Minimum 30% Tax on Discretionary Trust Income

Application Date

• Applies from 1 July 2028
• Transitional roll-over relief available from 1 July 2027 for a period of three years

Background

In the lead-up to the 2026–27 Federal Budget, Treasurer Jim Chalmers acknowledged ongoing public debate surrounding the taxation of trusts, capital gains tax concessions, and negative gearing. These discussions have formed part of Australia’s broader tax reform debate for many years.

Similar reforms were previously proposed during the 2019 Federal election campaign by the Australian Labor Party under then Opposition Leader Bill Shorten. However, those measures were never implemented following Labor’s election defeat at that time.

The Government has indicated that growing fiscal pressures following the pandemic, continued global economic uncertainty, and increasing expenditure demands have renewed the need for structural tax reform. According to the Government, the proposed changes are intended to improve fairness within the tax system while helping fund future personal income tax relief measures.

Trusts remain a widely used business and investment structure in Australia, with more than one million trusts currently registered. In most cases, trusts operate as flow-through entities for tax purposes, meaning income is generally distributed to beneficiaries rather than taxed within the trust itself. Where trust income is not distributed, it is typically taxed at the top marginal tax rate of 45%.

Discretionary trusts, commonly referred to as family trusts, provide trustees with flexibility to distribute income among beneficiaries in a tax-effective manner. This often allows income to be allocated to individuals or entities subject to lower marginal tax rates. Critics of the current system argue that such arrangements can create tax advantages not available to ordinary salary and wage earners.

Proposed 30% Minimum Tax on Discretionary Trusts

As part of the 2026–27 Federal Budget, the Government announced the introduction of a minimum tax rate of 30% on taxable income derived by discretionary trusts.

From 1 July 2028, trustees of discretionary trusts (non-fixed trusts) will be required to pay a minimum rate of tax of 30% on the trust’s taxable income.

Beneficiaries, other than corporate beneficiaries, will generally receive non-refundable tax credits for tax already paid by the trustee.

Trusts Excluded from the New Rules

The proposed minimum tax will not apply to the following entities:

• fixed trusts and widely held trusts, including fixed testamentary trusts;
• complying superannuation funds;
• special disability trusts;
• deceased estates; and
• charitable trusts.

Types of Income Excluded from the Minimum Tax

Certain categories of income will also remain outside the scope of the new rules, including:

• primary production income;
• specified income relating to vulnerable minors;
• amounts already subject to non-resident withholding tax; and
• income derived from assets held by discretionary testamentary trusts existing at the time of the announcement.

Comparing Different Business Structures

During the 2028–29 income year, both Kurt and Loretta earn $300,000 from operating small businesses. However, they use different business structures.

Loretta operates through a company structure. She pays herself a salary of $100,000 and retains the remaining profits within the company to support future business growth. The retained profits are taxed at the small business company tax rate of 25%. Under this structure, the combined tax payable by Loretta and her company totals $72,002.

Kurt, by comparison, operates through a discretionary family trust. He also pays himself a salary of $100,000, leaving $200,000 of trust income available for distribution. The trust distributes $50,000 each to four extended family members who have no other taxable income.

Under the current rules, the total tax payable by Kurt’s family group would be approximately $42,010, substantially lower than the amount payable under Loretta’s company structure.

However, under the proposed minimum trust tax rules, the trust would be required to pay tax at a minimum rate of 30% on the $200,000 of trust income, regardless of how that income is distributed among beneficiaries.

If Kurt continued using the same arrangement, the total tax payable would increase to approximately $86,002.

As a result, once the new rules commence, operating through a company structure and accessing the 25% small business company tax rate may become more tax-effective than using a discretionary trust structure in similar circumstances.

Roll-Over Relief for Trust Restructuring

To support taxpayers affected by the proposed reforms, the Government will introduce expanded roll-over relief for a three-year period commencing from 1 July 2027.

The relief is intended to assist small businesses and investors wishing to restructure from discretionary trust arrangements into alternative structures, such as companies or fixed trusts, without triggering immediate tax consequences as part of the restructure process.

2026–27 Federal Budget – Working Australians Tax Offset (WATO)

Start Date

From 1 July 2027

As part of the 2026–27 Federal Budget, the Government announced the introduction of the Working Australians Tax Offset (WATO), a permanent annual tax offset aimed at providing additional tax relief for Australian workers.

The offset will apply to employment income, including wages and salaries, as well as eligible business income earned by sole traders.

According to the Government, the measure will effectively increase the tax-free threshold for eligible taxpayers to approximately $19,985, and up to $24,985 for low-income earners who also qualify for the Low Income Tax Offset.

The Government estimates that more than 13 million Australian workers will benefit from the measure from 1 July 2027 onwards.

The offset will be applied automatically when eligible taxpayers lodge their income tax returns, with no separate application process required.

2026–27 Federal Budget – $1,000 Instant Tax Deduction

Start Date

Applies from the 2026–27 income year

Prior to the Federal Budget, the Government released exposure draft legislation titled Treasury Laws Amendment Bill 2026: Standard Deduction for Work-Related Expenses together with explanatory materials for public consultation.

Background

The proposal was first announced on 13 April 2025 as part of the Government’s election commitments. The measure is intended to simplify tax return preparation and provide additional cost-of-living relief for Australian workers.

On 20 April 2026, draft legislation and explanatory materials were released outlining the proposed changes.

The draft legislation proposes amendments to the Income Tax Assessment Act 1997 to:

• introduce a $1,000 standard deduction for work-related expenses for Australian resident individuals earning labour income; and
• amend substantiation rules, capital allowance provisions, and capital gains tax rules to align with the new deduction framework.

The draft Bill also proposes amendments to the Fringe Benefits Tax Assessment Act to introduce integrity measures preventing taxpayers from receiving double benefits through both employer-provided benefits and the standard deduction. These integrity measures are proposed to apply from FBT years commencing on or after 1 April 2027.

Instant Tax Deduction

Under the proposed reforms, eligible Australian tax residents earning employment or business income will automatically receive a standard tax deduction of up to $1,000 from the 2026–27 income year onwards.

Taxpayers claiming deductions below $1,000 will no longer need to separately itemise or substantiate individual work-related expenses.

Taxpayers whose deductible work-related expenses exceed $1,000 may continue to claim actual expenses under the existing substantiation rules.

Importantly, other deductible expenses that are not work-related — such as charitable donations, union fees, and professional association membership fees — will remain separately deductible in addition to the instant deduction.

2026–27 Federal Budget – Modernising Private Health

Application Date

From 1 April 2027

Background

Under the current private health insurance rebate system, eligibility for the rebate depends on factors including income level, family circumstances, and the type of private health insurance policy held.

The rebate rate also varies depending on the age of the oldest insured individual. Currently, higher rebate rates apply where the oldest person covered under the policy is aged 65 years or older.

Announcement

As part of the 2026–27 Federal Budget, the Government announced that it will abolish the age-based uplift applied to the Private Health Insurance Rebate from 1 April 2027.

The Government stated that savings generated from the measure will be redirected toward aged care funding, including additional residential aged care places and improved access to home care services.

In addition, the Government will provide $3.2 million over two years from 2025–26 to support implementation of the reforms and undertake consultation regarding broader changes to Australia’s private healthcare system.

2026–27 Federal Budget – Increased Medicare Levy Low-Income Thresholds

Start Date

From 1 July 2025

As part of the 2026–27 Federal Budget, the Government announced increases to the Medicare levy low-income thresholds for individuals, families, seniors, and pensioners.

Under the revised thresholds, taxpayers whose taxable income falls below the relevant limit will remain exempt from the Medicare levy. Taxpayers with income slightly above the threshold may continue to qualify for a reduced levy rate under the existing phase-in arrangements.

The increase is intended to ensure that low-income individuals and families continue to remain exempt from, or pay a reduced amount of, Medicare levy.