Proposed discretionary trust tax changes could leave business owners facing an important choice.
The Federal Government has proposed a 30% minimum tax on discretionary trusts from 1 July 2028. But a new option in the draft legislation could allow some trusts to avoid the tax without restructuring.
The trade-off? Trustees may need to give up the flexibility to decide how income and capital are distributed between beneficiaries.
For some businesses and families, that could be a practical solution. For others, that flexibility may be one of the main reasons the trust was established in the first place.
The question is therefore not simply whether the proposed election could reduce tax.
It is what you may be giving up in return.
What are the proposed discretionary trust tax changes?
The proposed minimum tax was announced as part of the Federal Government’s 2026–27 Budget tax reform package.
Under the proposed reforms, trustees of discretionary trusts will generally face a minimum tax rate of 30% on taxable income from 1 July 2028.
The reform is targeted specifically at discretionary trusts rather than trusts generally. The Government has proposed exclusions for a range of structures and income, including certain charitable trusts, special disability trusts, superannuation funds, deceased estates, genuine testamentary trusts and primary production income.
The Government estimates that fewer than 10% of Australia’s 2.7 million active small businesses will be affected by the reforms in any given year.
A new alternative to restructuring
Until now, one of the options for businesses concerned about the proposed tax has been to consider moving away from a discretionary trust structure.
This might involve restructuring into a company, fixed trust or another arrangement.
To assist, the Government has proposed expanded federal tax roll-over relief for a three-year period from 1 July 2027.
But restructuring is rarely just a tax decision.
Discretionary trusts can hold land, shares, intellectual property and other valuable business assets. Moving those assets or changing the structure through which they are held can have wider tax, duty, legal and commercial consequences.
The latest exposure draft proposes another option.
Rather than restructuring, an eligible discretionary trust could elect to make fixed distributions to ore-nominated beneficiaries. If the requirements are satisfied, the trust could remain in place and be exempt from the proposed minimum tax.
The Government says this would not require the trust itself to be restructured and is therefore not expected to result in state or territory stamp duty.
What would you give up?
The attraction of the proposed election is clear. A business may be able to retain its existing trust structure while avoiding the minimum tax.
But there is an important trade-off.
Once the election applies, the trustee would no longer have the same freedom to vary distributions between beneficiaries each year.
That matters because flexibility is one of the reasons discretionary trusts have traditionally been used in business and family structures.
Depending on the circumstances, that discretion can play a role in:
- family and succession planning
- responding to changing family circumstances
- asset ownership and protection strategies
- managing and deploying business wealth
- taxation outcomes within the limits of tax law.
For some trusts, that discretion may rarely be used in any meaningful way.
For others, it may be fundamental to how the business or family’s affairs are managed.
The decision therefore needs to consider more than the potential tax saving.
What are the options?
If the reforms proceed substantially in their current form, affected business owners may need to consider three broad pathways.
Keep the existing discretionary arrangements
A trust could continue operating on a discretionary basis and accept the tax consequences of the new regime where they apply.
Whether this results in a materially higher tax burden will depend on the trust’s income, distributions and wider circumstances.
Make the fixed-distribution election
The trust could remain structurally intact while committing to fixed distributions to nominated beneficiaries.
This may avoid the minimum tax and the need for a formal restructure, but the long-term value of the flexibility being surrendered needs to be considered carefully.
Restructure
Some businesses may decide that a company, fixed trust or another structure better suits their future needs.
Proposed federal roll-over relief may reduce some income tax and capital gains tax consequences, but businesses will still need to consider state and territory duties, transaction costs and the wider implications of moving assets or changing structures.
There will be no single answer that is right for every business.
Look beyond the tax outcome
Before making a decision, business owners should understand why their trust exists and what they need it to do in the future.
That means looking beyond the immediate tax position.
What does the trust deed currently allow? Who are the beneficiaries? How important is the trustee’s discretion? What assets are held within the trust? How does the structure fit with the owners succession plans?
Changing the structure, or materially changing how an existing trust operates, could also affect financing arrangements, contracts, licences, asset protection strategies and relationships between beneficiaries.
These considerations can be particularly important where a trust holds a family business or substantial assets intended to be managed across generations.
Solving a tax problem should not create a larger legal, commercial or succession problem elsewhere.
What should business owners do now?
The proposed minimum tax is not due to commence until 1 July 2028 and the legislation remains in draft form.
There is no need to rush into restructuring based on the current proposal.
However, business owners using discretionary trusts can use the lead time to understand their existing arrangements, review their trust deeds and consider how the proposed changes could affect them.
The exposure draft is open for consultation until 18 September 2026, with further legislation dealing with implementation, administration and integrity measures also expected.
Once the final legislation is known, affected businesses will be in a better position to compare the tax, legal, commercial and succession consequences of the available options.
For many, that will require their legal and tax advisers to work together.
The important question will not simply be which option produces the lowest tax?
It will be which structure best supports what the business and family are trying to achieve in the years ahead?
Before you change your trust structure, understand what else could change with it.
Archer Scott can work alongside your tax and financial advisers to consider the legal, commercial and succession implications of the options available.
Talk to our team about your structure
This article contains general information only and does not constitute legal, taxation or financial advice. Advice should be obtained in relation to your particular circumstances.
