Trust Tax Reform After Consultation: What We Know So Far
The Federal Government's proposed overhaul of the taxation of discretionary trusts has moved another step forward following the recent Treasury consultation process. Although the reforms are not yet law, the consultation materials provide a much clearer indication of how the Government intends the new regime to operate and what it may mean for families, investors and business owners who use trusts.
Background to the Reform
As part of the 2026-27 Federal Budget, the Government announced a proposed 30% minimum tax on discretionary trusts from 1 July 2028. The stated objective is to reduce the tax advantages that can arise through income splitting and to align the taxation of trust income more closely with other forms of personal income.
Under the proposal, trustees would generally be required to pay tax at a minimum rate of 30% on trust income, with beneficiaries receiving tax credits for tax already paid.
What Has Emerged from Consultation?
The consultation process has provided greater clarity about the Government's intentions and highlighted several important concessions.
Testamentary Trusts Appear Protected
One of the most significant developments for estate planning is the Government's indication that genuine testamentary trusts established under a Will are expected to remain outside the proposed regime.
Deceased estates and certain arrangements benefiting vulnerable beneficiaries are also expected to be excluded. This reflects the long-standing role of testamentary trusts in succession planning, asset protection and the management of family wealth across generations.
Family Trusts Remain the Primary Target
The proposed changes are largely directed at traditional discretionary or family trusts. Other trust structures, including fixed trusts, charitable trusts and complying superannuation funds, are expected to remain outside the scope of the new rules.
As a result, families and business owners who rely on discretionary trusts as their primary investment or business structure are likely to be most affected if the reforms proceed.
Restructuring Relief Proposed
Recognising that some taxpayers may wish to move away from discretionary trust structures, the Government has proposed a three-year restructuring rollover commencing from 1 July 2027.
The intention is to allow eligible taxpayers to transfer assets into alternative structures without triggering immediate tax consequences. While the details are still being developed, the proposal suggests that the Government expects at least some trustees to consider alternative structures before the new regime commences.
Significant Questions Remain
Despite the additional detail provided through consultation, important issues remain unresolved. The treatment of corporate beneficiaries, commonly referred to as "bucket companies", and the interaction of the proposed rules with franking credits are still under consideration.
These matters are likely to be closely scrutinised once draft legislation is released.
What Should Trustees Be Doing Now?
Although the reforms are not yet law, they represent the most significant proposed changes to discretionary trust taxation in many years. For now, trustees should avoid making major restructuring decisions based solely on the announcements. However, it is prudent to review existing trust structures, understand potential exposure to the proposed rules, and consider whether greater flexibility may be required in future planning.
The consultation outcomes suggest that the Government remains committed to trust tax reform. While the final shape of the legislation is yet to be seen, families, investors and business owners should be closely monitoring developments over the coming months.
This article is general information only and should not be relied upon as legal or taxation advice. Specific advice should be obtained regarding your individual circumstances.