The 2026-27 Federal Budget introduced the most significant change to trust taxation in Australia since the Ralph Review of 1999. Treasury estimates the measure will raise $4.5 billion over five years from 2025-26, larger than the more publicly debated negative gearing and CGT package. From 1 July 2028, a 30% minimum tax applies to all discretionary trust taxable income, payable by the trustee. Beneficiaries receive non-refundable tax credits to avoid full double taxation. Corporate beneficiaries do not receive those credits at all.
That last sentence is where most of the structural damage sits. It is the reason the bucket-company strategy stops working. And it is why around 350,000 small businesses operating through a discretionary trust need to understand these changes now, not in 2027.
This article works through the mechanics of the new regime, explains what the bucket-company credit-loss problem means in dollar terms, and examines the 3-year rollover relief window that Treasury has built in. The one disclosure worth making upfront: this is analysis, not advice. FGO is a credit broker, not a tax adviser. The legislation has not yet passed the Senate and final rules may differ from what is described. Tax structure decisions belong with your accountant.
1. The Headline Change: What Is New on 1 July 2028 and Who Is Caught
From 1 July 2028, a trustee of a discretionary trust must pay a minimum 30% tax on the trust’s taxable income for that year. The tax is calculated at the trustee level, before distribution. Individual beneficiaries who receive distributions then receive a non-refundable tax credit for the trustee tax already paid on that income. If the beneficiary’s effective tax rate on the distribution is above 30%, they pay the difference. If it is below 30%, the surplus credit is lost. It cannot be refunded.
The measure is deliberately designed to end the income-splitting flexibility that discretionary trusts have provided for decades. When a trustee could distribute $50,000 to a spouse with no other income, the tax on that distribution was effectively zero or close to it. Under the new rule, the 30% trustee tax has already been paid, and the beneficiary’s low-rate status does not recover that cost.
Around 840,000 discretionary trusts exist in Australia. Roughly half are not expected to be affected in any given year because they already distribute primarily to beneficiaries whose effective tax rate is at or above 30%. The measure concentrates its impact: approximately 90% of private trust wealth sits with households above roughly $2.3 million net worth. The practical effect is that the change touches a relatively small number of trusts in absolute terms, but those trusts include a significant share of Australia’s private business wealth.
Around 350,000 small businesses operate through a discretionary trust. This is the cohort most relevant to ETA buyers and existing SME owners. The trading entity, the accumulated retained earnings, the family distributions, the asset protection function, all of it runs through a trust structure that is now subject to a minimum tax rate. Treasury estimates that around 40% of those 350,000 (roughly 140,000) will not pay additional tax or need to restructure in any given year, and more than 90% of all small businesses overall are unaffected. The change is real for affected owners, but it is not a universal restructuring event.
Several exclusions apply.
Excluded trust types:
- Fixed trusts
- Widely held trusts
- Complying superannuation funds (including SMSFs)
- Special disability trusts
- Deceased estates
- Charitable trusts
Excluded income types:
- Primary production income
- Certain income relating to vulnerable minors
- Amounts subject to non-resident withholding tax
- Income from assets of testamentary trusts existing at announcement
Wages paid to family members who work in the business are not trust distributions and remain outside the rule entirely. That distinction matters: legitimate salary payments to working family members remain a viable income-extraction path.
One further mechanic to know: trustees who receive franked dividends will be required to use their franking credits to pay the minimum tax. For share-portfolio trusts, this changes how franking credits are deployed.
The effective date is 1 July 2028. That gives owners roughly two financial years to understand the change and make structural decisions. It also means that the 2026-27 and 2027-28 years operate under the existing rules, which makes planning decisions in the window between now and the rollover relief closing date (30 June 2030) consequential.
2. Why the Bucket-Company Strategy Stops Working
The bucket-company structure has been a standard feature of Australian SME tax planning for roughly two decades. The logic was straightforward. A trading company earns income. That income flows to a discretionary trust. The trustee distributes a portion to individuals (at their marginal rates) and retains a portion by distributing it to a corporate beneficiary (the bucket company) at the company tax rate of 30%. The bucket company holds retained earnings at 30%, protecting them from the top personal marginal rate of 47%. The individual can later extract those earnings as franked dividends when their income is lower, or invest them from within the company.
The 2026-27 budget does not change what a bucket company is. It changes what happens to the tax credit when the trustee pays the 30% minimum tax.
Under the new rule, when the trustee pays 30% tax on trust income and then distributes that income to a corporate beneficiary, the corporate beneficiary does not receive the non-refundable tax credit. The credit mechanism applies only to individual beneficiaries.
The result: the same income is taxed at 30% by the trustee, and then taxed again at 30% inside the bucket company. The effective rate on that income approaches 60%. The bucket company no longer acts as a tax-efficient accumulation vehicle; it becomes a double-taxation trap.
A dollar example makes this concrete.
Under the old structure:
- Trust earns $300,000
- Trustee distributes $150,000 to a bucket company and $150,000 to family members
- Bucket company pays 30% corporate tax on its $150,000 distribution: $45,000
- Individuals pay at their marginal rates
- Total tax on the bucket-company portion: $45,000, effective rate 30%
Under the new structure:
- Trustee first pays 30% minimum tax on the full $300,000: $90,000
- Trustee distributes $150,000 to the bucket company; the bucket company is taxed on the gross $150,000 but does not receive the credit for the $45,000 of trustee tax already paid on that portion
- Bucket company pays its own 30% corporate tax on the $150,000 of assessable income: $45,000
- Total tax on the bucket-company portion: $45,000 (trustee) plus $45,000 (bucket company) equals $90,000, effective rate 60%
- Bucket company retains $60,000 after all taxes, rather than $105,000
That is the bucket-company credit-loss mechanic. The economic case for the bucket-company structure substantially evaporates: the double-tax outcome on the same income removes the accumulation advantage that made the structure worth running. Clients currently operating this pattern will need to revisit it with their accountants in light of the 1 July 2028 commencement.
3. The 3-Year Rollover Relief Window: Why This Is the Action Item
Treasury did not simply impose the 30% minimum tax and leave existing trust owners with no exit path. A specific rollover relief window has been announced for the period from 1 July 2027 to 30 June 2030. During this three-year window, qualifying restructures out of a discretionary trust into a company or a fixed trust can occur with full CGT and income tax rollover. No CGT event is triggered. No income tax liability crystallises on the restructure itself.
This is a meaningful concession. Without rollover relief, a trust with significant accumulated business assets or goodwill would face a CGT event on transferring those assets out, potentially at a cost that made restructuring uneconomical. The rollover removes that barrier.
The key dates to hold:
The key dates:
- 1 July 2027: rollover window opens (12 months before minimum tax starts)
- 1 July 2028: trustee minimum tax takes effect
- 30 June 2030: rollover window closes (two financial years into the minimum tax regime)
The cleanest restructuring window is therefore 1 July 2027 to 30 June 2028, the twelve months before the minimum tax commences. Clients who restructure in this period avoid the minimum tax entirely and do so with CGT rollover available. Clients who restructure later still get CGT rollover up to 30 June 2030, they just absorb one or two years of trustee minimum tax on income earned in the interim.
What restructuring options are available under the window:
Moving into a company is the primary option Treasury has flagged. Small businesses operating through a company access the 25% base-rate-entity corporate tax rate, dividend imputation, and cleaner retained earnings mechanics.
The 25% rate carries an important qualifier: the company must have aggregated turnover under $50 million AND no more than 80% of its assessable income from passive sources (rent, dividends, interest, royalties, capital gains). For a trust holding mostly active trading income, this is straightforward. For a property-heavy or share-portfolio trust restructuring into a company, the corporate rate is 30%, not 25%. This matters for ETA buyers and SME owners whose trust holds significant rental or investment income alongside the trading business.
Fixed trusts are also an available destination. Their income distributions are proportional and pre-determined, so the flexibility issue that drives the minimum tax on discretionary trusts does not arise.
The legislation has not yet passed the Senate. The mechanics of the rollover relief have been announced but the detailed enabling provisions are still pending. A common conservative approach is to plan in 2026, wait for the legislation to settle in 2027, and execute any restructure once the enabling provisions are clear. In our view, the exception is clients about to do a new acquisition or investment, where setting up a fresh structure aligned to the new rules from day one is more efficient than perpetuating a structure that will need to change.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) is expected to provide support from 1 January 2027, ahead of the rollover window opening.
The 12-month overlap between the rollover window opening (1 July 2027) and the minimum tax commencing (1 July 2028) is the planning sweet spot. Clients who move in that window get both the CGT rollover and one financial year’s buffer before the minimum tax applies.
4. Alternative Structures: A Conversation for Your Accountant
Some accountants are exploring alternative ownership structures that sit outside the discretionary trust pattern, including interposing a holding company between the family trust and the trading entity. The mechanics involve standard tax-law provisions (the Division 615 rollover for inserting a holding company, the base-rate-entity rules for the corporate tax rate, the active-income test), so they are not new constructs. What changes is whether they are appropriate for any given client.
These structures carry real considerations that should not be dismissed.
Part IVA exposure. Restructures done primarily to reduce tax following a budget announcement are exactly the pattern the ATO monitors. The dominant-purpose test requires genuine commercial substance, not a tax outcome alone.
State stamp duty. Federal rollover relief addresses the federal tax position. It does not extend to state transfer duty. In Victoria especially, the state cost on transferring property between entities can run to five or six figures per property. This is particularly material for property-heavy trusts. No corresponding state relief had been announced as at the budget date.
Exit complexity. Selling a business held inside a holding-company structure is procedurally and tax-wise harder than selling out of a trust. The small-business CGT concessions can become more complex to access depending on entity setup.
This is a tax-structure conversation, not a credit-broker conversation. We are not equipped to recommend a structure for your circumstances. If you want to explore the trade-offs, talk to your accountant. We are happy to discuss the deal-financing implications of whatever structure you and your accountant land on.
5. Distribution Strategy After 1 July 2028
Once the minimum tax takes effect, the distribution strategy inside a discretionary trust changes significantly. The objective shifts from minimising the effective rate across all distributions to ensuring that distributions go to beneficiaries who can actually use the non-refundable credit.
The general principle. Distributions need to go to beneficiaries whose marginal tax rate is at or near 30%, so that the non-refundable credit is fully utilised rather than forfeited. The specific thresholds for any given trust depend on the beneficiary’s other income and the size of the distribution. Your accountant can model this for your specific family situation.
The implication for low-income beneficiaries. Distributing to a beneficiary with little or no other income is value-destroying under the new structure. The trustee pays 30% tax on the income before distribution. The beneficiary receives the gross amount and the credit, but the credit is non-refundable. If the beneficiary’s actual tax liability on that income is only 5% or 10%, the excess 20% to 25% credit is simply forfeited. That is the surplus credit loss the rule is designed to enforce.
Working family members remain a viable exception. Wages paid to family members who genuinely work in the business are employment income, not trust distributions. They sit outside the distribution minimum tax framework entirely and continue to be taxed at the individual’s marginal rate. For families where multiple members actively work in the business, salary packaging across working members remains a legitimate income-splitting mechanism.
The effective shift is from distributing small amounts across many beneficiaries to concentrating the distribution into fewer beneficiaries at income levels where the credit is fully used. Trusts with adult children who have their own taxable income, or with working family members drawing commercially reasonable salaries, adapt more easily than trusts where the strategy has been to distribute nominal amounts to low-income beneficiaries.
6. What This Means for ETA Buyers
ETA buyers acquiring businesses that sit inside discretionary trust structures need to build trust-restructuring assumptions into their due diligence.
The roughly 350,000 small businesses operating through a discretionary trust are a significant share of the acquirable universe in the $500,000 to $5 million range. Vendors who have operated through a trust-and-bucket-company structure may have accumulated retained earnings inside a bucket company on the assumption that those earnings would be available for franked dividend extraction over time. The collapse of the bucket-company strategy changes the after-tax value of those retained earnings. A vendor pricing a business on the basis of historical after-tax accumulation assumptions may need to revisit the exit economics.
For buyers, the structure question is whether to acquire the business inside the existing trust-held structure or to set up a fresh structure that fits the post-budget rules from day one. The rollover relief window aligns naturally with ETA acquisition timelines, and structuring decisions made at acquisition time are usually cleaner than restructures done post-settlement. A buyer completing a deal in the second half of 2027 has the full rollover window available for any subsequent restructure of the target’s trust assets through to 30 June 2030.
Lender positioning matters here. An acquisition finance application that involves a holding company structure sitting above the trading company requires the lender’s credit team to be comfortable with three things:
- Intercompany guarantees
- The holding company’s role as the borrowing entity or security provider
- The asset protection rationale for the structure
Some lenders have been slow to update their credit policies to reflect holding-company acquisition structures. It is worth confirming with your lender early in the process that the proposed structure meets their security and guarantor requirements.
Vendor urgency may work in buyers’ favour, with one important caveat. Vendors with significant goodwill who are currently sitting under the old CGT discount regime face a different calculation from 1 July 2027 when the 50% CGT discount is replaced with cost-base indexation and a 30% minimum tax on gains. A vendor with a business worth $3 million who acquired the goodwill for $500,000 has a substantially larger headline CGT liability under the new regime if they sell after 1 July 2027.
The 2026-27 budget retains the small business CGT concessions (15-year exemption, $500,000 retirement exemption, 50% active asset reduction, small business rollover), which for eligible vendors (under $10 million turnover, under $6 million net assets) often cover most or all of the CGT bill independent of the general 50% discount. For vendors who qualify, the regime change is less consequential than the headline framing suggests. For vendors who do not qualify, particularly larger businesses or asset structures that fall outside the small business CGT tests, the timing pressure to settle before 1 July 2027 is real and may generate accelerated deal flow in the twelve months to June 2027.
7. What This Means for Existing SME Owners with Trust-and-Bucket-Company Setups
For business owners currently running a trust-and-bucket-company structure, the timeline is as follows.
Now to 30 June 2027. The minimum tax does not apply until 1 July 2028. There is no immediate obligation to change anything. The 2026-27 and 2027-28 financial years operate under the current rules. The bucket company continues to function normally for distributions in those years.
1 July 2027 onwards. The rollover relief window opens. This is the first date on which a qualifying restructure into a company or fixed trust can occur with full CGT and income tax rollover.
The practical planning cadence:
- Spend the remainder of 2026 understanding the change and engaging your accountant
- Do not restructure before the enabling legislation passes. It has been announced but not assented to, and the detail of the rollover relief may differ from what has been published
- Plan in 2026, wait for the legislation in the first half of 2027, then execute the restructure during the July 2027 to June 2028 window
The 12-month overlap between the rollover window opening and the minimum tax commencing gives owners who act in that window the cleanest outcome: they restructure with CGT rollover available and before the minimum tax applies to their first affected financial year.
For property-heavy trusts, state stamp duty is the most material cost variable. Federal CGT rollover does not address state transfer duty. Victoria has not announced any corresponding relief. Clients should not assume this cost will be waived and should get a stamp duty assessment from a tax lawyer before committing to a restructure timeline.
The bucket company itself does not need to be wound up immediately. It continues to hold its existing retained earnings under the old regime. The question is whether to continue directing new income into it after the rollover window closes. The answer, once the minimum tax is in force, is almost certainly no.