New Entity Tax Regime for Discretionary Trusts
The 2026-27 Federal Budget introduces a 30% minimum tax on the taxable income of most discretionary trusts, starting 1 July 2028. This represents a major shift for entities that distribute income among beneficiaries in ways that reduce tax liability.(budget.gov.au)
What’s Included and What’s Exempt
- Most discretionary trusts will be included. Widely held trusts (such as most managed investment trusts) and super funds are exempt.(budget.gov.au)
- Beneficiaries receive non-refundable credits for tax paid by the trustee. But if a beneficiary is taxed at more than 30%, they will pay the difference; if less, no refund for the gap.(kpmg.com)
- Rollover relief available for 3 years from 1 July 2027 to help businesses and individuals restructure into other entity types (companies, fixed trusts) where possible.(budget.gov.au)
Why Businesses Must Act Now
- Entities currently structured as discretionary trusts should assess whether their current distributions could trigger high tax under new rules.
- Some may benefit from converting to fixed trusts or companies to avoid the minimum-trust rate. Using the rollover relief period (2027-28 to 2030) may save costs and avoid abrupt transitions.
- Tax planning now can help reduce litigation or compliance risk later.
Example: Restructuring Decision
TrustCo, a family discretionary trust distributing to low-rate beneficiaries to minimize tax, projects $150,000 of taxable trust income in 2028. Under current rules, distributions and beneficiary tax brackets yield effective rates well below 30%. Post 1 July 2028, TrustCo will face a 30% minimum trustee tax obligation. If beneficiaries are taxed individually at higher rates, they pay extra; if lower, no refunds. TrustCo could restructure into separate companies or fixed trusts during the 3-year rollover window to reduce trustee tax liability.
Compliance & Setup Guidance
- Engage a tax or legal adviser between now and 30 June 2027 to explore restructure options.
- Ensure all trust deeds are reviewed to determine flexibility, constraints, and whether they allow for changing distribution methods or beneficiaries.
- Maintain clear records of distributions, beneficiary details, and trustee decisions to support trust tax lodgements under new law.
These changes shake up long-standing advantages of discretionary trusts. With new limits and minimum rates, setup decisions today can significantly affect tax exposure tomorrow.