264 |
| Credit (share of trustee tax) | $10,000 | $30,000 |
| Top-up payable | nil | nil |
| Excess credit (lost) | $7,579 | $22,736 |
| Total tax borne | $30,000 | |
| Effective rate | 30.00% |
Under current law, three beneficiaries each on $33,333 would pay $7,264 in total. The new measure increases the burden by $22,736 – more than tripling the tax payable.
Example 3 – Trust with five adult beneficiaries, $100,000 split equally
| Component | Per beneficiary | Total (5) |
|---|---|---|
| Assessable income | $20,000 | $100,000 |
| Beneficiary’s tax | $288 | $1,440 |
| Credit (share of trustee tax) | $6,000 | $30,000 |
| Top-up payable | nil | nil |
| Excess credit (lost) | $5,712 | $28,560 |
| Total tax borne | $30,000 | |
| Effective rate | 30.00% |
Under current law, five beneficiaries each on $20,000 would pay $1,440 in total. The new measure increases the burden by $28,560 – a roughly twenty-fold increase. The income-splitting benefit of the discretionary trust is entirely collapsed where every beneficiary sits below the 30% marginal rate.
Example 4 – $100,000 of interest income earned by an individual directly (no trust)
For comparison, an individual earning $100,000 of interest income in their own name pays:
| Bracket | Amount | Rate | Tax |
|---|---|---|---|
| $0 – $18,200 | $18,200 | 0% | $0 |
| $18,201 – $45,000 | $26,800 | 16% | $4,288 |
| $45,001 – $100,000 | $55,000 | 30% | $16,500 |
| Total | $100,000 | $20,788 |
Effective rate: 20.79%.
Comparison
| Structure | Total tax | Effective rate | |
|---|---|---|---|
| 1 | Discretionary trust, 1 beneficiary | $30,000 | 30.00% |
| 2 | Discretionary trust, 3 beneficiaries | $30,000 | 30.00% |
| 3 | Discretionary trust, 5 beneficiaries | $30,000 | 30.00% |
| 4 | No trust, individual earns directly | $20,788 | 20.79% |
The conclusion from these four scenarios is straightforward: under the proposed measure, holding income-producing assets through a discretionary trust produces a worse outcome than holding them personally, for any income level where the individual’s average rate sits below 30%. The number of beneficiaries does not matter. The splitting benefit is gone.
Three further scenarios that illustrate the design
Example 5 – High-income trust, mix of high and low rate beneficiaries
Trust taxable income of $300,000 split equally between three adult beneficiaries ($100,000 each). Beneficiary 1 has $200,000 of other salary income; Beneficiary 2 has $50,000 of other salary income; Beneficiary 3 has no other income.
Trustee minimum tax at 30%: $90,000 ($30,000 credit per beneficiary).
| B1 (high) | B2 (mid) | B3 (none) | |
|---|---|---|---|
| Other income | $200,000 | $50,000 | $0 |
| Trust distribution | $100,000 | $100,000 | $100,000 |
| Tax attributable to distribution | $42,750 | $32,550 | $20,788 |
| Trustee credit | $30,000 | $30,000 | $30,000 |
| Top-up payable | $12,750 | $2,550 | nil |
| Excess credit (lost) | – | – | $9,212 |
| Tax borne on distribution | $42,750 | $32,550 | $30,000 |
Total tax on the $300,000: $105,300. Under current flow-through law: $96,088. The extra tax under the measure is exactly the wasted credit on B3’s distribution.
The point: the measure is neutral for above-30% beneficiaries. The credit mechanism produces parity with current law for them. The entire cost of the measure is concentrated on distributions to beneficiaries below the 30% threshold.
Example 6 – Bucket company beneficiary
Trust taxable income of $200,000 distributed entirely to a corporate beneficiary taxed at 25%.
| Step | Amount |
|---|---|
| Trustee minimum tax (30%) | $60,000 |
| Corporate beneficiary assessable income | $200,000 |
| Company tax (25%) | $50,000 |
| Credit available to company | nil |
| Total tax at the corporate/trust layer | $110,000 |
| Effective rate before dividend to shareholders | 55.0% |
If the company then pays the after-tax balance as a dividend, further tax arises at the shareholder’s marginal rate. The trustee-level $60,000 does not generate franking credits, so only the company’s $50,000 of tax is available to frank dividends.
The point: bucket company structures become economically punitive under the announced design. Two layers of tax stack on the same income with no credit relief between them. Even before any dividend is paid, the effective rate is 55%. The legislative detail here remains the most unsettled part of the announcement, and the design will need careful review when exposure draft legislation is released.
Example 7 – Trustee retains income (no beneficiary presently entitled)
Trust taxable income of $40,000, retained by the trustee. Under current law this attracts s 99A tax at 45% – $18,000.
The announced minimum tax sets a floor, not a ceiling. It applies “unless higher rates already apply”. Where trustee income is taxed under s 99A at 45%, that higher rate continues. The minimum tax does not reduce the trustee’s liability.
The point: the measure does not displace existing higher trustee rates. It is targeted at one specific pattern of use – income flowing out to beneficiaries on low marginal rates – not at every aspect of discretionary trust taxation. Some commentary has framed the measure as a comprehensive overhaul. It is not.
What this means in practice
For families with discretionary trust structures, several practical conclusions follow from the announced design:
Income splitting to low-rate beneficiaries no longer works. The pre-eminent income tax advantage of the discretionary trust – the ability to direct distributions to spouses, adult children, or other family members on lower marginal rates – is removed for any beneficiary below the 30% threshold. The credit mechanism ensures that the tax payable on the distribution is always at least 30%, regardless of who receives it.
Non-tax reasons for discretionary trusts remain. Asset protection, succession flexibility, creditor insulation, and the ability to alter distributions as family circumstances change are all unaffected by the measure. The case for a discretionary trust does not disappear – it shifts. For many families, those non-tax reasons remain compelling on their own.
Bucket company structures require urgent review. The double-taxation outcome for corporate beneficiaries is severe, and the three-year rollover window (from 1 July 2027) is designed to allow restructuring before the measure takes effect. Families with bucket companies should be reviewing their structures now, not closer to 1 July 2028.
Testamentary trusts need a careful look. Trusts in existence on 12 May 2026 are grandfathered, but the position for trusts arising under wills executed before that date – but where the testator dies after – is unclear. Families with existing wills should obtain advice on whether their estate planning remains effective under the announced regime, and whether any amendments are warranted.
The 1 July 2028 commencement is closer than it looks. The intervening period is intended for legislative drafting, consultation, restructure, and transitional planning. Families who delay until the legislation is enacted will have a compressed window to act, and may miss the rollover relief.
Important caveats
The measure is announced, not enacted. Significant design details remain unsettled, including:
- The mechanics of how corporate beneficiaries are “assessed” and whether any credit is allowed at the dividend stage
- The interaction with section 100A and existing anti-avoidance provisions
- The treatment of franked dividends and capital gains within the regime
- The precise scope of the testamentary trust carve-out
- Whether the s 102AG concessional rate for excepted trust income is preserved
Exposure draft legislation is expected in due course, and the design may shift in material ways during consultation. The worked examples above use 2024–25 individual tax rates as a proxy; the rates and thresholds for the 2028–29 income year are not yet known. Medicare levy has been excluded from the calculations for simplicity. Real-world figures will differ.
Frequently asked questions
QDoes this mean testamentary trusts are no longer worth including in a will?
Not at all. The asset protection, family law protection, and vulnerable beneficiary protections remain entirely intact regardless of the tax treatment. For many families, those benefits alone justify using a testamentary trust. The proposed changes reduce the tax advantage – they do not eliminate the other reasons these structures exist. A testamentary trust that protects a vulnerable child’s inheritance from being lost to addiction or a failed relationship does not become less valuable simply because the income tax concession shrinks.
QMy will already includes a testamentary trust – do I need to change it now?
Probably not immediately. Testamentary trusts in wills existing at 12 May 2026 appear to attract a specific exemption under the budget papers – income from those trusts is a carved-out category. However, you should confirm with your solicitor whether your existing will’s trust provisions are discretionary or fixed, and monitor developments as the legislation is finalised. Making changes before the law is settled may be premature.
QIs this really a death tax?
Not technically. Australia abolished death duties in 1979. A death tax is a tax imposed on the transfer of assets at death. What the government is proposing is a change to how income distributed from discretionary trusts is taxed in the hands of beneficiaries after the trust is operating. The practical effect for some families may feel similar – particularly for those who established testamentary trusts specifically for the income tax concession – but legally and structurally, it is a different thing. The characterisation has stuck in the media because it resonates, not because it is legally precise.
QShould I sign a new will before the legislation is finalised?
If your existing will is current, reflects your wishes, and already includes testamentary trust provisions created before 12 May 2026, there is no urgency to sign a new will purely because of the budget announcement. For those who do not yet have a will – or whose existing will is significantly out of date – the budget announcement is a useful prompt to act, but the trust tax question should not drive the timing. The overall quality and currency of your estate plan matters more than the trust tax position, which remains subject to change.
Disclaimer: The contents of this article are considered accurate as at the date of publication. The information contained in this article does not constitute legal advice. Readers should seek legal advice about their specific circumstances.
