What the Changes to Rules on Trusts Could Mean For You

Our inboxes have been flooded with “what does this mean for me?” related questions since the Federal Budget was handed down last Tuesday – mainly in regards to the changes to Trusts. And you’re right to have questions! The announcement is a fundamental shift in how trusts are taxed and it means changes in structure and tax strategy are coming from 1 July 2028.

We want to point out that whilst these changes have been announced, they have not formed legislation yet – which means nothing is set in stone! For now though, here’s what’s changing, what it means in practice, and what to do next.

What actually changed?

From 1 July 2028, trustees of discretionary trusts will pay a minimum 30% tax on the trust’s taxable income, before any distributions are made.

Until now, trusts have been one of the most powerful tools for managing tax across a family group. Distribute income to a spouse, a student kid, or a retired parent on a low marginal rate, and the family unit pays significantly less tax overall. That flexibility is part of what made discretionary trusts so widely used. Treasury estimates around 350,000 active small businesses operate through one.

That flexibility is now being heavily curtailed.

How the 30% floor actually works

The mechanics matter here, because the way the tax credit system operates changes the outcome significantly depending on who your beneficiaries are.

Beneficiaries still declare their share of trust income and pay tax at their marginal rate. Non-corporate beneficiaries receive a non-refundable credit for the trustee’s tax already paid. Corporate beneficiaries (like bucket companies) get no credit at all. This is a deliberate design choice the government has baked into the proposed legislation.

In practice, that means three very different outcomes depending on your situation.

1. If your beneficiaries are already on marginal rates of 30% or higher, not much changes. The credit cancels the trustee’s tax and they pay what they would have paid anyway.
2. If your beneficiaries are on rates below 30% (often students, retired parents, a stay-at-home spouse) the excess credit is lost. The 30% sticks. Income splitting to low-rate beneficiaries, one of the primary reasons people set trusts up in the first place, is effectively dead in the water.
3. If you’ve been distributing to a bucket company, the trust pays 30% minimum tax and the company gets no credit. When the company eventually pays a dividend to you, it pays tax again. The effective rate on that income can push past 50% – double taxation by design.

What the changes to trusts mean in practice

A physiotherapy practice with $350K profit, a working spouse, and a teenager at TAFE. 

Today, distributing income across the family (some to the operator, some to the spouse, a portion to the teenager, and the rest to a bucket company)  produces a manageable total tax bill because of the spread across lower marginal rates. Under the new rules from FY29, the same distribution pattern pushes the tax bill up significantly, with the 30% floor applying before anything reaches a beneficiary. The better long-term path for a business retaining and reinvesting earnings is a company structure at 25%, but rather than dissolving the trust, it can continue to sit above the company shares, preserving asset protection without being the primary income vehicle.

A landscaping business with $280K profit, a spouse managing admin, and an adult child working in the field. 

This one is instructive because the answer depends entirely on whether family members are genuinely working in the business. If the spouse is legitimately managing bookkeeping and the kid is on the tools full time, paying them actual wages, rather than trust distributions, costs roughly the same in tax as the current structure and stays defensible. Wages aren’t caught by the minimum tax, distributions are. The trust stays in place, asset protection stays intact, and the tax position is clean. Run it as pure trust distributions under the new rules and the bill jumps by roughly 35%.

A property investor distributing $120K to a bucket company for retention. 

Under today’s rules, that $120K hits the bucket company at the corporate rate and sits there efficiently. Under the new rules, the trustee pays 30% minimum tax first, the company receives the remainder with no franking credit, and then pays tax again when it eventually distributes a dividend to the shareholder. The effective rate on that income ends up well north of 50%. The bucket company as a new distribution strategy is effectively finished – though existing retained earnings inside bucket companies already taxed at the corporate rate are a separate matter and should be wound down deliberately rather than hastily replaced.

What if you’re already operating as a company with a trust as the holding structure?

This is a question we’re hearing a lot, and the short answer is: the repercussions are more limited, but they’re not zero.

If your trust’s primary role is as a holding shell over company shares – and it isn’t earning or distributing significant taxable income of its own – the day-to-day impact is relatively contained. The company continues to operate and pay tax at the corporate rate as it always has.

The issue arises when the trust itself is earning income like rent, investment returns, or distributions from other entities, and then passing that down. In those situations, the 30% minimum tax still applies at the trust level before anything moves. And if the trust eventually distributes to individual beneficiaries on lower marginal rates, or to another bucket company, the same problems apply.

So if you’re in this position, the structure probably doesn’t need an urgent overhaul, but it may need a review once the legislation is passed and we have a true understanding of the exact changes. The question is whether the trust is genuinely passive, or whether it’s quietly doing income work that will now cost more than it used to.

The advice you’ve probably read, and why it’s incomplete

You’ll hear two things a lot over the next 18 months: “just incorporate” and “move it to a fixed trust.” Both of these solve the tax problem. Both of them can compromise everything else the trust was doing.

A trust was never just a tax vehicle. It was a wealth protection structure. Trusts provide strong asset protection; assets sit outside your personal estate, harder for creditors, ex-spouses, and litigation to reach. They allow flexible succession so you can hand control between generations without triggering CGT on every transfer. And, they give year-by-year income flexibility based on changing circumstances.

A company gives you none of that in the same way. Your shares are your personal asset – visible, attachable, and divisible in a divorce. Every share movement is a CGT event. Changing shareholders triggers value transfers, Division 7A risks, and paperwork.

A fixed trust solves the minimum tax problem but removes every reason you used a discretionary trust in the first place. Entitlements lock in – you can’t change who gets what based on who loses their job or starts a business. Converting from a discretionary trust to a fixed trust can trigger state duty events the federal rollover doesn’t cover. Loss flexibility goes. Succession gets harder, not easier. A fixed trust isn’t a discretionary trust with the tax problem removed, it’s a different structure with a different risk profile.

Some situations are worse than they look (eek!)

There are two scenarios that aren’t getting enough attention yet.

Losses get stranded

Today, a trust in a loss position carries those losses forward and offsets future income. Under the new rules, the 30% trustee tax applies at the trustee level on taxable income, and the credit is non-refundable to the receiving beneficiary. Structures with multiple trusts lose the practical ability to net income against losses across the group. Consolidated company groups get this advantage automatically. If you run a multi-entity family group, the case for consolidating into a corporate structure just got stronger.

Where a trust distributes to a company the income will be taxed twice 

Under these proposed changes the trust will pay 30% tax and then the company will pay tax again at 30% prior to the income being paid out. The tax paid by the trust can’t be used to reduce the tax paid by the company. When the dividend is paid out from the company only the company tax will be available to reduce the tax of the recipient and the trust tax is forgone.  

What not to do

• Don’t dissolve the trust entirely. Even if it’s no longer working as a distribution vehicle, the asset protection layer is still doing its job. Keep the structure, change the function
• Don’t restructure in a panic before 30 June 2027. The rollover window opens 1 July 2027 but – again – the legislation hasn’t passed and we don’t have all the details. Move before that and you trigger CGT on the transfer. Plan once the legislation has been passed and execute when it makes sense to, not because you’ve panicked early. We have time!
• Don’t replace your bucket company with a new bucket company. The strategy isn’t broken for existing retained earnings – wind it down deliberately rather than replacing it.

Who needs to act, and who doesn’t

The trusts most affected are those splitting income to low-rate beneficiaries, those using bucket companies, and those distributing franked dividends to retirees or students. Anyone running a trading business through a trust or holding investment property in a trust can have a planning conversation once legislation passes.

Largely unaffected: trusts distributing only to beneficiaries already on 30%+ marginal rates, primary production trusts, existing testamentary trusts, special disability trusts and charitable trusts.

Five questions to ask before you change anything

Before you restructure, there are five things worth working through.

1. Is the trust running an active business, or holding assets? The answer changes everything.
2. Who are the actual beneficiaries and what are their real marginal rates? 
3. What was the trust originally set up to protect against? 
4. Does family genuinely work in the business? Wages aren’t caught by the minimum tax, distributions are.
5. What does the state duty position look like? The federal rollover doesn’t cover stamp duty, and state law applies.

This is the most significant change to trust taxation in decades. The government has signalled its intentions clearly – expanded rollover relief is being offered to help people restructure out of trusts, which is as close as a government gets to saying “we expect you to leave.”

But that doesn’t mean everyone should. It means everyone with a trust should understand exactly what their structure is doing, why it was set up, and what the real numbers look like under the new rules, before making any decisions.

If you have a trust and you’ve got questions, get in touch. We’ll update both this blog and our clients once legislation does pass, and we have a firmer action plan.