The 2026-27 Federal Budget, handed down on 12 May 2026, introduced one of the most significant changes to Australian trust taxation in decades. From 1 July 2028, discretionary trusts will be subject to a minimum 30% tax on their taxable income, payable by the trustee. The Government’s stated objective is to narrow the gap between the tax paid on trust income and the tax paid by ordinary wage and salary earners on comparable income.

For physiotherapy practice owners operating through a family trust - either directly, via a bucket company, or through a company with shares held by a trust - the consequences are substantial and, in many cases, deeply negative. This article examines how each of these common structures is affected and what you now face.

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Trading Directly Out of a Family Trust

How It Works Today

A discretionary family trust that carries on a trading business (such as a consultancy, trades business, retail operation, or professional practice) currently operates as a flow-through entity for tax purposes. The trust itself does not pay tax. Instead, the trustee distributes income each year to beneficiaries - typically adult family members - and each beneficiary pays tax at their own marginal rate.

This has been a cornerstone of Australian small business tax planning. A business earning $300,000 in profit could distribute that income across a working spouse, adult children, or other family members. By spreading the income, the family’s total tax bill could be meaningfully lower than if one individual earned the entire $300,000 and paid tax at the top marginal rate.

What Changes from 1 July 2028

Under the new rules, the trustee of a discretionary trust will pay a minimum tax of 30% on the trust’s taxable income. This is a separate liability imposed on the trustee and applies regardless of how the income is distributed among beneficiaries.

Beneficiaries who are individuals (non-corporate beneficiaries) will receive a non-refundable tax credit for the 30% already paid by the trustee. This means the credit can reduce their personal tax to zero, but any excess credit is lost - it is not refunded.

The Negative Impact

The damage falls hardest on trusts that distribute to beneficiaries with marginal tax rates below 30%. Consider these scenarios:

A non-working spouse or adult child with no other income: Under the current system, a $25,000 distribution to this beneficiary attracts minimal personal tax (well below 30%). Under the new regime, the trustee will have already paid 30% tax on that income - $7,500. The beneficiary receives a non-refundable credit, but because their personal tax liability on $25,000 is far less than $7,500, the excess credit is simply forfeited. The family has permanently lost the benefit of that lower marginal rate.

A beneficiary earning $40,000 from other employment: Their marginal rate on additional trust income is below 30% for a significant portion of that income. Again, the non-refundable credit cannot deliver a refund, so the family overpays compared to the current system.

Part-time working family members: Many family trust structures involve distributing income to family members who contribute to the business in a part-time capacity (bookkeeping, administration, customer service). These individuals often have taxable incomes well below the threshold where the 30% rate applies. The minimum trust tax eliminates the benefit of directing income to these lower-taxed individuals.

Even for beneficiaries whose marginal rate is at or above 30%, the mechanics of the non-refundable credit mean no net benefit - at best, they break even. The flexibility that made discretionary trusts attractive for distributing income to those who needed it most within the family has been significantly curtailed.

Loss of Income Streaming

Beyond the headline rate, the new minimum tax undermines the practice of income streaming - directing specific types of income (such as capital gains or franked dividends) to particular beneficiaries to optimise the family’s overall tax position. With a blanket 30% minimum applying to the trust’s taxable income, the benefit of carefully tailoring distributions to exploit individual beneficiaries’ circumstances is greatly diminished.

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Trading Out of a Family Trust with a Bucket Company

How It Works Today

Many family business groups have used what is known as a “bucket company” (or corporate beneficiary) strategy. Under this model, the family trust distributes a portion of its income to a private company. The company pays corporate tax at 25% (for base rate entities with turnover under $50 million) or 30%, and the after-tax profits can be retained within the company and reinvested, rather than being distributed and taxed at higher personal rates.

When the company eventually pays a dividend to its shareholders, the dividend carries franking credits that offset the shareholders’ personal tax. This has allowed families to defer personal tax, retain earnings at a lower rate, and accumulate wealth within a corporate vehicle - a perfectly legal and widely used planning strategy. Around 80,000 companies receive distributions from discretionary trusts, and according to Treasury data, 83% of those companies have no other business activity - indicating they exist primarily as bucket companies.

What Changes from 1 July 2028

The Budget has specifically targeted the bucket company strategy with what is effectively an anti-avoidance rule. Under the new regime:

• The trustee will pay the 30% minimum tax on the trust’s taxable income.
• Corporate beneficiaries will not receive any non-refundable tax credit for the tax paid by the trustee - unlike individual beneficiaries, who do receive such a credit.
• The company will then pay its own corporate tax on the full distribution it receives from the trust.

This results in deliberate double taxation of trust income flowing through a bucket company.

The Devastating Arithmetic

Consider $100 of trading profit earned by the family trust:

1. The trustee pays 30% minimum tax = $30
2. The trust distributes $70 to the bucket company
3. The bucket company pays corporate tax at 25% on the $70 received = $17.50
4. The company retains $52.50

The combined tax at the corporate level is now $47.50 on the original $100 - an effective rate of 47.5%.

If the company later pays a fully franked dividend to an individual shareholder at the top marginal rate, the total tax on the original $100 could reach somewhere between 55% and 63%, depending on the precise mechanics of the franking credit regime (which are yet to be legislated in full detail). One major accounting firm has modelled the effective rate as potentially reaching 62.9% on income cycled through a bucket company and ultimately distributed to an individual.

By comparison, an employee earning the same $100 and paying the top marginal rate (including Medicare levy) pays 47%. The bucket company route - once the most tax-efficient path for retaining and growing business profits - now produces a worse outcome than simply being a salaried employee.

Franking Credits Are Also Trapped

The rules go further. If the trust receives franked dividends (for example, from its own investments), the trustee must use the attached franking credits to offset the 30% minimum tax. This prevents trusts from accumulating franking credits and passing them through to corporate beneficiaries to neutralise the minimum tax. The franking credit pipeline that many family groups relied upon has been deliberately shut down.

The Strategic Implications

The bucket company strategy is, in Treasury’s own words, now economically counter-productive. Business owners who have spent decades building retained earnings within a bucket company, or who planned to use the structure to fund future investments, retirement, or succession, now face a structure that actively penalises them.

For many, this will force a fundamental restructuring of their business affairs. The Government has acknowledged this by providing a three-year rollover relief window from 1 July 2027 to 30 June 2030, allowing eligible trusts to restructure into a company, fixed trust, or other entity without triggering income tax or capital gains tax consequences.

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Trading Out of a Company with Shares Owned by a Trust

How It Works Today

A third common structure involves the trading business being operated through a company (Pty Ltd), with the shares of that company held by a discretionary family trust. The company earns the trading income, pays corporate tax at either 25% or 30%, and the after-tax profits are either retained or paid out as franked dividends to the trust. The trust then distributes those franked dividends (along with the attached franking credits) to individual beneficiaries, who include the dividends and credits in their personal tax returns.

This structure has offered asset protection (through the company), the ability to retain profits at the lower corporate rate, and the flexibility (through the trust) to direct dividend income to family members in the most tax-efficient manner each year.

What Changes from 1 July 2028

Distributing to Individual Beneficiaries

When the trust receives a franked dividend from the company and distributes it to individual beneficiaries, the new minimum tax rules apply. The trustee must pay 30% on the trust’s taxable income, and the franking credits attached to the dividend must be applied against that 30% liability first.

For beneficiaries at or above the 30% marginal rate, the system broadly breaks even - the franking credits offset the minimum tax, and the beneficiary’s personal tax position is similar to today. However, the critical disadvantage emerges for beneficiaries below 30%. Because the non-refundable credit cannot produce a refund, any excess is lost. A beneficiary who would previously have received a franking credit refund (because their marginal rate was below the corporate rate) will now lose that benefit, as the trustee’s minimum tax absorbs the franking credits before they can flow through.

This is a meaningful loss for families that directed franked dividend income to lower-income members (a retired parent, a part-time working spouse, an adult child still studying) specifically to capture the refund of excess franking credits.

Distributing to a Bucket Company

If the trust instead distributes the franked dividend income to another corporate beneficiary (a second-tier bucket company), the same anti-bucket-company rules apply. The corporate beneficiary receives no credit for the trustee’s 30% minimum tax. The company then pays its own corporate tax on the distribution. The result is the layered double taxation described in Section 2, compounded by the fact that the income has already been taxed once at the operating company level.

In this worst-case layering scenario:

1. The operating company earns $100 and pays 25% corporate tax = $25
2. It pays a $75 franked dividend to the trust
3. The trustee pays 30% minimum tax on the grossed-up dividend income ($100) = $30, offset by the $25 franking credit, leaving $5 payable
4. The trust distributes $70 to a bucket company
5. The bucket company pays 25% corporate tax on $70 = $17.50
6. Total tax so far: $25 + $5 + $17.50 = $47.50 on the original $100

And if the bucket company then distributes to an individual, further personal tax applies - pushing the total burden well beyond what any single taxpayer would pay on comparable income.

The Structural Trap

The irony is that this structure was originally designed to give families both the operational benefits of a company and the distribution flexibility of a trust. The new rules effectively penalise the combination. The trust layer, which once added value through flexible income allocation, now adds cost through the minimum tax. And the interposition of a bucket company between the trust and the ultimate individual beneficiary transforms a tax-efficient arrangement into one of the most tax-inefficient structures available.

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What Trusts Are Excluded?

Not all trusts are caught. The following are specifically excluded from the 30% minimum tax:

• Fixed trusts and widely held trusts (including most managed investment trusts)
• Complying superannuation funds (including SMSFs)
• Special disability trusts
• Deceased estates
• Charitable trusts
• Testamentary trusts in existence as at 12 May 2026

Primary production income is also carved out, meaning farming and agricultural enterprises operating through discretionary trusts receive some relief.

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The Rollover Relief Window

Recognising the severity of the change, the Government has announced rollover relief for trusts that choose to restructure out of a discretionary trust into a company, fixed trust, or other structure. This relief will be available for three years, from 1 July 2027 to 30 June 2030, and will ensure there are no income tax or capital gains tax consequences triggered by the restructure.

The Australian Small Business and Family Enterprise Ombudsman will also be empowered to assist small businesses as they evaluate their options from 1 January 2027.

However, restructuring a trust is not simple. It involves legal, accounting, and commercial considerations including the impact on asset protection, succession planning, loan arrangements, lease agreements, licensing, and contractual obligations. Many trusts hold significant unrealised capital gains, property, or goodwill that complicate any transition.

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Conclusion

The 2026 Federal Budget’s 30% minimum tax on discretionary trusts represents a fundamental shift in how Australian family businesses and investors are taxed. For those trading directly out of a family trust, the ability to distribute income to lower-taxed family members is significantly curtailed. For those using a bucket company, the strategy has been rendered not just ineffective but actively harmful, with effective tax rates potentially exceeding 60%. And for those trading through a company with trust shareholders, the layering of the minimum tax on top of corporate tax creates a compounding tax burden that punishes structural complexity.

With these changes not taking effect until 1 July 2028, and rollover relief available from 1 July 2027, there is time to plan - but the planning required is substantial. Every family group operating through a discretionary trust should be seeking professional advice now to understand their options and position themselves before the new rules commence.

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There Are Solutions - And We Can Help

While the changes are significant, they are not without solutions. The right strategy depends on your specific circumstances, but there are genuine opportunities to restructure, adapt, and in many cases protect your position before the new rules take effect.

Some of the options that may be available to you include:

• Restructuring into a company to take advantage of the 25% small business corporate tax rate and the dividend imputation system, using the Government’s three-year CGT rollover relief window before it closes on 30 June 2030.
• Converting to a fixed trust where the structure and beneficiary profile make this appropriate, preserving many of the benefits of a trust while falling outside the new minimum tax regime.