Are Trusts Still Tax Effective After the 2026 Budget?
The 2026 Budget introduced a 30% minimum tax on discretionary trust income from July 2028, reducing the benefits of income splitting. However, trusts still offer value for asset protection, succession planning, and family wealth management. Fixed trusts and several other trust structures remain exempt, while rollover relief creates time to review existing arrangements.
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Introduction
Discretionary trusts have been one of the most widely used wealth structures in Australia for decades.
Business owners have used them to protect assets. Families have used them to pass wealth between generations. Investors have used them to hold property and shares. They have also been popular because they offered flexibility when distributing income among family members.
The 2026 Federal Budget changes that equation. From 1 July 2028, discretionary trusts will face a new 30% minimum tax on taxable income. The Government says the goal is to ensure income earned through trusts is taxed more consistently with income earned through work.
For families who have relied on discretionary trusts to reduce tax through income splitting, the rules are changing. However, that does not mean trusts are dead, nor does it mean every trust should be unwound.
The real question is whether trusts remain worthwhile once some of their tax advantages are reduced.
What Changed for Discretionary Trusts?
From 1 July 2028, discretionary trusts will be subject to a 30% minimum tax on taxable income.
The trustee will be responsible for paying this tax because the trustee controls how trust income is distributed.
Beneficiaries will still need to include trust distributions in their own tax returns. However, individual beneficiaries will receive a non-refundable tax credit for the tax already paid by the trustee.
The Government wants to reduce the benefit of distributing income to family members on very low tax rates. For example, if a family previously distributed investment income to adult children, retired parents, or other beneficiaries with little taxable income, the overall family tax bill could be reduced. The new rules are designed to limit that outcome.
Does This Mean Income Splitting No Longer Works?
Not entirely. The biggest impact will be felt by families whose primary reason for using a discretionary trust was to achieve a total tax rate below 30%.
Once a 30% minimum tax applies, the savings available from distributing income to low-income beneficiaries are reduced.
That does not mean trust distributions disappear. Trustees will still have flexibility in how income is allocated.
What changes is the size of the tax benefit that flexibility can deliver.
For some families, the trust may still make sense. For others, the numbers may no longer stack up the way they once did.
Which Trusts Are Not Affected?
One of the most important points for investors to understand is that the new rules do not apply to every trust.
Several trust structures are specifically excluded.
These include:
· Fixed trusts.
· Fixed testamentary trusts.
· Special disability trusts.
· Charitable trusts.
· Deceased estates.
· Complying superannuation funds.
If you use one of these structures, the new 30% minimum tax does not apply.
This is particularly relevant for families already using fixed trusts or those considering different structures for long-term wealth planning.
Are There Any Types of Income That Remain Exempt?
Yes. Even within discretionary trusts, certain income streams are excluded from the new minimum tax. These include:
· Primary production income.
· Certain income relating to vulnerable minors.
· Income from assets held in existing discretionary testamentary trusts.
The details will matter, particularly for farming families and those with estate-planning arrangements already in place.
If Trusts Lose Tax Benefits, Why Would Anyone Still Use Them?
Because tax is only one reason people use trusts. In practice, many successful families use trusts for reasons that have little to do with annual tax savings. The key takeaway is that a trust does not become useless simply because one tax advantage is reduced.
Asset Protection
Trusts can help separate personal assets from business and investment activities. For business owners, professionals, and investors, this can be a valuable layer of protection against future claims or creditor risks.
Succession Planning
Trusts can help families transfer wealth across generations in a controlled manner. Rather than assets passing directly to beneficiaries, trustees can manage how and when wealth is distributed.
Family Wealth Management
Families use trusts as a central structure for holding investments, shares, and property. Even if the tax outcome changes, the administrative and estate-planning benefits may still justify keeping the structure.
Should You Move Assets Out of Your Trust?
For some families, that question will become increasingly relevant over the next few years. Recognising this, the Government is introducing a restructuring window.
From 1 July 2027 until 30 June 2030, expanded rollover relief will allow eligible assets to be moved from discretionary trusts into alternative structures without triggering immediate tax consequences.
This means investors may be able to transfer assets into:
· Companies.
· Fixed trusts.
· Other eligible structures.
Without rollover relief, these transfers could create Capital Gains Tax and other tax liabilities. The relief gives families time to assess their options before the new trust tax rules take effect.
Could Companies Become More Attractive?
In some situations, yes. The Budget continues to support a 25% corporate tax rate for eligible small companies with turnover below $10 million.
Companies also offer advantages that trusts do not.
These include:
· The ability to retain profits.
· Greater certainty around tax rates.
· Simpler treatment of retained earnings.
· Access to loss carry-back provisions.
That does not mean companies automatically replace trusts.
Trusts and companies serve different purposes and often work together within broader wealth structures. However, the gap between the two structures may narrow after 2028.
What Should Trust Owners Do Now?
There is no need to rush into major changes.
The new rules do not begin until 1 July 2028, and rollover relief will be available for three years from 1 July 2027.
That gives families time to assess:
· Whether their trust still achieves its objectives.
· How much value they receive from income splitting.
· Whether asset protection remains a priority.
· Whether a company or fixed trust may be more suitable.
· How the trust fits into their long-term estate plan.
The worst response is usually making structural changes before understanding the broader consequences.
So, Are Trusts Still Tax Effective After the 2026 Budget?
The answer depends on why the trust exists.
If the primary objective was distributing income to family members on very low tax rates, the new rules reduce much of that benefit.
If the trust exists to protect assets, manage family wealth, support succession planning, or hold investments over the long term, it may remain an effective structure even after the reforms.
The Budget does not eliminate trusts. It changes the reasons people may choose to use them.
For many families, the next few years will be an opportunity to review whether their current structure still aligns with their goals and whether a different approach could deliver a better outcome.
If you own assets through a discretionary trust and want to understand how the proposed changes could affect your family wealth strategy, book a free 15-minute call with James Hayes for personalised financial planning advice.
Disclaimer
The information in this article is provided as a general guide only. It does not constitute personal financial advice and should not be relied upon as such. Readers should seek advice from a licensed financial adviser before making any financial decisions. James Hayes and his associated entities accept no responsibility or liability for any loss, damage, or action taken in reliance on the information contained in this article. Links to third-party websites are provided for reference purposes only. We do not endorse or guarantee the accuracy of their content.