While much of the media attention surrounding the 2026 Federal Budget has focused on housing affordability and negative gearing, one of the most significant proposed tax changes for small business owners has received far less coverage — the taxation of discretionary trusts. For many family businesses, farms, and professional practices, these proposed changes could materially alter how income is taxed in the future. Introduction One of the most significant announcements from the 2026 Federal Budget is not directed at large multinational corporations or major public companies. Instead, it targets structures commonly used by everyday Australian small businesses and families. From 1 July 2028, discretionary trusts are proposed to be subject to a minimum 30% tax on taxable income, fundamentally changing the way trust distributions are taxed. What Has Been Announced? Under the proposed measures announced in the 2026 Federal Budget: Discretionary trusts will be subject to a minimum 30% tax on taxable income The trustee will withhold and remit this tax Beneficiaries will receive a non-refundable tax credit for tax already paid by the trust While further legislative detail is still to be released, the proposed framework represents a major shift away from the current flow-through taxation model traditionally applied to discretionary trusts. Why This Matters for Individual Beneficiaries Under the current system, trust distributions to individuals are taxed at the beneficiary’s marginal tax rates. This allows beneficiaries to access lower tax brackets, including the tax-free threshold and lower marginal rates on income up to certain thresholds. Under the proposed rules, much of this flexibility appears likely to disappear. Even beneficiaries with total taxable income below current lower tax thresholds may effectively bear tax at the minimum 30% rate on trust distributions. For many families, this could significantly increase overall tax liabilities where trusts have historically been used for legitimate income distribution and family succession planning purposes. Why Small Businesses Could Be Most Affected Discretionary trusts remain one of the most common business structures used by small businesses across Australia, including: Farming operations Trades and construction businesses Professional practices Family-run enterprises Investment and asset-holding structures While paying wages instead of trust distributions may assist in reducing the impact of the proposed measures, this approach can introduce additional compliance obligations and operating costs for businesses that do not currently employ staff. These may include: Payroll software and processing costs Payday superannuation compliance Single Touch Payroll (STP) reporting WorkCover and payroll tax considerations Additional administrative requirements Concerns Around ‘Bucket’ Companies Another major concern relates to trust distributions to corporate beneficiaries, commonly referred to as “bucket companies”. Based on information released to date, companies do not appear to receive access to the proposed non-refundable tax credit attached to trust income. This raises the potential for double taxation and may significantly undermine longstanding tax planning strategies used to smooth income over multiple financial years and retain profits for future business or family needs. Impact on Existing Company and Trust Structures Many small business groups currently operate through a company structure where the shares in the company are owned by a discretionary trust. Historically, this structure has provided flexibility for: Family succession planning Asset protection Income distribution Long-term business planning While companies may continue paying franked dividends to trusts, distributions from the trust to individual beneficiaries may still be subject to the proposed minimum 30% tax outcome — even where the underlying income originated from ordinary business profits. Example Consider a family business earning $120,000 through a discretionary trust. Under the current rules, the income may be distributed between two individuals, resulting in taxable incomes of $60,000 each. Based on current tax rates (excluding Medicare levy and offsets), the combined tax payable would be approximately $17,576. Under the proposed measures, the same $120,000 distributed through the trust could result in tax of $36,000 — an increase of approximately $18,424. For active business operations, consideration may need to be given to paying commercial wages to working family members to reduce exposure to the proposed minimum trust tax rules. However, where trust income is primarily derived from passive investments, the ability to justify wage payments may be significantly more limited. What this means going forward Although these proposed measures are not scheduled to commence until 1 July 2028, and substantial legislative detail is still outstanding, the potential implications for small business owners, farming families, and discretionary trust structures are significant. Clients currently operating through trusts, or businesses considering future structuring decisions, should closely monitor developments as further information becomes available. This article contains general information only and does not constitute taxation or financial advice. Independent professional advice should be obtained based on your individual circumstances.