Is a Discretionary Trust Still Right for You?
Discretionary trusts have been a cornerstone of Australian wealth structuring for decades, offering flexibility in how income is distributed, a degree of asset protection, and the ability to adapt as circumstances change.
But the landscape has evolved, with further change on the horizon. If your trust was set up years ago and hasn't been reviewed since, it's worth understanding what's different now and whether it still delivers what you set it up to achieve.
Legislative changes you should know about
Several developments affect how discretionary trusts function today, and one significant proposal could reshape things even more.
Division 296: the new super tax
This doesn't directly affect trusts, but it’s a consideration for structuring decisions.
Division 296 commenced on 1 July 2026 and introduces an additional tax on superannuation earnings for individuals with large super balances.
An extra 15% on earnings attributable to balances between $3 million and $10 million, and
An extra 25% on earnings attributable to balances above $10 million
Bringing the effective tax rate on that top tier to around 40%, once combined with existing fund-level tax.
For those who've traditionally used superannuation as their primary tax-effective wealth vehicle, trusts and companies may become relatively more attractive for holding wealth above these thresholds.
Proposed minimum tax on discretionary trusts
As part of the 2026–27 Federal Budget, announced 12 May 2026, the Government proposed a 30% minimum tax on discretionary trusts, intended to apply from 1 July 2028.
This is not yet law. Details may change before (or if) it's legislated, but it’s worth understanding now.
Broadly, the tax would apply at the trustee level, with beneficiaries able to claim a credit for tax already paid to reduce double taxation. A time-limited (three-year) CGT rollover would allow assets to move out of discretionary trusts into other entities, suggesting the Government expects some restructuring in response.
If legislated in its current form, the advantage of streaming income to beneficiaries on lower marginal rates would be significantly reduced for income caught by the minimum tax. We're watching this closely and will update clients as it develops.
Ongoing scrutiny of trust distributions
The ATO has increased its focus on how trust distributions are made in practice. Section 100A is an anti-avoidance provision that can apply where a beneficiary is made presently entitled to trust income, but the economic benefit actually flows to someone else. Commonly scrutinised in distributions to adult children where the funds are effectively used by parents, and circular arrangements involving related companies.
Unpaid present entitlements owed to corporate beneficiaries also need careful management, generally via a complying Division 7A loan. Getting this wrong risks the amount being treated as an unfranked dividend, taxed at the top marginal rate.
While bucket company strategies and family trust distributions remain available, they now require stronger commercial justification, comprehensive documentation, and proper administration. Under the proposed rules, trust distributions to bucket companies may also be subject to double taxation, with tax paid at the trust level and again at the 30% company tax rate, without the company receiving a credit for the tax already paid by the trust.
Tax efficiency today vs. yesterday
The traditional case for a trust rests on flexibility, and for many families, that still holds. But it's worth comparing against a company structure, particularly if your trust holds a business or investments generating consistent, retained income.
Companies pay a flat rate - 25% for base rate entities (aggregated turnover under $50 million, no more than 80% passive income), or 30% otherwise—regardless of how much profit is made or distributed. For retained, reinvested income, this can be more tax-effective than a trust, where undistributed income is generally taxed to the trustee at the top marginal rate.
Trusts do not provide the same flat-rate tax benefit on retained income as companies, but they offer greater flexibility. Income can be distributed to beneficiaries on lower tax rates, and capital gains may qualify for the 50% CGT discount when distributed to individuals. From 1 July 2027, trusts will move to an indexation-based CGT system. The market value of assets at that date will generally become the new cost base, meaning tax will apply only to the indexed growth after 1 July 2027, with a minimum tax rate of 30% on those gains.
Which is more efficient depends on your situation
A family with several adult beneficiaries on varying incomes, distributing most profits annually, often still benefits more from a trust. A business reinvesting for growth, with fewer beneficiaries to stream to, may find a company structure delivers a better outcome once the real cost of trust administration is factored in. If the proposed minimum tax becomes law, companies may become more favourable for larger trusts, since the measure specifically targets the income-streaming advantage.
As with any structuring decision, running modelling based on your income levels, beneficiary circumstances, and reinvestment plans is the only reliable way to know which structure serves you better. General guidance can point you in the right direction, but the answer is different for every family and business.
Asset protection
Asset protection is often cited as a core reason for using a discretionary trust, and it does offer protection in certain circumstances.
What's protected
Because beneficiaries don't legally own trust assets, a trust can shield assets from a beneficiary's personal creditors. If sued personally or made bankrupt, trust assets generally aren't treated as personal property and aren't automatically available to creditors. This can be valuable for those exposed to professional or trading risk.
Where are the gaps?
Family law
The Family Court has broad powers to treat trust assets as a financial resource, or effectively as property of a party. Holding assets in trust doesn't automatically remove them from a property settlement.
Bankruptcy clawback
If contributions were made to defeat creditors, or a trust is found to be a "sham" with no genuine separation from the individual, a bankruptcy trustee may be able to unwind those transactions.
Control undermines separation
If you're trustee, appointor and beneficiary of the same trust, courts may look past the legal structure to the practical reality of control. More concentrated control means more scrutiny if protection is challenged.
Division 7A traps
If a trust owes money to a related company and it isn't managed correctly, the ATO can treat it as a deemed dividend, complicating both the tax position and what's protected.
Is your trust still fit for purpose?
Discretionary trusts still work well for many families and businesses. A review is worth considering if your beneficiary group has changed since establishment, you're unsure whether recent distributions would hold up under ATO scrutiny, or the proposed minimum tax could materially affect you.
How we help
At Accounting Heart, we help you assess how your current structure performs against your goals, model the numbers against alternatives like a company structure, and ensure your trust is being compliantly administered. As the proposed minimum tax develops, we'll also help you understand what it means for your specific situation and whether restructuring within the proposed rollover window makes sense.
Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and/or other advice as may be appropriate having regard to their particular circumstances. This article refers to the proposed minimum tax on discretionary trusts announced in the 2026–27 Federal Budget, which is not yet law and may change before or if it is enacted.