30% Minimum Tax on Discretionary Trust Distributions: Australian Preparation Guide
Australian discretionary trusts face a substantial policy change from 1 July 2028: a minimum 30% tax treatment for relevant distributions. Although commencement is two years away, the measure affects structures built around distributing income among family members on different marginal rates. Trust deeds, beneficiary arrangements, retained working capital and succession plans may all need review.
The headline does not mean every family trust automatically pays 30% on gross revenue. A trust is not the same as a company, and Australian trust taxation depends on present entitlement, the trust deed, the character of income, beneficiary identity and specific anti-avoidance rules. Final legislation and ATO administration will determine the exact reach. Planning should therefore focus on robust scenarios, not aggressive steps based on assumptions.
How discretionary trusts are taxed now
A discretionary trust generally earns income and the trustee decides which eligible beneficiaries become entitled to it under the deed. Where a beneficiary is presently entitled by year end, the beneficiary is commonly assessed on its share of the trust’s net income under Division 6, with separate streaming rules relevant to capital gains and franked distributions.
If no beneficiary is validly entitled, the trustee may be assessed, often at a high rate. Minors can face penalty rates on most unearned income. Non-resident distributions can create withholding and source issues. Section 100A can apply where one person is made entitled but another receives the economic benefit under a reimbursement agreement.
Current individual rates as context
| Taxable income | 2025-26 resident rate, excluding Medicare levy |
|---|---|
| $0-$18,200 | Nil |
| $18,201-$45,000 | 16% above $18,200 |
| $45,001-$135,000 | $4,288 plus 30% above $45,000 |
| $135,001-$190,000 | $31,288 plus 37% above $135,000 |
| Over $190,000 | $51,638 plus 45% above $190,000 |
These rates explain the incentive to distribute to adult family members with lower taxable income. The new framework is intended to establish a floor for relevant distributions rather than allow the ultimate tax to fall below 30% merely because of beneficiary selection.
What a 30% minimum could mean in practice
Assume a trust has $240,000 of taxable business income available for distribution. Under a simplified current-law example, it distributes $80,000 each to three adult resident beneficiaries who have no other income. Each beneficiary’s tax before Medicare levy is approximately $14,788, or $44,364 collectively. That is an effective rate of about 18.5%.
If the relevant income is subject to a 30% minimum, total tax would need to reach $72,000, a difference of about $27,636. The actual mechanism might impose a trustee-level top-up or adjust beneficiary treatment; the final law matters.
| Simplified $240,000 distribution | Approximate tax | Effective rate |
|---|---|---|
| Three beneficiaries at $80,000 | $44,364 | 18.5% |
| 30% minimum | $72,000 | 30.0% |
| Illustrative increase | $27,636 | 11.5 percentage points |
This example excludes Medicare levy, offsets, other income, deductions, capital gains and franking credits. It illustrates scale, not a tax return calculation.
Why cash flow can differ from taxable income
A trustee may distribute taxable income while retaining cash in the business, creating an unpaid present entitlement to a beneficiary. Conversely, accounting profit may include non-cash items or differ from trust net income. If additional tax is due, the group needs liquidity to pay it even when customers have not paid invoices or cash is tied up in stock.
For a business trust earning $500,000, a 30% floor represents $150,000 of tax before considering how credits and beneficiary tax interact. A quarterly cash-flow forecast should reserve for tax rather than assume that low-rate beneficiaries will reduce the final amount.
Which structures need attention
Family investment trusts
Trusts holding shares, managed funds and property often distribute dividends, rent and realised gains. Character streaming, franking credits and capital gains concessions can produce results that differ from ordinary income. Trustees should model each category separately.
Trading trusts
A trust operating a professional practice, retailer, farm or service company may have employees, debt and working-capital needs. A higher tax floor can affect drawings, loan covenants and the amount available to reinvest. The business structure should be reviewed alongside asset protection and succession, not tax alone.
Trusts with corporate beneficiaries
A “bucket company” may be made presently entitled to income and taxed at a corporate rate, subject to eligibility and integrity rules. Unpaid entitlements and loans can engage Division 7A or trust-specific rules. The new minimum does not automatically make a company obsolete, but it may change the benefit and administration burden.
Trusts distributing to adult children or retirees
The ATO already scrutinises arrangements where a beneficiary is assessed but the money is returned, gifted or applied for someone else. Genuine distributions used by the beneficiary for their own expenses are factually different from circular arrangements. Families should document entitlement, payment and use without manufacturing evidence after year end.
Company comparison: 25%, 30% and later dividends
Eligible base rate entities can pay company tax at 25%; other companies generally pay 30%. It may appear attractive to move a business from a trust to a company, but the comparison is incomplete. When profits are later paid as dividends, shareholders include the grossed-up dividend and may receive franking credits, resulting in top-up tax or a refund depending on their rate.
A transfer may also trigger capital gains tax, GST, stamp duty, lender consent, contract novation and loss of asset protection. Small business CGT concessions or rollovers may help in qualifying cases, but eligibility is technical. Never restructure solely because two headline percentages differ.
Capital gains and franked distributions
Trusts can often stream capital gains and franked distributions where the deed and resolutions support specific entitlement. A resident individual with an eligible asset held for more than 12 months may access the 50% CGT discount; companies generally cannot. How a 30% minimum interacts with discounted gains and franking credits is therefore central.
Suppose a trust sells an investment for a $200,000 capital gain after three years. Ignoring costs and losses, the 50% discount could reduce the net capital gain to $100,000 for an eligible individual beneficiary. A rule applied to the gross gain, discounted gain or beneficiary tax would produce very different outcomes. Trustees should wait for final technical detail before accelerating or delaying disposals purely for tax reasons.
Section 100A remains important
The future measure does not replace existing anti-avoidance law. Section 100A may treat a beneficiary as never having been presently entitled where an agreement involves another person receiving the benefit and a tax-reduction purpose, unless an exclusion such as ordinary family or commercial dealing applies.
High-risk signs include distributions to adult children whose entitlement is immediately transferred to parents, journal entries unsupported by payment, loan arrangements with no commercial terms and resolutions prepared after the deed deadline. A 30% minimum may reduce a rate advantage but does not validate an artificial arrangement.
A preparation timeline
During 2026-27: establish the facts
Inventory every trust, trustee, appointor, beneficiary class, corporate beneficiary, unpaid entitlement and related-party loan. Confirm deeds and variations are complete. Reconcile accounting records to tax returns and resolutions. Identify which distributions actually moved as cash.
Prepare three forecasts: current rules, a simplified 30% floor and a stress scenario involving lower profit plus higher tax payments. Include business debt and household drawings.
During 2027-28: respond to enacted detail
Once legislation and ATO guidance are final, update distribution policy and governance. Review whether the deed permits the intended streaming and whether resolutions can be made reliably before 30 June. Renegotiate banking facilities if the tax reserve reduces working capital.
Consider structural change only after modelling transaction taxes and long-term extraction of profits. Allow time for valuations, legal documents and counterparty consent.
From 1 July 2028: operate the new system
Update monthly tax provisioning, beneficiary statements and trustee minutes. Do not wait until the final week of June to discover the trust lacks cash or eligible beneficiaries. Monitor actual tax against the minimum and preserve calculation workpapers.
Ten questions for an annual trust review
- Is the deed current and executed correctly?
- Who controls appointment and removal of the trustee?
- Which beneficiaries are eligible, resident and under a legal disability?
- Does the trust earn ordinary income, capital gains or franked distributions?
- Are there tax losses or debt deductions requiring review?
- Have prior entitlements been paid or documented?
- Could Section 100A, Division 7A or non-arm’s-length arrangements apply?
- Is the trustee carrying enough cash for tax?
- Would death, divorce or incapacity disrupt control?
- Does the structure still meet commercial and asset-protection goals?
What not to do
Do not add beneficiaries or distribute to them without checking the deed and state duty implications. Do not backdate resolutions. Do not transfer assets to a company without modelling CGT and duty. Do not assume an adult child’s lower rate is available when they have salary, HELP repayments or other income. Do not treat private expenses as deductible merely because a trust pays them.
Avoid mass-marketed schemes promising to “beat” the minimum tax. ASIC and the ATO regularly warn about arrangements that rely on contrived steps, and promoter penalty laws can apply to scheme promoters. Trustees remain responsible even where software or an adviser prepared documents.
Broader commercial considerations
Tax is one cost among many. Discretionary trusts can provide flexible succession and asset separation, but control disputes, financing complexity and annual administration are real. A company can retain profits predictably but has different ownership and extraction rules. A partnership may be simple but expose partners to liabilities. Individual ownership may reduce administration while concentrating risk.
For a trust with $300,000 annual profit, an extra five percentage points of effective tax equals $15,000 a year. Over five years that is $75,000 before investment returns. That warrants planning, but a restructure costing $40,000 in tax, duty, legal and refinancing fees may still take years to recover.
The bottom line
The 30% minimum is a reason to improve records and scenario planning, not to rush into a new structure. The most valuable work in 2026 is to understand where income, cash and economic benefit genuinely go. Once final rules are available, families can compare staying with the trust, changing distribution patterns, using a company or restructuring on complete after-tax numbers.
For tailored modelling and compliant resolutions, find an Australian accountant on WealthWorks. For investment and succession decisions that extend beyond tax, find a financial adviser.
Frequently Asked Questions
When does the 30% minimum trust distribution tax start in Australia?
The announced Australian measure is intended to apply from 1 July 2028. Trustees should monitor enacted legislation and ATO guidance because final definitions, exceptions and calculations determine the actual result.
Will every Australian family trust pay 30% tax?
No. The measure concerns a minimum tax treatment for relevant discretionary trust distributions, not a flat tax on every trust receipt. Trust type, beneficiary, income character, exclusions and final legislation will matter.
Can an Australian trust still distribute income to adult children?
Trust deeds may still permit distributions to adult beneficiaries, but anti-avoidance rules, reimbursement agreements, beneficiary entitlement, actual benefit and the new minimum-tax framework must be considered. Paper distributions that return funds to parents are high risk.
What is the company tax rate compared with the trust minimum rate in Australia?
Eligible Australian base rate entities generally pay 25% company tax and other companies generally pay 30%. A company can also create later dividend and franking consequences, so comparing only the headline rate is misleading.
How are Australian trust distributions taxed before 1 July 2028?
Under current Australian rules, a presently entitled beneficiary is commonly assessed on its share of trust net income, subject to specific rules for capital gains, franked distributions, minors, non-residents and anti-avoidance provisions. Trustees can be assessed in some circumstances.
