A tax reform introduced in the 2026/27 Federal Budget eliminates discretionary trusts’ tax advantage
The federal government has followed through on a long-recommended step and set a 30% minimum tax on the taxable income of discretionary trusts in the recently announced 2026/27 Federal Budget.
The tax will be imposed as of 1 July 2028 and will be shouldered by the trustee. Non-refundable tax credits will be provided to beneficiaries (except corporate beneficiaries) to offset individual tax liabilities; corporate beneficiaries will not receive credits so as to avoid the establishment of “bucket” companies to evade the tax.
The 30% tax will not be imposed on “fixed and widely held trusts”, complying superannuation funds, special disability trusts, deceased estates, or charitable trusts, according to a DLA Piper post. It will also exclude income categories like primary production income and the income of existing discretionary testamentary trusts. Three years of expanded rollover relief will be made available beginning 1 July 2027 to help those seeking to restructure into companies or fixed trusts.
According to Holding Redlich tax partner Dhanushka Jayawardena, the move takes out discretionary trusts’ tax advantage over companies.
“The government has just done what 25 years of tax reform reviews recommended and neutralised the tax advantage of discretionary trusts over companies. With both vehicles now sitting at or around 30%, and small business companies sitting below that at 25%, the case for a discretionary trust collapses to non-tax considerations”, Jayawardena said. “Asset protection and succession planning remain valid reasons to choose a trust. Tax efficiency is no longer one of them”.
Jayawardena added that the firm expects a “meaningful migration into corporate structures” during the rollover window. Starting this year, it anticipates a “near-universal default to companies for new structures”.
Per DLA Piper, the ATO has typically been strict when it comes to the classification of fixed trusts. Court outcomes have indicated that the “unit trust” label does not necessarily translate to fixed entitlements.
“Consequently, aside from attribution managed investment trusts (AMITs) which are deemed to be fixed trusts, trustees and fund managers of all unit trusts face heightened compliance risk and may need to seek private rulings from the ATO to obtain certainty before 1 July 2028”, DLA Piper experts Brendon Lamers, Eddie Ahn, Adam Smith, Alex Lebsanft, Jun Au, Kelvin Yuen, Amahl Weeramantry, Darcy Grace, Patrick Norman and Sarah Gard wrote in the post on the firm’s website.
While the move has been presented as a housing affordability measure, the housing market was “the smaller half of the story”, Jayawardena said.
“The 50% discount disappears for every asset class held by Australian individuals, partnerships and trusts such as listed shares, private company scrip, units in funds, infrastructure interests, private equity. The single largest change to the taxation of Australian savings since 1999 has been announced under the banner of helping first home buyers”, Jayawardena said.
He noted that the return to indexation could mean that valuation evidence becomes a highly litigated issue down the line.
“Returning to indexation sounds simple until you remember why we abandoned it in 1999. Every long-held asset now needs a 1 July 2027 cost base, and the taxpayer gets to choose between a professional valuation and the ATO's formula. Five years from now, the valuation evidence on a 2027 disposal may well be the single most-litigated issue in the CGT regime”, Jayawardena said.
