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Discretionary Trusts: Where the Real Tax Problems Start

Andrew Mattner
July 18, 2026

Discretionary Trust Tax Problems for Business Owners

The proposed 30% minimum tax on discretionary trusts is not just a technical tax change. It goes directly to the heart of how Australian SMEs, family groups and professional businesses have historically structured profit distribution and wealth accumulation.

And the biggest mistake clients can make right now is assuming this simply means: “Trusts will pay 30% tax.”

That is not what the proposal appears to do.

The proposal is closer to a trust-level withholding or prepayment system designed to ensure discretionary trust income bears a minimum effective tax rate of around 30%.

The real issue is not the headline tax rate.

The real issue is: wasted credits, reduced income splitting effectiveness, and the potential death of the traditional bucket company strategy.

How the Government Intend the Proposed Trust Tax to Work

From 1 July 2028:

the trustee pays a minimum 30% tax;
beneficiaries still include the income in their own tax returns;
non-corporate beneficiaries receive a non-refundable credit;
corporate beneficiaries do not receive the credit.

That last point is potentially enormous.

The Real Problem: Low Income Beneficiaries

Historically, discretionary trusts have allowed business owners to distribute income across family members on lower marginal tax rates.

That is now directly under attack.

Under the proposal, if the trust pays 30% tax and the beneficiary’s actual tax liability is lower than 30%, the excess credit is lost.

That means the traditional strategy of distributing profits to spouses, adult children, retired parents, university-aged beneficiaries, or low-income family members becomes dramatically less effective.

Practical Example: Low Income Beneficiary

Assume: business profit through trust = $300,000, distributed as $100,000 to each of 3 adult beneficiaries with minimal other income.

Current Rules

Approximate tax per person

$23,000

Personal tax + Medicare. Total across 3 beneficiaries: $69,000. Effective rate: 23%. Family keeps benefit of lower marginal rates.

Proposed Rules

Trust pays 30% minimum tax

$90,000

Actual beneficiary tax only ~$69,000. Excess $21,000 credit wasted. Effective minimum tax: 30%. Income splitting advantage largely disappears.

The Breakeven Point Matters

This is where business owners need proper modelling.

Technically, the marginal rate reaches 30% at around $45,000 taxable income. But due to the tax-free threshold, lower marginal brackets, and Medicare interactions, the actual economic breakeven point is materially higher.

In the absence of other structuring options, beneficiaries generally need taxable income around $200,000 before the 30% trust credit is substantially utilised.

Beneficiary Income	Likely Outcome
Under $45k	Major wastage of credits
$45k to $100k	Moderate wastage
$100k to $150k	Some wastage
$150k+	Most credits utilised
$190k+	Additional top-up tax

This is one of the most significant structural changes to discretionary trust planning in decades.

Why Bucket Companies Are in Trouble

This is the part many business owners still do not understand.

Under current structures: trusts distribute surplus profits to a company, tax is capped at 25% or 30%, and profits are retained and reinvested.

That strategy is effectively dead.

Under the proposal, the trust pays 30% minimum tax, the company still includes the income, and the company does NOT appear to receive the trust tax credit. Unless softened through legislation, this creates the risk of double taxation.

Example: Bucket Company Exposure

Assume: trust distributes $100,000 to bucket company.

Layer	Tax
Trust minimum tax	$30,000
Company tax (25%)	$25,000
Combined tax before dividends	$55,000

And that is before eventual shareholder dividends.

When a Company Structure May Become Better

Under the old system, many SMEs operated through discretionary trusts because income splitting worked, bucket companies worked, and flexibility existed. Under the proposed regime, that equation changes.

For some businesses, operating directly through a company taxed at 25%, paying commercial salaries to owners, and retaining profits for growth may become more tax efficient and administratively cleaner.

Particularly where profits are consistently retained in the business, family distribution planning is limited, beneficiaries are already on high incomes, or the trust primarily exists for tax arbitrage.

That does NOT mean “everyone should move to companies.” This is where reliable tax advice becomes critical.

Structure Decisions Still Involve

asset protection
succession
Division 7A
financing
land tax
payroll tax grouping
CGT concessions
estate planning
business sale strategy
and control of family wealth

The answer is not: “Trusts are dead.”

The answer is: “The role of trusts may fundamentally change.”

While discretionary trusts can provide flexibility and asset protection benefits, business owners should regularly review whether their structure remains appropriate as regulations evolve and family circumstances change. Understanding different family trust structures is an important part of that process.

Questions Every Business Owner Should Be Asking Now

Are we still getting real benefit from discretionary trust distributions?
Which beneficiaries are now inefficient?
Do we rely on bucket companies?
What is our Division 7A exposure?
Would a company operating structure now produce better long-term outcomes?
Should the trust become a holding or control vehicle only?
What happens if we sell the business in the next 3 to 5 years?
How does this interact with Small Business CGT concessions?
Do we need a full structure review before 30 June 2027?

Take the next step

Not sure where your structure stands?

Book a free 45-minute clarity call with our team. We will look at your structure, walk through the specific risks, and give you a clear picture of what needs reviewing before 30 June 2027.

Book a Free Clarity Call