Proposed Changes to Taxation of Discretionary Trusts
The 2026–27 Federal Budget introduces a 30% minimum tax for discretionary trusts from 1 July 2028. Under the Government’s tax explainer, the trustee pays 30% tax on the trust’s taxable income (unless higher rates apply). Beneficiaries still return trust distributions, and non‑corporate beneficiaries receive non‑refundable tax credits for tax paid by the trustee—avoiding double taxation while ensuring at least 30% is paid overall.
STEP Australia considers the measure may strengthen the long‑term, intergenerational savings role of trusts. Trusts have too often been characterised as tax devices; properly understood, they are a core tool for family wealth preservation. The reforms should also reduce reliance on “bucket company” structures as a workaround: trustees can retain income in the trust, pay 30% tax (unless higher rates apply), and when income is later distributed, the beneficiary receives the associated credit.
The long‑term, intergenerational savings objective of trusts is more easily achieved.
The Government has flagged consultation on key design features, including collection mechanics and franking credit interactions, before finalising details. STEP welcomes the opportunity to contribute to that consultation.
Budget 2026 & Testamentary Trusts
The Budget factsheet states that “income from assets of testamentary trusts existing at announcement” is excluded from the minimum tax.
On its face, this reads like a grandfather‑style carve‑out for at least some existing testamentary trust income—though the precise scope will depend on legislation and consultation outcomes.
STEP Australia emphasises that testamentary trusts are not a tax device; they are a longstanding estate‑planning structure used for protecting and supporting families, often for deeply personal reasons. These have existed for literally hundreds of years. Reform must recognise that people don’t time death for tax outcomes. A careful transition is essential, including adequate lead time for families to review wills and succession plans.
STEP Australia calls for a minimum two-year transition to enable individuals to reconsider and re-establish their wills and estate planning.
Non‑Budget ATO changes (administration)
Separately, but coincidentally with Budget 2026, the ATO is modernising trust administration. From 1 July 2026, it intends to use trust statement of distribution data to pre‑fill individual beneficiaries’ tax returns, as part of broader system changes to improve trust/beneficiary reporting integrity.
This does not change tax rates, but it will likely tighten compliance by reducing mismatches between trust reporting and beneficiary returns.
STEP Australia supports this administrative reform, it will assist in streamlining general trust tax administration.
CONTACT INFORMATION:
For further information please contact either:
Jim O’Donnell TEP, Chair of STEP Australia
E: jodonnell@jacmac.com.au
Peter Bobbin TEP, Consultant Lawyer (Taxation & Superannuation), STEP Australia Advocacy Committee Member
E: peter@bobbin.net.au
ABOUT STEP:
STEP is the global professional association for practitioners who specialise in family inheritance and succession planning. STEP works to improve public understanding of the issues families face in this area and promotes education and high professional standards among its members. STEP members help families plan for their futures, from drafting wills to issues surrounding international families, protection of the vulnerable, family businesses and philanthropic giving. Full STEP members, known as TEPs, are internationally recognised as experts in their field, with proven qualifications and experience.
Find out more at www.stepaustralia.com