Discretionary trusts are one of the most common structures used by Australian families and small businesses, yet they are also one of the most misunderstood. With the 2026 to 2027 Federal Budget proposing significant changes to how these trusts are taxed, many business owners and families are now asking what a discretionary trust actually is, and whether their current structure still suits them. This guide explains the essentials and outlines what the proposed changes could mean for you.

What is a discretionary trust?

A discretionary trust is a legal structure where a person or company, called the trustee, holds and manages assets or business income for the benefit of a group of people or entities, called the beneficiaries.

It is described as “discretionary” because the trustee has the discretion to decide which beneficiaries receive income or capital, and how much each one receives. The beneficiaries do not usually have a fixed entitlement until the trustee decides to make a distribution.

How a family trust works in practice

A common example is a “family trust” that owns a business. The trustee runs the business, and the beneficiaries might include a husband, wife, children, related companies, or other family entities. At the end of the financial year, the trustee decides how the trust income is distributed among the eligible beneficiaries, subject to the trust deed and the relevant tax laws.

For instance, the trustee may decide to distribute part of the income to one parent, part to the other parent, and part to a company beneficiary, taking advantage of income splitting to minimise tax. The beneficiaries do not own the business directly, but if the trustee decides to make distributions to them from the business’s profits, they receive a benefit.

Why discretionary trusts have been popular

Several features have made this structure attractive to families and businesses.

Flexibility

A discretionary trust can provide flexibility, because the trustee may distribute income differently each year. This can be useful where family members have changing financial circumstances, which might result in a better tax outcome. There are strict rules governing the tax treatment of trust distributions, designed to prevent tax evasion, but within those limits a trust has generally been a flexible tax management tool.

Asset protection

A trust may also assist with asset protection, because the business assets are held by the trustee separately from the personal assets of individual beneficiaries. If a beneficiary personally experiences financial difficulty, trust assets are, for the most part, protected.

Succession planning

A trust can support succession planning. A family business can continue through the trust even if individual family members change roles, or pass away. Control of the trust may pass by changing the trustee or appointor, rather than by transferring each business asset separately.

What is changing after the Federal Budget?

Following the 2026 to 2027 Federal Budget, handed down on 12 May 2026, discretionary trusts may become less tax effective. The Government has announced that from 1 July 2028, trustees may be required to pay a 30% minimum tax on trust income. This change is aimed at limiting income splitting, which is the practice of distributing income to family members on lower tax rates to reduce the overall tax paid.

Some trusts and some types of income may be excluded from the new rules, and a time limited rollover relief has been proposed to help people restructure out of discretionary trusts where appropriate. Importantly, the proposal is not yet law, so the final details may still change as it moves through Parliament.

What this means for you

Because the proposed start date is 1 July 2028, there is time to review whether a discretionary trust still suits your circumstances. Every family and business is different, and the right structure depends on your assets, your goals, and how you intend to pass control or wealth to the next generation. Reviewing your position early allows you to make considered decisions rather than rushed ones.

If you would like to understand how a discretionary trust works, or whether the proposed changes could affect your business or family structure, our experienced team can help. Contact our experienced team to discuss your situation.