The New 30% Trust Tax Floor

The federal government’s historic tax overhaul includes a major structural change specifically targeting family trusts. Officially taking effect on 1 July 2028, a new rule introduces a minimum 30% tax on discretionary trust distributions.

This measure is explicitly designed to eliminate traditional "income-splitting" tactics, fundamentally altering how family groups manage and distribute wealth. Here is what you need to know about the new rules.

1. The Impact on "Income-Splitting" to Low Earners

Historically, a primary benefit of a discretionary (family) trust was the flexibility to stream investment or business income to family members in lower tax brackets—such as adult children studying at university or retired parents.

From 1 July 2028, this strategy will be heavily restricted:

• The New Tax Floor: Any distribution made from a discretionary trust to an individual will face a minimum effective tax rate of 30%.

• The Reality: If you distribute $20,000 to a family member who has no other income (and would normally pay $0 tax under their personal tax-free threshold), that distribution will now attract a flat 30% tax bill ($6,000).

• High Earners: If you distribute income to a beneficiary who is already in a personal tax bracket above 30% (such as the 37% or 45% brackets), they will simply continue to pay their usual higher marginal rate.

2. The Death of the 25% "Bucket Company" Advantage

For years, investors and business owners used a corporate beneficiary to cap their trust tax exposure at the small business company tax rate of 25%.

Because the new law enforces a strict 30% baseline across discretionary distributions, the financial advantage of streaming income to a 25% small business bucket company disappears. Trust income distributed through to the corporate beneficiary will now face a baseline minimum of 30%.

3. What is Safe From This Change?

• Fixed & Testamentary Trusts: This minimum tax floor strictly targets discretionary family trusts. Fixed unit trusts and deceased estate testamentary trusts are excluded from these restrictions.

• Minor Children: The existing, harsh tax rules for minor children (under 18) remain unchanged. Distributing unearned trust income to minors will still trigger penalty tax rates up to 45%.

4. Next Steps for Your Family Structure

This measure is not yet legislation.  An Exposure Draft has been released.  The final details are being refined by Treasury. This includes the recent addition of a 3-year capital gains tax rollover window to help families restructure out of discretionary trusts if they choose to.

Once this measure becomes legislation, we will update you with any relevant changes.