Federal Budget 2026 Trust Tax Changes
Federal Budget 2026:
Proposed Trust Tax Changes Explained
What Australian Family Trusts, Business Owners & Property Investors Need to Know
The Federal Budget 2026 has introduced one of the most significant proposed changes to discretionary trust taxation Australia has seen in decades.
While the changes are currently proposed only and have not yet passed Parliament, the announcement has already created significant discussion. Many Australians use discretionary trusts and family trusts for tax planning, asset protection and investment structuring. If legislated, the proposed reforms could potentially impact:
- Tax planning strategies
- Income distribution flexibility
- Property investment structures
- Small business cashflow
- Intergenerational wealth planning
- Asset protection arrangements
- Family business succession planning
At this stage, the legislation may still be amended, delayed or potentially not proceed in its current form.
What Is the Government Proposing?
Under the proposed Federal Budget 2026 trust tax reforms:
- Discretionary trusts may pay a minimum 30% tax on distributed trust income
- Beneficiaries would receive a non-refundable tax credit for tax already paid by the trust
- Beneficiaries on higher marginal tax rates may still pay additional tax
- Beneficiaries on tax rates below 30% may not receive refunds for unused credits
- The proposed commencement date is 1 July 2028
The Federal Government says the proposal aims to:
- Reduce income-splitting opportunities
- Improve tax system fairness
- Align trust taxation more closely with PAYG wage earners
- Simplify some trust tax integrity measures
However, critics argue the proposal could disproportionately affect legitimate family businesses and investment structures that have operated legally for decades.
Why Discretionary Trusts Are So Common in Australia
Discretionary trusts (often called family trusts) are widely used because they can provide:
- Flexible income distribution
- Asset protection
- Succession planning advantages
- Capital gains tax planning opportunities
- Investment flexibility
- Business risk separation
Thousands of Australian small businesses, medical practices, tradies, consultants, investors and farming operations currently operate through discretionary trusts.
If the proposed changes proceed, many of these structures may require review well before 2028.
Example 1: Family Business Using a Trust
A family business currently distributes profits between:
- Two adult children studying at university
- Retired parents on lower marginal tax rates
- The business owners
Under current rules, this may allow the family group to legally manage overall tax outcomes through income distribution flexibility.
Under the proposed Federal Budget 2026 trust tax changes, the trust itself may first pay 30% tax before beneficiaries receive distributions and credits.
This could:
- Reduce the effectiveness of income splitting
- Increase the family’s total tax payable
- Create additional cashflow pressure for small businesses
Example 2: Property Investors Using Family Trusts
Many Australian property investors hold investment properties through discretionary trusts.
For example, an investor may currently distribute rental profits and capital gains between spouses or adult beneficiaries to manage overall tax outcomes.
If the proposed 30% trust tax rules proceed:
- Some beneficiaries may not fully utilise tax credits
- Effective tax rates may increase
- Future property investment structuring decisions may change
- Trust-held investment portfolios may become less tax effective in some cases
This is particularly relevant for:
- Property investors
- Airbnb investors
- Holiday home owners
- Multi-property family groups
- Long-term capital growth investors
Example 3: Professional Services & Medical Practices
Many professional businesses use discretionary trusts alongside companies or bucket company arrangements.
For example:
- Medical practices
- Consultants
- Accountants
- Builders
- Marketing agencies
- Financial advisers
A consulting business operating through a discretionary trust may currently distribute profits across family members while also retaining profits through a corporate beneficiary.
If the proposed trust tax reforms proceed, some existing structures may become less efficient, potentially leading to:
- Business restructuring
- Increased reliance on companies
- Changes to beneficiary arrangements
- More complex tax planning strategies
What Is Still Unclear?
Several important details remain uncertain under the current proposal, including:
- Exemptions
- Transitional rules
- Treatment of testamentary trusts
- Corporate beneficiary arrangements
- Restructuring relief
- Capital gains treatment
- Interaction with existing anti-avoidance rules
There has also been public debate regarding whether the reforms could indirectly affect intergenerational wealth transfer planning, although the Government has rejected claims the proposal resembles a “death tax.”
Key Takeaways and Important Points to Understand
The proposed trust tax changes are not yet law
Proposed commencement date is 1 July 2028
Existing family trusts may still be affected
Property investors and small businesses could face higher taxes
Trust distribution strategies may need review
Restructuring opportunities may exist before commencement
Professional tax advice is critical before making changes
Frequently Asked Questions (FAQ)
What is a discretionary trust?
A discretionary trust (family trust) allows trustees to decide how income is distributed between beneficiaries each financial year.
Is the 30% trust tax already law?
No. The changes are currently proposed only and still need to pass through Parliament.
When would the proposed changes start?
The Government has proposed a commencement date of 1 July 2028.
Will existing family trusts be affected?
Current commentary suggests existing discretionary trusts may be captured if the legislation proceeds.
Should I restructure my trust now?
Because the legislation is still uncertain, major restructuring decisions should only occur after receiving professional advice.
Speak With Cashflow Financial
At Cashflow Financial, once further legislation and guidance become available, we will be working closely with our tax lawyers and professional advisers to assess the best strategies and potential options for our clients moving forward.
Until the legislation is finalised, we believe it is important that business owners and investors avoid making rushed restructuring decisions without professional advice.
If you operate through a discretionary trust or are concerned about how the proposed Federal Budget 2026 trust tax changes may affect your personal or business situation, contact Cashflow Financial to discuss your circumstances and stay informed as further updates emerge.