How the 2026 Federal Budget's Trust, CGT and Negative‑gearing Changes Affect Estate Planning in Australia

Last reviewed: 16 May 2026

The 12 May 2026 Federal Budget introduced the most significant trust tax changes Australia has seen in decades, headlined by a proposed 30 per cent minimum tax on discretionary trusts effective from 1 July 2028. Alongside trust reform, the Budget flagged changes to the longstanding 50 per cent capital gains tax (CGT) discount and announced phased restrictions on negative gearing, each carrying direct consequences for wills, succession plans and intergenerational wealth transfer. For high‑net‑worth individuals, trustees, family business owners and their advisers, the combined effect demands an urgent review of existing estate‑planning structures. This guide sets out what has been announced, who is affected, and the practical legal steps that should be taken now, well before implementing legislation is finalised.

What the 2026 Federal Budget Proposes, Headline Measures and Timeline

Understanding 2026 federal budget estate planning reform starts with isolating the three headline measures and their respective implementation windows. Each measure sits at a different stage of legislative development, and the distinction matters for timing any restructure or deed amendment.

The three core measures

1. 30 per cent minimum tax on discretionary trusts. From 1 July 2028, taxable income retained in or distributed from a discretionary trust will be subject to a minimum 30 per cent tax rate. The measure targets income‑splitting arrangements where trust distributions flow to low‑ or nil‑income beneficiaries at marginal rates well below 30 per cent. The Australian Government’s Budget factsheet confirms both the rate and the start date.
2. CGT discount reform. The Budget signals changes to the existing 50 per cent CGT discount for individuals and trusts. Full details, including any replacement discount percentage and transitional provisions, are subject to draft legislation. Industry observers expect exposure drafts before end of 2026, but no operative date has been locked in beyond the Budget’s forward estimates period.
3. Negative‑gearing restrictions. Phased limitations on the ability to offset rental‑property losses against other income have been announced. Exact phase‑in dates and asset thresholds are to be confirmed through legislation. The changes are expected to interact with investment property structures commonly held inside family trusts and self‑managed superannuation funds (SMSFs).

Quick reference timeline

How will the 2026 Budget affect family and discretionary trusts?

The Budget’s centrepiece reform directly targets discretionary (family) trusts. Where trust income is currently distributed to adult beneficiaries on low marginal rates, sometimes as low as zero, the new minimum tax will impose a 30 per cent floor. Fixed trusts, unit trusts and charitable trusts appear to be excluded from the measure based on the Budget factsheet’s scope, although the final legislative definitions will be critical. The likely practical effect will be the end of pure income‑splitting strategies that have underpinned Australian family trust planning for over 40 years.

Discretionary and Family Trusts, Who Is Affected and How the Trust Tax Changes Australia‑Wide

The proposed minimum tax on discretionary trusts tax in Australia represents a structural change, not merely a rate adjustment. Understanding the mechanics is essential before making any restructuring decision.

How will the new tax on trusts work?

Under the current system, a discretionary trust itself does not generally pay tax. Instead, the trustee distributes (or is deemed to distribute) net income to beneficiaries, who then include it in their personal returns at their own marginal rates. The 30 per cent minimum tax changes this model by imposing a floor: where the effective tax rate on distributed trust income would otherwise fall below 30 per cent, the trustee will be liable for a top‑up amount to bring the total to at least 30 per cent. The tax is assessed at trust level, payable by the trustee in their representative capacity.

Key features based on the Budget factsheet include:

• Scope. The measure applies to discretionary trusts, those where the trustee has discretion over distributions. Fixed trusts and unit trusts with predetermined entitlements are not captured.
• Start date. Income years commencing on or after 1 July 2028.
• Interaction with franking credits. Treatment of franked dividends flowing through trusts remains subject to legislation. Early indications suggest franking credits may offset the minimum tax liability, but precise mechanics await the exposure draft.
• Beneficiary treatment. Beneficiaries on marginal rates at or above 30 per cent are unaffected, as the effective rate already meets the minimum. The measure targets distributions to beneficiaries on lower rates.

Will my family trust be taxed at 30 per cent and when does that start?

From 1 July 2028, a discretionary trust distributing income to beneficiaries whose marginal tax rates fall below 30 per cent will face a top‑up tax to bring the effective rate to 30 per cent. Trusts distributing solely to beneficiaries already in the 30 per cent bracket or above will see no change. The measure does not apply to income years before 1 July 2028.

Worked examples

Scenario A, Adult child with no other income. A family trust earns $100,000 net income and distributes it entirely to an adult beneficiary with no other income. Under current law, the beneficiary would pay approximately $24,967 in personal income tax (2025–26 rates). Under the proposed minimum, because this effective rate (roughly 25 per cent) falls below 30 per cent, the trustee would owe a top‑up of approximately $5,033, bringing the total tax to $30,000.

Scenario B, Distribution split across two beneficiaries earning above the threshold. The same $100,000 is split equally between two beneficiaries, each already earning $90,000 in salary. Their marginal rate on the additional $50,000 exceeds 30 per cent, so no top‑up is payable by the trustee.

Tax effect by beneficiary type

Capital Gains Tax Changes Australia, Impact on Estates, the Main Residence and Testamentary Trusts

The proposed changes to the 50 per cent CGT discount carry significant implications for capital gains tax changes Australia‑wide, particularly for deceased estates, testamentary trusts and family homes passed between generations.

What the Budget proposes on CGT

While precise replacement discount rates and transitional rules await legislation, the Budget papers signal a reduction in the CGT discount available to individuals and trusts on assets held for more than 12 months. For estate planning, three interactions require immediate attention:

• Deceased estates. When a person dies, CGT is generally deferred until the beneficiary or legal personal representative disposes of the inherited asset. A reduced CGT discount will increase the tax payable on that eventual disposal, potentially by tens or hundreds of thousands of dollars on high‑value properties and share portfolios.
• Main residence exemption. The principal place of residence remains CGT‑exempt on the owner’s disposal, and this exemption extends for a period after death when the property passes to a beneficiary. However, where an inherited home is not the beneficiary’s own main residence, any future sale will attract CGT, and the reduced discount will magnify the liability.
• Testamentary trusts. Assets transferred into a testamentary trust Australia‑wide currently benefit from the CGT discount when eventually sold. A reduced discount will affect the after‑tax position of testamentary trust beneficiaries, making trust design, including powers to distribute capital gains to beneficiaries in the highest‑discount position, even more important.

Drafting implications for wills

Practitioners should consider adding or reviewing clauses that give executors discretion over the timing of asset disposals, powers to appropriate assets in specie to beneficiaries with the most favourable CGT position, and flexibility to distribute capital gains separately from income. Where a will establishes a testamentary trust, the trust deed should confer broad investment and distribution powers to allow the trustee to manage CGT outcomes as legislation evolves.

SMSF and CGT, superannuation death benefits

SMSF succession planning must also account for CGT reform. Where an SMSF holds assets in accumulation phase and a member dies, the fund may face a CGT event on transferring assets to pay death benefits. A reduced CGT discount increases the tax cost within the fund, diminishing the net benefit received by dependants. Binding death benefit nominations and reversionary pension nominations should be reviewed to ensure they interact efficiently with the changed CGT settings, particularly where benefits are directed to non‑tax‑dependants.

Succession Planning Australia, Restructuring Options and Legal Pathways

The announcement creates immediate pressure to consider a family trust restructure, but hasty action carries its own risks. The following pathways should be evaluated methodically, ideally in consultation with both legal and accounting advisers.

Option 1, Maintain the existing discretionary trust

For trusts where all regular beneficiaries already have marginal rates at or above 30 per cent, the minimum tax may have no practical impact. The trust’s asset‑protection, flexibility and succession benefits are preserved without change. This is often the right answer for trusts held primarily for estate planning rather than income splitting.

Option 2, Convert to a fixed or unit trust

Fixed trusts and unit trusts appear excluded from the minimum tax measure. However, converting a discretionary trust to a fixed trust involves resettlement risks, the ATO may treat the conversion as a disposal of assets, triggering CGT, and state revenue authorities may impose stamp duty on a change of beneficial ownership. The succession planning trade‑off is significant: a fixed trust lacks the distribution flexibility that makes discretionary trusts powerful for adapting to family circumstances over decades.

Option 3, Establish a corporate structure

Transferring income‑producing assets to a company eliminates the trust minimum tax issue but introduces the company tax rate (25 per cent for base‑rate entities or 30 per cent otherwise), the problem of trapped profits, and complications on extracting value for beneficiaries via dividends or loans. For succession planning Australia practitioners, the loss of asset protection and the rigidity of share structures make this option suitable only in limited circumstances.

Option 4, Use testamentary trusts

Testamentary trusts established under a will remain a powerful tool for controlling post‑death distributions. Where the testator’s assets will pass on death rather than inter vivos, a well‑drafted testamentary trust can provide beneficiaries with ongoing income‑streaming flexibility. The interaction between testamentary trusts and the minimum tax measure will depend on the final legislation, but early indications suggest testamentary trusts that exercise discretionary powers may be captured.

Option 5, Deed variation and pre‑settlement

Varying an existing trust deed to restrict the class of beneficiaries or amend distribution powers could mitigate the minimum tax impact, but variations that effectively create a new trust risk resettlement, CGT events and duty exposure. Any deed variation should be supported by a clear legal opinion and documented commercial rationale.

Step‑by‑step legal checklist

Immediate (within 30 days):

• Obtain a copy of every trust deed and review the variation power, distribution clauses and appointor/guardian provisions.
• Run preliminary tax modelling comparing the current and proposed regimes for each trust.
• Identify beneficiaries whose marginal rates fall below 30 per cent.

Within 3–6 months:

• Engage legal counsel to assess whether deed amendments are warranted and whether they risk resettlement.
• Review all wills that establish testamentary trusts, ensure executor powers and distribution discretions are sufficiently broad.
• Coordinate with accountants on distribution strategies for the 2026–27 and 2027–28 income years.

Before 1 July 2028:

• Finalise any restructuring with supporting legal opinion and commercial documentation.
• Update trustee resolutions and minute books to reflect revised distribution policies.
• Confirm SMSF binding death benefit nominations and reversionary pension elections remain appropriate.

Practical Drafting and Trustee Action Items

For estate planning practitioners, the Budget reforms call for a systematic review of trust deeds, wills and ancillary documents. The following drafting and administration items should be prioritised.

Trust deed review points

• Variation power. Confirm the deed permits amendment without triggering a resettlement, check whether the power is limited to administrative changes or extends to the trust’s beneficial provisions.
• Distribution clauses. Ensure the trustee retains broad discretion to stream income, capital gains and franked distributions separately to different beneficiaries, enabling tax‑efficient allocations under the new rules.
• Appointor and guardian provisions. Succession of control is critical. Review who holds the power to appoint and remove the trustee, and ensure these provisions survive the appointor’s death or incapacity.
• Vesting date. Trusts approaching their vesting date may face compounded issues if they vest during a period of legislative transition. Consider whether an extension is permissible and desirable.

Will and testamentary trust provisions

• Executor powers. Grant executors express authority to delay asset sales, appropriate assets in specie and elect timing for CGT events.
• Testamentary trust terms. Include flexible income and capital distribution powers, broad investment powers, and the ability to add or exclude beneficiaries within defined classes.
• Buy‑sell and succession clauses. For family business assets, review or introduce buy‑sell agreements and succession clauses that interact cleanly with trust and CGT changes.

Is the ATO cracking down on family trusts?

The ATO has been progressively modernising trust reporting obligations through its trust administration systems, increasing data matching and targeting arrangements it considers to be non‑arm’s‑length or income‑diverting. The Law Society Journal has noted a rise in ATO audit activity concerning family trusts and distributions to low‑income beneficiaries. Trustees should ensure distribution resolutions are executed before 30 June each year, that minutes accurately reflect genuine exercises of discretion, and that unpaid present entitlements are properly documented and managed.

Template checklist for trustees

• Current trust deed (with all amendments)
• Trustee appointment and removal records
• Distribution resolutions for the last five income years
• Beneficiary schedule with current marginal tax rates
• Loan agreements for any unpaid present entitlements
• Minutes of trustee meetings recording investment and distribution decisions
• Updated wills of the appointor, trustee and principal beneficiaries

SMSF and Superannuation Succession Planning

Superannuation remains Australia’s most tax‑effective wealth‑transfer vehicle, but the Budget’s trust tax changes Australia practitioners must address will interact with SMSF structures in several ways.

Binding death benefit nominations (BDBNs). A valid BDBN directs the SMSF trustee to pay death benefits to specified dependants or the member’s legal personal representative. Where CGT reform reduces the discount available inside the fund on the disposal of assets to pay benefits, the net amount received by beneficiaries decreases. Members should review whether existing BDBNs direct benefits in the most tax‑efficient manner, for example, directing benefits to a tax‑dependant spouse via a reversionary pension rather than a lump sum to an adult non‑dependant child.

Corporate trustee succession. Many SMSFs use a corporate trustee. The directors of that company control the fund. Estate plans must ensure that directorship passes to the intended person on a member’s death, typically through the member’s will or a shareholder agreement, to avoid control disputes that delay benefit payments and crystallise unnecessary tax events.

Practical steps.

• Confirm all BDBNs and reversionary pension nominations are current and valid.
• Review the SMSF trust deed to ensure it permits the payment of death benefits in the most flexible manner.
• Model the CGT impact of disposing of SMSF assets to pay death benefits under current and proposed discount rates.
• Consider whether commutation and re‑contribution strategies remain viable under the new settings.

Risks, ATO Scrutiny and Anti‑Avoidance Considerations

Any restructuring undertaken primarily to avoid the new minimum tax carries significant risk. The ATO has signalled, through its compliance programs and public commentary, that it will closely examine trust restructures, conversions and asset transfers implemented in the lead‑up to 1 July 2028.

Anti‑avoidance provisions. Part IVA of the Income Tax Assessment Act 1936 allows the Commissioner to cancel tax benefits obtained through schemes entered into for the dominant purpose of obtaining a tax benefit. A conversion from a discretionary trust to a unit trust, or a transfer of assets from a trust to a company, undertaken without a genuine commercial rationale could be challenged under Part IVA.

Compliance documentation. The safest approach is to document, contemporaneously, the commercial and family reasons for any structural change. Board or trustee minutes should record the non‑tax objectives of the restructure, such as asset protection, governance simplification or succession clarity, alongside any tax modelling.

Voluntary disclosure. Where existing arrangements may not comply with current ATO guidance on trust distributions or unpaid present entitlements, industry observers expect voluntary disclosure before the new measures take effect could attract reduced penalties. Practitioners should monitor ATO announcements for any formal amnesty or disclosure programme.

What is the 7‑year rule for trusts?

The “7‑year rule” is frequently referenced in Australian online discussions but originates from UK inheritance tax law, where gifts made within seven years of death may be taxable. Australia does not have an equivalent inheritance tax or gift duty. However, Australian practitioners should be aware of analogous look‑back provisions, such as the clawback rules under family provision legislation and the ATO’s ability to examine transactions in the years preceding a taxpayer’s death for CGT and income‑tax purposes. This distinction is important when clients rely on overseas guidance.

Recommended Next Steps for Clients and Advisers

The Budget’s trust, CGT and negative gearing changes australia represent a once‑in‑a‑generation shift in the estate‑planning landscape. The window between now and 1 July 2028 should be treated as a structured implementation period rather than a reason to delay action.

We recommend the following steps for clients and their professional advisers:

1. Schedule a trust and estate review. Bring together your solicitor, accountant and financial adviser to assess your current structures against the proposed measures.
2. Run tax modelling. Compare the after‑tax position of each trust under current and proposed rules for at least two income years.
3. Review all wills and testamentary trust provisions. Ensure your documents give executors and trustees the flexibility to respond to the final legislation.
4. Update SMSF nominations. Confirm BDBNs, reversionary pensions and corporate trustee succession arrangements.
5. Document everything. Maintain contemporaneous records of all decisions, including the commercial rationale for any restructure.

For tailored advice on how these reforms interact with your specific family and business circumstances, contact an Australian estate‑planning solicitor through the Global Law Experts directory.

Conclusion

The 2026 Federal Budget marks a turning point for trust tax changes Australia estate‑planning practitioners have long anticipated. The 30 per cent minimum tax on discretionary trusts, reforms to the CGT discount and negative‑gearing restrictions collectively reshape the structures that Australian families have relied on for wealth protection and intergenerational transfer. While implementing legislation remains to be finalised, the policy direction is clear and the window for orderly preparation is finite. Trustees, beneficiaries, executors and their advisers should act now, not to make premature restructuring decisions, but to model outcomes, review documentation and position themselves to implement changes efficiently once the law is settled.

All measures discussed in this guide remain subject to the passage of legislation and any further ATO guidance.

Sources

1. Australian Government, Budget 2026 Factsheet: Minimum Tax on Discretionary Trusts
2. Australian Taxation Office, Trusts / Trustees Guidance
3. ABC News, Trust Reform Coverage
4. Australian Financial Review, Budget Trust Measures
5. Pitcher Partners, Federal Budget 2026–27: Minimum Tax on Discretionary Trusts
6. Law Society Journal, Family Trusts and the ATO: Increased Scrutiny and Emerging Risks
7. Australian Government, Budget 2026–27 Main Page