The Federal Budget Changes That Matter If You Have a Discretionary Trust

While these measures are still proposals, they have prompted many business owners to ask the same questions:

• Will these changes affect my business?
• Do I need to change my business structure?
• Should I be doing anything now?

In this article, we’ll explain what these proposed federal budget changes mean for businesses that already operate through a discretionary trust, who is most likely to be affected, and the practical steps worth considering before making any decisions.

Change 1: A 30% minimum tax on Discretionary Trusts under the Federal Budget changes

Right now, income distributed from a discretionary trust is taxed at each beneficiary’s marginal rate. If you distribute to a family member on a lower income, that income is taxed at their lower rate. That flexibility is the reason discretionary trusts became so common for family businesses, and it is exactly what the government is targeting.

From 1 July 2028, the trustee will be required to pay a minimum tax of 30% on the trust’s taxable income before distributions are made. If a beneficiary’s own rate is already above 30%, nothing effectively changes for them. But if your structure relies on distributing to beneficiaries on lower incomes, the tax saving that strategy has produced largely disappears.

The government’s own numbers show that around 350,000 active small businesses currently operate through discretionary trusts. Of those, roughly 40% are expected to face no material change. The remaining 60% will need to model the impact of these proposed trust changes and decide whether their current structure still makes sense.

Which side of that line you fall on depends on how income has been distributed and who the beneficiaries are. A business distributing primarily to working owners who already pay tax above 30% may feel little change. A business that has consistently distributed to a non-working spouse, adult children or a corporate beneficiary taxed at 25% will feel it directly.

The flexibility that discretionary trusts have provided for decades is the flexibility these federal budget changes are designed to address. That is worth being clear about.

Change 2: The CGT Discount is gone — and it hurts most when shares have a nominal cost base

From 1 July 2027, the 50% capital gains tax discount that has applied since 1999 will be replaced with cost base indexation and a 30% minimum tax on real capital gains. The change applies to all CGT assets held by individuals, trusts and partnerships—including shares in private companies.

The theory is reasonable enough. Instead of halving the gain regardless of how long inflation has been eroding the dollar, you adjust the cost base for CPI. Only the real gain gets taxed. For an investment property bought for $500,000 that is now worth $900,000, that distinction matters a lot. Indexation will absorb a meaningful portion of the nominal gain.

For business owners, the problem is different.

Shares in a private company typically have a nominal cost base. A dollar, sometimes a few hundred. When the business has grown to be worth $1 million, $1.5 million or $3 million, indexing a nominal cost base against CPI does almost nothing. The entire gain is real. It will now be taxed at the owner’s marginal rate—up to 47%—subject to a 30% floor, with no 50% discount to reduce it.

If you hold shares through a discretionary trust, you face both changes at once. The trust minimum tax applies to income year by year from 2028. The CGT reform applies at the point of sale from 2027. For owners planning an exit in the next five to ten years, these proposed federal budget changes could materially change the numbers.

The Discretionary Trust Rollover Window — Not as simple as it sounds

The government has included rollover relief: a three-year window opening on 1 July 2027 for businesses to restructure out of a discretionary trust into a company or fixed trust without triggering CGT at the entity level. On paper, that is a genuine concession. In practice, it is more complicated.

A restructure of this kind touches your shareholders agreement, your banking arrangements, your Division 7A position, asset protection, stamp duty implications, and potentially your eligibility for the small business CGT concessions on exit. The rollover addresses the income tax consequence of the move itself. It does not resolve everything that comes with it.

The right answer is not the same for everyone. Some structures will work better as companies. Others may be fine remaining as discretionary trusts, particularly if the proposed 30% minimum rate is already close to how income has been distributed. Some businesses will find that the small business CGT concessions on exit—which the government has confirmed will remain in place—effectively contain the problem on the CGT side anyway.

But working out which category you are in requires time and proper analysis. That is not something to do in a hurry when the window opens.

So, where does that leave business owners with a discretionary trust?

While these proposed trust changes are significant, they are not a reason to rush into restructuring. Changing your business structure without understanding the full implications can be expensive and disruptive, and there is no obligation to move before the rules change.

However, there is a difference between choosing to wait and not yet having the information to make that choice. The first step is getting a clear picture of your current position, including:

• what income is being distributed and to whom
• what the shares in your business are realistically worth
• what their cost base is
• what an exit or restructure would look like under the proposed rules compared with the current rules.

The opportunity to complete that analysis calmly—while your options remain open—is now. Waiting until 2027 doesn’t create urgency; it reduces flexibility.

It’s also important to remember that these are proposed federal budget changes. While the direction is becoming clearer, there is still time to understand how they may affect your particular circumstances and consider the most appropriate strategy for your business.

Every discretionary trust is different. The impact of these changes will depend on how your trust has been used, how income has been distributed, and what your long-term plans look like.

If you’d like to better understand how these proposed trust changes may affect your business, or whether your current structure remains the right fit, we’d be happy to help you work through the numbers and discuss your options.