Trusts are one of the most common ways Australians hold business assets and family wealth, yet they are often misunderstood. With the 2026-27 Federal Budget proposing significant changes to how discretionary trusts are taxed, now is a sensible time to understand what these structures are, why they have been so widely used, and what the proposed reforms could mean for you. Below, we explain the essentials in plain English so you can have an informed conversation about whether a discretionary trust still suits your circumstances.
What Is a Discretionary Trust?
A discretionary trust is a legal structure in which a person or company, known as the trustee, holds and manages assets or business income for the benefit of a group of people or entities, known as the beneficiaries.
It is described as “discretionary” because the trustee has the discretion to decide which beneficiaries receive income or capital, and how much each one receives. The beneficiaries do not usually have a fixed entitlement until the trustee makes a distribution.
A Common Example: The Family Trust
A familiar example is a family trust that owns a business. The trustee runs the business, and the beneficiaries might include a husband, wife, children, related companies, or other family entities.
At the end of each financial year, the trustee decides how the trust income is distributed among the eligible beneficiaries, subject to the trust deed and the relevant tax laws. For instance, the trustee may decide to distribute part of the income to one parent, part to the other parent, and part to a company beneficiary. Historically, decisions like this have allowed families to split income between members on different tax rates.
The beneficiaries do not own the business directly. However, if the trustee decides to make distributions to them from the business’s profits, they receive a benefit.
Why Have Discretionary Trusts Been So Popular?
Several features have made discretionary trusts a common choice for families and business owners.
Flexibility. The trustee can distribute income differently each year. This can be useful where family members’ financial circumstances change from one year to the next. Strict rules govern the tax treatment of trust distributions, but within those rules a discretionary trust has generally offered a flexible way to manage income.
Asset protection. Business assets are held by the trustee for the trust, separately from the personal assets of individual beneficiaries. If a beneficiary personally runs into financial difficulty, trust assets are, for the most part, protected.
Succession planning. A family business can continue through the trust even if individual family members change roles or pass away. Control of the trust can often pass by changing the trustee or appointor, rather than transferring each business asset separately.
How the 2026-27 Federal Budget Could Change Things
The 2026-27 Federal Budget has put discretionary trusts squarely in focus, with proposed changes to the way they are taxed.
Under the announced measure, from 1 July 2028 trustees may be required to pay a 30% minimum tax on trust income. This would reduce the benefit of distributing income to family members on lower tax rates, and is aimed at limiting the practice of income splitting.
The proposal is not yet law. Some trusts and types of income may be excluded, and temporary rollover relief has been flagged to help people restructure out of discretionary trusts where appropriate. Because the measure is still subject to consultation, the final detail may change.
If you currently use a discretionary trust, there is no need to act hastily. The proposed start date is some time away, which gives trustees and business owners a reasonable window to review their structure and plan ahead with proper advice.
Discretionary Trusts and Testamentary Trusts: What Is the Difference?
It is worth noting that not every trust works the same way. A testamentary trust is created through a will and only takes effect after a person’s death, which makes it a separate estate planning tool rather than a structure for running a business during your lifetime. The proposed Budget measure also does not treat every trust in the same way, and testamentary trusts are dealt with separately under the announcement.
If you would like to understand how testamentary trusts work and whether one might suit your estate plan, you may find our article “What is a testamentary trust, and should you include one in your will?” helpful.
Get Advice on the Right Structure for You
A discretionary trust can still offer real benefits, but the proposed tax changes make it more important than ever to understand how your structure works and whether it remains the right fit. Every situation is different, and the best structure depends on your business, your family, and your long-term goals.
Get in touch to discuss your situation and our experienced team will help you understand your options with clear, practical advice on trusts and business structures.
