Case Studies
Case Study: How an SME Should React to Australia’s Discretionary Trust Tax Shift
An illustrated example explores how a small professional firm can assess whether to restructure trust arrangements ahead of 2028 reforms and calculate trade-offs.
By NomadicTax Research Team • 5-8 min read • June 11, 2026
## Context: Discretionary trusts for SMEs and professional firms
Many small businesses and professional firms in Australia use discretionary trusts (e.g. service trusts) to distribute profits among family members or partners. These structures have historically offered flexibility, income-splitting, and tax rate smoothing. But with Budget 2026 reforms, a **30% minimum tax on discretionary trust income** (trustee level) will apply from **1 July 2028**, with rollover relief starting **1 July 2027**. ([budget.gov.au](https://budget.gov.au/content/04-tax-reform.htm?utm_source=openai))
Let’s see how one SME might respond.
## The case: Smith & Co. Legal Services (fictional but realistic)
- Operated via a discretionary trust “Smith Family Trust” with trustee distributing annual profits as follows:
- Partner A (high income): receives distributions taxed at personal marginal rate of 45%
- Partner B and C (lower incomes): receive distributions taxed at 15–19%
- Company “Smith Pty Ltd” receives some income distributions to act as a “bucket company” for investment income taxed at 25% corporate rate and then dividends issued to shareholders.
- Trust income in FY 2027-28 is AUD 500,000, with distributions split accordingly. Under current rules, no trustee level tax is paid.
## Reform impact on Smith & Co.
| Scenario | What changes after reform (from 1 July 2028) | Effect on tax payable |
|---|---|---|
| Existing trust structure maintained | Trustee must pay **30% tax** on full taxable income ($500,000) = AUD 150,000. Non-corporate beneficiaries get credit for trust tax; corporate beneficiary (bucket company) **does not**. | Corporate distribution loses its benefit. Overall trust tax payable increases significantly vs current where income taxed at beneficiaries’ rates—including lower ones. |
| Restructure to fixed trust or direct company ownership | Trust becomes fixed (no discretionary distributions) or convert to a company for business operations; distributions via dividends or salary. Trustee-level minimum tax avoided. | May pay corporate tax (25%), but able to divide income appropriately; more predictable tax; potential loss of flexibility. |
| Partial restructure | For example allocate more income to non-corporate beneficiaries taxed at high marginal rates to reduce “spillover” to corporate beneficiary. Combine strategies with company ownership of investment assets. | Some mitigation of trustee level minimum tax; complexity and costs of restructuring increase. |
## Lessons from this case
- **Timing matters**: Restructuring should ideally happen during the **rollover window** from 1 July 2027 to 30 June 2030 to take advantage of relief. ([pitcher.com.au](https://www.pitcher.com.au/insights/federal-budget-2026-27-tax-reform-key-dates/?utm_source=openai))
- **Weigh costs vs benefits**: Legal, accounting and potential stamp duty costs may materially affect savings from restructuring.
- **Understand exclusions**: Trusts such as fixed trusts, widely held trusts, super funds, deceased estates etc., may be exempt. Distinguishing fixed vs discretionary and ensuring deeds match classification will be vital. ([budget.gov.au](https://budget.gov.au/content/04-tax-reform.htm?utm_source=openai))
## Action checklist for SMEs / professional firms
- Map out current trust income flows; quantify what you would pay under trustee minimum tax.
- Get advice on whether a fixed trust, unit trust or company structure could achieve similar economic benefits with lower tax under new rules.
- Plan distributions in FY 2027-28 and earlier to optimize beneficiary tax rates under existing rules.
- Review trust deeds to ensure discretionary vs fixed classification is clear.
- Start preparing for administrative requirements (e.g. issuing credits, trustee accountability).
This case shows that while the upcoming reforms pose challenges, they also present opportunities for SMEs to adjust structures and manage tax obligations proactively.