Treasury Backs Off on Discretionary Trusts, But There Is a Catch

Some welcome news arrived from Treasury this month, with the Government softening its proposed treatment of discretionary family trusts.

However, there are still some important catches, and we are not recommending that clients make any changes just yet.

What was originally proposed?

As part of the 2026–27 Federal Budget, the Government announced that from 1 July 2028, trustees would generally be subject to a minimum tax rate of 30% on taxable income of discretionary trusts.

The proposal represented a significant change to the taxation of family trusts and raised concerns about whether many existing structures would continue to provide the same tax and commercial benefits.

Treasury has now released exposure draft legislation containing an important alternative.

A new option for family trusts

Under the latest proposal, a discretionary trust could elect to make fixed distributions to pre-nominated beneficiaries and, if the relevant requirements are satisfied, avoid the proposed 30% minimum tax.

Importantly, this would not require the trust to restructure into a company or fixed trust, potentially avoiding the capital gains tax and stamp duty issues that can arise when assets are transferred between structures.

That is a significant improvement on the original proposal.

However, there is a catch.

What happens to the flexibility of a family trust?

One of the greatest benefits of a discretionary family trust has always been its flexibility.

Each year, the trustee can consider the circumstances of the family and determine how income should be distributed.

Those circumstances can change considerably over time.

A beneficiary may lose their job, suffer a business failure, experience a marriage breakdown or require additional financial support due to illness. Children grow up, enter the workforce, start businesses and establish families of their own.

Under the proposed alternative, distributions would instead need to be made in fixed proportions to beneficiaries nominated under the election.

This potentially removes some of the flexibility that makes discretionary trusts so useful in the first place.

Could a company provide some flexibility?

Potentially.

One interesting aspect of the proposal is the possibility of nominating a company as one of the beneficiaries entitled to a fixed proportion of the trust's income.

For example, rather than fixing all trust income between individual family members, a proportion could potentially be allocated to a corporate beneficiary.

That company could retain profits after paying company tax and, depending on how it is structured, may potentially have different classes of shares, including dividend access shares. This could provide some flexibility over how the company's profits are ultimately distributed between family members in future years.

In other words, while the trustee may lose some discretion over the initial distribution of trust income, there may still be opportunities to retain flexibility further down the structure.

However, this is an area where the detail will be critical.

The interaction with Division 7A, unpaid present entitlements, different classes of shares and the integrity provisions will need to be carefully considered. Treasury has separately indicated that the treatment of unpaid present entitlements to corporate beneficiaries will be progressed as part of further reforms.

Accordingly, we would not recommend establishing structures around this strategy until the final rules are known.

What about franking credits?

There is also some welcome clarification regarding franking credits.

A question arising from the original proposal was what would happen where a discretionary trust had excess franking credits after satisfying its minimum tax liability.

The exposure draft now provides for refunds of franking credits relating to income subject to the minimum tax where those credits remain after the trustee has offset its income tax liabilities.

This is particularly important for family trusts holding substantial Australian share portfolios.

Should you change your trust structure now?

No immediate action is required.

These measures are still proposed and have not yet become law.

The Government currently intends for the 30% minimum tax to commence from 1 July 2028. It has also proposed expanded restructuring relief for three years from 1 July 2027 for taxpayers who ultimately decide to move away from a discretionary trust.

There are also a number of proposed exclusions, including genuine discretionary testamentary trusts, deceased estates, special disability trusts and certain primary production income.

The exposure draft consultation closed on 18 September 2026, and further legislation covering administrative and integrity measures is still expected.

For this reason, we are not currently advising clients to restructure or make significant changes based on the proposed rules.

What happens next?

There is still considerable time before the proposed commencement date, and the final legislation may differ from what is currently on the table.

Once the legislation has been finalised, we will review the position of clients who may be affected and contact them directly.

For some families, retaining their existing discretionary trust and making the proposed fixed distribution election may ultimately be appropriate. For others, using a corporate beneficiary, restructuring into an alternative structure or simply accepting the minimum tax may produce a better overall outcome.

Tax is also only one consideration. Asset protection, succession planning, estate planning and the ability to adapt to changing family circumstances all need to be considered.

For now, there is no need to rush into making changes.

We will continue to monitor the legislation closely and provide further guidance once the final rules and their practical implications become clear.