Family trusts have long been one of the most common structures used by Australian families, business owners, farmers and investors. They can provide flexibility in distributing income to beneficiaries and may assist with asset protection, succession planning and tax management.
However, one of the significant announcements from the 2026 Federal Budget was the Government’s proposal to introduce a minimum 30% tax on discretionary trust income from 1 July 2028, with proposed restructuring relief and specific rules dealing with corporate beneficiaries.
Executive Summary
The proposal would require trustees of discretionary trusts to pay a minimum level of tax on trust income. Beneficiaries would still declare trust income in their own tax returns, but most non-corporate beneficiaries would receive non-refundable credits for tax paid by the trustee. Corporate beneficiaries, including bucket companies, are expected to be treated differently. If they cannot access credits for trustee-level tax, the effective tax rate on some bucket company distributions could approach 55% to 60%. Several trust types are expected to be excluded, and the proposed rollover relief is expected to apply to income tax and CGT only — not stamp duty.
Practical point: The proposal does not mean trusts automatically become redundant. It does mean the tax planning assumptions behind many family trust and bucket company arrangements may need to be reviewed.
The key issue is not whether trusts will disappear — it is whether the tax planning assumptions behind many trust structures may need to change.
Cruz & Co practical planning insight
How Trust Distributions Work Under the Current Rules
Under current Australian tax law, a discretionary trust can distribute income among beneficiaries. Beneficiaries are generally assessed on their share of trust income, provided they are presently entitled to that income. The ATO also highlights the importance of valid trustee resolutions in determining how trust income is distributed.
Current Trust Distribution Model
Trust Earns Income
Business profit, rent,
dividends, interest or
capital gains.
Trustee Resolves Distribution
Trustee determines eligible beneficiaries before year-end.
Beneficiaries Pay Tax
Generally taxed based on each beneficiary’s own tax position.
Which Trusts Are Expected to Be Excluded?
Not every trust is expected to be affected by the proposed 30% minimum tax. This is important because many readers may hear “trust changes” and assume that all trusts are captured.
The proposal is primarily aimed at discretionary trusts, commonly known as family trusts, where trustees have discretion over how income is distributed.
Key Takeaway
If you operate through a fixed trust, widely held trust, complying superannuation fund, charitable trust, special disability trust or deceased estate, the proposed 30% minimum tax may not apply in the same way. The final position should be checked once legislation is released.
How Will Franking Credits Be Treated?
A less publicised but important issue is how the proposed minimum tax will interact with franked dividends. Many family trusts hold Australian shares or receive franked dividends from private companies.
Under the Budget materials, trustees that receive franked dividends are expected to use available franking credits to help pay the minimum trust tax. This may reduce the amount of additional trustee tax payable, but it also creates extra compliance complexity.
Simple Example: Franked Dividend Received by Trust
Cruz & Co Insight
Trusts with Australian share portfolios may not experience the same tax impact as trusts earning business profits, rent or unfranked investment income. However, trustees may need additional calculations to track franking credits, trustee-level tax and beneficiary reporting.
Rollover Relief: Important Limits and Practical Costs
The Government has proposed a three-year restructuring relief period commencing 1 July 2027 and ending 30 June 2030. This window is intended to allow affected taxpayers to review and potentially restructure their affairs before or after the proposed rules commence on 1 July 2028.
However, this point needs to be understood carefully: the proposed rollover relief is expected to apply to income tax and capital gains tax consequences only. It does not cover state and territory stamp duty.
Important: Rollover Relief Does Not Cover Stamp Duty
Even if income tax and CGT rollover relief is available, restructuring may still trigger other costs and complications, including:
- State or territory stamp duty;
- Bank consent and refinancing requirements;
- Contract assignment or novation issues;
- Licence, permit and registration transfers;
- Payroll tax and GST considerations;
- Legal, accounting and valuation costs; and
- Commercial disruption.
For property investors and business owners, stamp duty may be one of the largest restructuring costs. A restructure that appears tax-effective may still be commercially unattractive once state duty, finance and legal issues are considered.
Current Rules vs Proposed Rules vs Alternative Structures
Discretionary Trust
- Flexible annual distributions.
- Beneficiaries taxed at their own rates.
- Strong for family and succession planning.
- Requires valid trustee resolutions.
30% Minimum Trust Tax
- Trustee pays minimum 30% tax.
- Most non-corporate beneficiaries receive non-refundable credits.
- Potentially reduced benefit for low-rate beneficiaries.
- More annual compliance and reporting.
Alternative Structures
- Company structures may be considered.
- Direct ownership may suit some investments.
- Unit trusts may be relevant in some cases.
- Restructuring can trigger tax and duty.
Worked Example
Assume a discretionary trust earns $100,000 and the trustee wishes to distribute that income to family members.
Important
This example is simplified. It does not consider Medicare levy, tax offsets, company beneficiaries, capital gains, franked distributions, streaming rules, trust losses, family trust elections, Division 7A or state-based duties.
Who Could Be Affected?
The proposed changes may affect a broad range of taxpayers who use discretionary trusts, including family businesses, property investors, farming families, professional practices and family investment groups.
What About Bucket Companies?
One of the most common tax planning strategies used by family groups is the use of a bucket company. A bucket company is generally a private company that receives trust distributions and pays tax at the corporate tax rate. This can allow family groups to cap tax on retained profits and defer further personal tax until profits are ultimately paid out as dividends.
Current Bucket Company Strategy
Family Trust Earns Income
Trust generates business or investment income.
Distribution to Bucket Company
Company is made presently entitled to trust income.
Company Tax Outcome
Tax is paid at the corporate tax rate, with profits retained for future use.
How the Strategy Works Today
For example, a family trust may earn $300,000. If family members have already used their lower tax brackets, the trustee may distribute part of the income to a private company. That company then pays tax at the applicable corporate tax rate. This can be attractive where the family group does not need to immediately draw all profits for personal use.
How the Proposed Rules May Affect Bucket Companies
The Budget explainer indicates that corporate beneficiaries will be treated differently. It states that corporate beneficiaries will be assessed on the trust income to which they are entitled, without being able to claim credits for tax payable by the trustee. The stated purpose is to ensure the minimum trust tax cannot be avoided by cycling income through a bucket company.
Key Takeaway for Bucket Companies
Bucket companies may not disappear, but their tax effectiveness could be significantly reduced if corporate beneficiaries cannot access credits for the trustee-level minimum tax. The final outcome will depend on the legislation, but the Budget materials clearly show that bucket company arrangements are within the Government’s focus.
Proposed Bucket Company Treatment
Family Trust
Trust income is subject to the proposed 30% minimum tax regime.
Bucket Company Beneficiary
Corporate beneficiary may still be assessed on trust income.
No Trustee-Tax Credit
Budget materials indicate corporate beneficiaries will not receive the trustee tax credit.
Worked Examples: Why the Effective Tax Rate Could Approach 55%–60%
One of the biggest practical concerns with the proposed rules is the potential interaction between the 30% trustee-level minimum tax and the tax payable by a corporate beneficiary, such as a bucket company.
If a bucket company is assessed on the trust income but does not receive a credit for the tax already paid by the trustee, the same economic income may effectively be taxed twice. This is what gives rise to a potential effective tax rate of approximately 55% to 60%, depending on the company tax rate that applies.
Cruz & Co Warning
Based on the Budget materials, corporate beneficiaries are expected to be assessed on trust income without being able to claim trustee-tax credits. If implemented this way, bucket company strategies could become significantly less attractive and may produce tax outcomes worse than distributing income directly to individuals on the top marginal rate.
Current Bucket Company Strategy
Trust distributes $100,000 to a base rate entity bucket company. Company tax is $25,000 and $75,000 remains after tax.
Proposed Rules: 25% Company
Trustee tax of $30,000 plus company tax of $25,000 may result in total tax of $55,000 on the same $100,000.
Proposed Rules: 30% Company
Trustee tax of $30,000 plus company tax of $30,000 may result in total tax of $60,000 on the same $100,000.
Example 1: Current Rules — Bucket Company Taxed at 25%
Assume a family trust earns $100,000 and distributes the full amount to a bucket company that qualifies for the 25% company tax rate.
Example 2: Proposed Rules — Bucket Company Taxed at 25%
Assume the same $100,000 trust income is distributed to a bucket company, but the trustee is first required to pay the proposed 30% minimum trust tax and the corporate beneficiary does not receive a credit for that trustee tax.
Example 3: Proposed Rules — Bucket Company Taxed at 30%
If the bucket company is taxed at 30%, the total tax outcome could be even higher.
Visual Example: Current vs Proposed Bucket Company Outcome
$100,000 Trust Income
- Distributed to bucket company.
- Company tax at 25% = $25,000.
- $75,000 retained after tax.
- Effective tax rate: 25%
$100,000 Trust Income
- Trustee tax = $30,000.
- Company tax at 25% = $25,000.
- Total tax = $55,000.
- Effective tax rate: 55%
$100,000 Trust Income
- Trustee tax = $30,000.
- Company tax at 30% = $30,000.
- Total tax = $60,000.
- Effective tax rate: 60%
Why This Matters
The major concern is that the proposal could create a tax outcome that is higher than the top individual marginal tax rate, the company tax rate and the current tax outcome for many bucket company strategies. If this remains unchanged in the final legislation, the traditional trust + bucket company strategy may become commercially unattractive for many family groups.
This is likely to be one of the most heavily debated areas during consultation, because the practical effect could be double taxation unless the final rules include a mechanism to prevent it.
What Happens to Existing UPE Arrangements?
Many trusts distribute income to a bucket company without immediately paying the cash. This creates an unpaid present entitlement, commonly called a UPE. The ATO has detailed guidance on the interaction between private company beneficiaries, trust entitlements and Division 7A.
In simple terms, where a private company is made presently entitled to trust income and that amount remains unpaid, Division 7A issues may arise if the arrangement is not managed correctly.
This means the proposed minimum trust tax should not be reviewed in isolation. Family groups with bucket companies should also review existing UPE balances, Division 7A loans, sub-trust arrangements and cashflow practices.
Why Is the Government Considering This Change?
The Budget explainer describes the measure as part of a fairness objective. The Government has noted that discretionary trusts can produce different tax outcomes for families with similar income levels, particularly where income can be split among family members.
A trust review should not just ask “what is the tax rate?” It should ask whether the structure still supports the family’s business, investment, succession and asset protection goals.
Cruz & Co practical planning insight
Key Concerns for Trustees
1. Increased Tax Costs
Families that have historically distributed income to lower-rate beneficiaries may face higher tax costs if the proposal becomes law.
2. Succession Planning Complexity
Trusts are often used for family and succession planning. A tax change may affect how family groups transition business or investment wealth between generations.
3. Restructuring Risk
Moving assets out of a trust may trigger income tax, CGT and state duty consequences. Importantly, the proposed rollover relief is expected to cover income tax and CGT only, not stamp duty. Trustees should avoid rushed restructuring before legislation and detailed guidance are finalised.
4. Additional Compliance
If enacted, the proposal may add complexity to annual trust distribution minutes, beneficiary reporting and tax planning.
What Should Trustees Do Now?
- Do not panic or restructure prematurely.
- Identify whether your trust relies heavily on distributions to lower-rate beneficiaries.
- Review whether bucket companies are being used and whether UPEs exist.
- Review the commercial reasons for the trust, including asset protection and succession planning.
- Model the likely tax impact if a 30% minimum tax applies.
- Check whether your trust is potentially excluded from the proposed regime.
- Consider the stamp duty, finance, contract and licence implications of any restructure.
- Monitor legislation, Treasury consultation and ATO guidance.
References and Further Reading
- Budget 2026–27: Tax Reform — Fairer tax arrangements for discretionary trusts
- Budget 2026–27 Tax Explainer — Minimum tax on discretionary trusts
- Budget Paper No. 1 — Statement 4
- ATO: Trust income
- ATO: Trustee resolutions checklist
- ATO: Family trusts
- ATO: Franked distributions and trusts
- ATO: Division 7A trust entitlements
- ATO: Division 7A and trusts
- ATO Taxation Determination TD 2022/11
- Federal Register of Legislation
About Cruz & Co
At Cruz & Co, relationships are our business. We help business owners, investors and families navigate complex tax matters with proactive advice, practical guidance and personalised support.
Need to Review Your Trust or Bucket Company Structure?
If you operate through a family trust or use a bucket company and would like to understand how the proposed reforms may affect your circumstances, our team can review your structure, model the potential tax impact and help you prepare before the legislation is finalised.
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