Of all the measures in the 12 May 2026 Budget, the proposed 30% minimum tax on discretionary trusts is the one that reaches deepest into a typical firm's client base, and it received the least attention on the night. There are roughly 920,000 discretionary trusts in Australia, sitting at the centre of small-business operations, family investment portfolios, asset-protection structures, and intergenerational wealth plans. This is not a niche high-net-worth issue, it is ordinary small-business and family infrastructure, and from 1 July 2028 every one of those trusts would face a 30% minimum tax on its taxable income. Before going further, the essential caveat, stated first because it governs everything that follows: the ATO's own guidance says plainly that this measure is not yet law. It is an announcement, the start date is more than two years away, and key design details are still to be settled through consultation. The correct response is to understand it, model it, and review affected clients, and to change nothing until the legislation is real.
How the proposed minimum tax would work
The mechanism is a genuine departure from how discretionary trusts have always been taxed. Under the current model, a discretionary trust is a flow-through vehicle: the trustee decides which beneficiaries are presently entitled to the income each year, and those beneficiaries include it in their own returns and pay tax at their own marginal rates. The proposal keeps that present-entitlement machinery in place but adds a floor. From 1 July 2028, the trustee would pay a minimum 30% tax on the trust's taxable income, regardless of how it is distributed. Non-corporate beneficiaries, such as individuals, would then receive a non-refundable credit for the tax the trustee paid, which they can apply against their own liability. The word that matters there is non-refundable. Where a beneficiary's own marginal rate is already 30% or higher, the credit simply offsets their liability and nothing changes. But where a beneficiary's rate is below 30%, the trustee has already paid 30% and the beneficiary cannot get the excess back, so the effect is more tax overall than under today's rules. The measure is deliberately aimed at the long-standing practice of streaming trust income to lower-rate family members, and it works by making that stream cost 30% whatever the recipient's rate.
Two design features sharpen the impact. First, corporate beneficiaries would receive no credit at all for the trustee's tax, which is aimed squarely at "bucket company" arrangements and, on the current design, produces a double-tax outcome that effectively ends that strategy. Second, and this is the point that surprises people, there is no grandfathering. The measure would capture existing discretionary trusts from 1 July 2028, not just trusts established after Budget night, so a structure a client set up fifteen years ago is as exposed as one set up tomorrow. The exclusions are real but specific: fixed and widely held trusts, complying superannuation funds including SMSFs, deceased estates, special disability trusts, and charitable trusts are outside the regime, and certain income is carved out, including primary production income, some income of vulnerable minors, and income from discretionary testamentary trusts that already existed on Budget night.
The traps and the clients most exposed
Two nuances deserve a firm's attention because they are easy to miss and expensive to get wrong. The first is the testamentary trust trap. The carve-out only protects a testamentary trust that was in existence on 12 May 2026, and a testamentary trust does not exist when the will is signed, it springs into existence only on death. So a client with a professionally drafted will establishing a testamentary trust for their family has no protection under this carve-out if they die after Budget night, because the trust their will creates did not exist on the announcement date. Estate plans built years ago to deliver tax-effective distributions to children and grandchildren would see that benefit compressed, even though the asset-protection function of the structure is unaffected. That is a conversation worth having with any client whose estate planning relies on a testamentary trust. The second nuance is that the rollover relief, though genuinely helpful, has practical limits. The Government has flagged three years of relief from 1 July 2027 to 30 June 2030 to move assets out of a discretionary trust into a company or fixed trust without triggering income tax or CGT, but that relief does not touch state stamp duty, and many family trusts are land-rich, so a restructure that is clean for income tax can still carry a substantial duty cost. Restructuring is therefore not a simple or universally available escape.
The clients most exposed are the recognisable ones: family businesses that distribute to lower-rate adult children or a spouse to manage the group's effective tax rate, investors holding assets in a trust for streaming flexibility, and anyone running a bucket-company arrangement. For those clients the effective tax rate on affected income could rise sharply, and in some worked scenarios the interaction of the non-refundable credit produces effective rates well above 30% on the relevant income. That is precisely why the measure matters, and precisely why it cannot be answered with a template.
What firms should actually do before the law lands
The right posture is active preparation without premature action, and the distinction is everything here because a trust restructure done on the strength of an announcement can trigger CGT, duty, and Division 7A consequences that are ruinous if the rules then change in consultation. The useful first step is identification: work through the client base and flag which clients rely on discretionary distributions to lower-rate beneficiaries, which run bucket-company structures, and which have estate plans built around testamentary trusts, so that when the draft legislation appears the firm can move quickly and deliberately rather than start from scratch. Modelling comes next, comparing the client's likely position under the proposed regime against company and fixed-trust alternatives, as a planning exercise rather than a recommendation. What firms should resist is the instinct to restructure now to "get ahead of it," because the design is unsettled, the rollover window does not even open until 1 July 2027, and the stamp-duty and commercial constraints mean the right answer is genuinely client-specific. The message to give every affected client is the one the whole profession is converging on: this is real, it is significant, it is not yet law, and the value we add is to have you fully understood and modelled before the rules are final, so that when they are, you move once and move correctly. Reacting to the headline is how clients get hurt. Preparing calmly is how they come through it well.
