Family Trusts Are Changing

The 2026–27 Federal Budget has announced one of the biggest changes to how family trusts are taxed in Australian history. It does not take effect until 1 July 2028, but the time to start thinking about it is now, not later.

How Family Trusts Work

A family discretionary trust is a legal structure that holds assets or runs a business on behalf of a group of people, usually a family. Each year, the person in charge of the trust (the Trustee) decides how to divide up the income the trust has earned among the beneficiaries (usually family members).

One of the key advantages has always been flexibility. If one family member earns a lot and pays a high rate of tax, and another earns very little, the Trustee can direct more income to the lower-earning member, reducing the overall amount of tax the family pays, on the same pool of money. This is entirely legal and has been a common and accepted tax planning strategy in Australia for decades.

That flexibility is what the Government is now significantly winding back.

What Is Actually Changing

From 1 July 2028, the trust itself will be required to pay a minimum tax of 30% on all of its income, before any of that income is distributed to family members.

Family members who receive a distribution will get a credit to reflect the tax already paid, so they are not taxed twice in most situations. But here is the catch – that credit is non-refundable. 

This means that if a family member would normally pay less than 30% tax on that income (because their own income is low), they do not get a refund of the difference. The extra tax is simply gone.

In practical terms, this means the strategy of directing trust income to low-income family members to reduce the overall tax bill will largely no longer work.

A Simple Example

Under the current rules, a family trust with $200,000 in income might distribute $50,000 each, to four family members. If some of those members are on low incomes: a spouse who does not work full time, or an adult child studying, the family might pay as little as $24,000 in tax combined on that $200,000.

Under the new rules from 2028, the trust pays 30% on the full $200,000 upfront (that is $60,000 in tax) regardless of who receives the income or what their individual tax situation is. The family ends up paying significantly more.

What About Company Beneficiaries?

Some families have set up a related company alongside their trust. Each year, part of the trust income is directed to that company, which pays a lower flat tax rate of 25%. The money sits in the company and can be invested or paid out to shareholders later. This has been a popular way of building wealth inside a lower-tax environment.

The Budget has specifically targeted this arrangement. Under the new rules, if trust income goes to a company, that company gets no credit for the 30% tax already paid by the trust. This means you could end up paying tax twice on the same money, once in the trust and again in the company. The government has designed it this way deliberately, to discourage this strategy.

If this arrangement forms part of how your trust currently works, it is particularly important to review your situation now.

Does This Affect All Trusts?

No. The new rules apply specifically to discretionary trusts, the kind where the Trustee has flexibility to decide who gets what each year. 

The following are not affected:

• Fixed trusts, where each beneficiary has a set entitlement that cannot be changed
• Superannuation funds, including self-managed super funds (SMSF)
• Charitable trusts
• Special disability trusts
• Deceased estates
• Family trusts set up under a will, provided they existed before 12 May 2026

Importantly, there is no grandfathering for existing discretionary trusts. If you have had your family trust for 20 years, it is still affected. The start date is 1 July 2028 for everyone.

Should You Still Have a Trust?

This is the question many clients will be asking, and the honest answer is: it depends on your situation.

Family trusts still offer genuine asset protection benefits. If someone sues you personally, assets held in a trust are generally better protected than assets held in your own name. For many families, that alone is a strong reason to keep the structure.

What changes is the tax calculation. If the main reason your trust was set up was to reduce tax through income splitting, then from 2028 that benefit is largely gone. The structure may still make sense for other reasons, but it needs to be reviewed with fresh eyes.

For some clients, converting to a company structure will make more sense going forward. For others, staying in the trust but adjusting how income is distributed will be the right call. There is no one-size-fits-all answer — it depends on your income levels, your family circumstances, the assets in the trust, and your long-term goals.

The Main Thing We Want You to Take Away

These changes do not start until 2028. But the planning, analysis and any restructuring needs to begin well before then, particularly if you want to use the restructuring window that opens in July 2027.

Do not wait until 2027 to start this conversation. The clients who will navigate this best are the ones who understand their position now and have a clear plan in place before the window opens.

If you have a family discretionary trust (or if you think you might), now is the time to have a conversation about what these changes mean for you. Simmons Livingstone can review your structure, explain the impact in plain terms, and help you understand what your options are. Call 1800 618 800 or email admin@simmonslivingstone.com.au to arrange a time to chat.