Discretionary Trust Tax Changes 2026: What Property Investors Need to Do

Three reforms announced in the 2026-27 Federal Budget are about to collide inside the same trust structure. A 30% minimum tax on discretionary trusts from 1 July 2028. The end of negative gearing on established residential property from 1 July 2027. And the replacement of the 50% CGT discount with cost base indexation, also from 1 July 2027.

Each change matters on its own. Together, they close the last meaningful reason most residential property investors would hold assets in a discretionary trust. The restructure window runs from 1 July 2027 to 30 June 2030. The planning needs to start now.

What Changed and When It Takes Effect

On 12 May 2026, the Government announced it will introduce a 30% minimum tax on discretionary trusts from 1 July 2028. The measure is expected to raise $3.6 to $4 billion per year if passed.

Two things to note immediately. First, this measure is not yet law. Consultation is underway, and the final legislation could differ from the Budget announcement. Second, the minimum tax applies at the trustee level, not the beneficiary level. The trustee pays 30% first, and then individual beneficiaries can claim a non-refundable credit for that tax against their own liability.

That distinction between trustee-level and beneficiary-level taxation is where the real damage sits for property investors. More on that below.

Does This Apply to Your Trust?

Not all trusts are affected equally. Here is the breakdown.

If you hold residential investment property in a standard family (discretionary) trust, you are fully affected. If your property is in an SMSF, different rules apply.

How the 30% Floor Actually Works

The mechanics matter more than the headline rate.

The trustee pays 30% on the trust's taxable income before any distribution. Non-corporate beneficiaries who are presently entitled to a share of the net income can claim a non-refundable income tax credit for the tax the trustee already paid.

Non-refundable is the critical word. If a beneficiary is on a marginal rate below 30% (say a spouse with no other income, or an adult child on a low salary), they effectively pay 30% on the trust distribution with no way to claim the difference back. That wipes out the income-splitting benefit that was the primary reason most families used a discretionary trust for property in the first place.

The bucket company problem

It gets worse for investors using a corporate beneficiary. Under the proposed rules, a corporate beneficiary that receives a distribution from a discretionary trust receives no credit for the trustee's 30% tax.

Walk through the maths on $100,000 of trust income:

1. The trustee pays 30% minimum tax: $30,000
2. The bucket company receives the $100,000 distribution but gets no credit for the $30,000 the trustee paid
3. The bucket company is then taxed on the $100,000 distribution at the company rate
4. The same income is effectively taxed twice

The result: combined effective tax rates of 62 to 70% on distributions that eventually reach individuals through a bucket company. The bucket company strategy is finished.

The Problems Property Investors Already Had Inside a Trust

The 30% minimum tax is not landing on a clean slate. Discretionary trusts already carried pre-existing disadvantages for property investors:

• Trapped losses. Negative gearing losses inside a trust cannot be distributed to beneficiaries. They stay in the trust and can only offset future trust income.
• No main residence CGT exemption. If you ever wanted to live in a trust-held property, you would lose the main residence exemption entirely.
• Land tax thresholds. Trust-owned property typically does not receive state land tax threshold exemptions.
• Lending complexity. Trust loans are more complex, with banks requiring personal guarantees.

Income splitting was often the only remaining upside that justified these trade-offs. The 30% floor removes it.

How This Collides With Negative Gearing and CGT Changes

The trust minimum tax does not arrive alone. Two other reforms hit the same investors in the same structures, and they start a year earlier.

Negative gearing

The treatment depends on when the property was acquired:

• Owned before 7:30pm AEST 12 May 2026: Fully grandfathered for negative gearing for the life of the asset. Deductions against other income continue until sale.
• Bought between 13 May 2026 and 30 June 2027: Can be negatively geared only until 30 June 2027, not for the life of the asset. This is the most misunderstood category. The grandfathering applies to pre-12 May 2026 purchases only.
• From 1 July 2027 onward: Rental losses from established residential property can only offset other residential property income, not salary or other income.

One important carve-out: commercial property remains fully negatively gearable against other income. The changes apply only to residential. For a deeper look, see our negative gearing changes breakdown.

Capital gains tax

From 1 July 2027, the 50% CGT discount is replaced by cost base indexation with a 30% minimum tax rate on net capital gains. You pay tax on real gains (adjusted for inflation) rather than a flat 50% reduction.

For assets owned at 1 July 2027, there is a split treatment: the 50% discount applies to the pre-1 July 2027 portion, and the new method applies to the post-1 July 2027 portion. That means the 1 July 2027 market value must be established, either by a formal valuation or an ATO apportionment formula.

Even pre-1985 assets are brought into the CGT regime from 1 July 2027, though only gains accruing after that date are taxable.

SMSFs sit outside both reforms. They retain both negative gearing and the 33⅓% CGT discount. We cover that in detail in our CGT changes guide for property investors.

The Restructure Window

The Government has proposed a 3-year rollover window from 1 July 2027 to 30 June 2030 to allow families to restructure assets out of trusts without triggering CGT or stamp duty. The rollover facilitates the transfer of assets out of discretionary trusts to entities that are not discretionary trusts.

The most relevant destination for property investors is a fixed unit trust, which is excluded entirely from the minimum tax. Converting a discretionary trust to a fixed unit trust removes the 30% floor, but you lose distribution flexibility permanently. Every unit holder's entitlement is fixed by their unit holding.

The right structure depends on your distribution strategy, whether you use a bucket company, the type of property you hold, and your existing negative gearing position. There is no universal answer.

What Property Investors Should Do Before 2027

The legislation is not finalised. But the direction is clear, and the decisions are complex enough that waiting for Royal Assent is a risk in itself. Advisers will be overwhelmed once the law passes.

If you hold residential property in a discretionary trust:

1. Map the interaction. Work out how the 30% minimum tax, the negative gearing quarantine, and the CGT indexation change each affect your specific portfolio. A pre-May 2026 property in a trust with grandfathered negative gearing is a different problem from a 2024 purchase that is positively geared.
2. Model the bucket company impact. If you distribute to a corporate beneficiary, the effective 62 to 70% rate makes this the most urgent item. That strategy needs to end before 1 July 2028 regardless of whether you restructure the trust itself.
3. Get a 1 July 2027 valuation. The split treatment for CGT means the market value on that date determines how much of any future gain falls under the old rules versus the new ones. Order the valuation early. Do not rely on the ATO formula if you can avoid it.
4. Evaluate the rollover window. You have from 1 July 2027 to 30 June 2030 to move assets out of a discretionary trust without triggering CGT or stamp duty. That sounds like plenty of time, but each restructure requires legal, tax, and lending advice. Start the conversations now.
5. Consider whether you should be buying into the trust at all. If you are planning your next investment property purchase, the structure question has changed fundamentally. The combination of trapped losses, the 30% floor, and the end of the bucket company strategy means a discretionary trust is rarely the right vehicle for new residential property acquisitions.

PropSpotter's Stage 3 coaching covers tax structure decisions during acquisition, including the trust-versus-company-versus-personal-name question that every investor now needs to revisit in light of these reforms.

FAQ

What is the 30% minimum tax on discretionary trusts?

From 1 July 2028, discretionary trusts will pay a minimum 30% tax at the trustee level on all taxable income. Individual beneficiaries can claim a non-refundable credit for this tax, but cannot get a refund if their marginal rate is below 30%.

Are all trusts affected by the 2026 changes?

No. Fixed unit trusts, SMSFs, and complying superannuation funds are excluded entirely. Testamentary trusts that existed at 7:30pm AEST on 12 May 2026 are grandfathered. Primary production income within a discretionary trust is also excluded, though other income in the same trust is affected.

Can I still use a bucket company with my family trust?

The bucket company strategy is effectively over. From 1 July 2028, corporate beneficiaries receive no credit for the trustee's 30% minimum tax, meaning the same income is taxed twice, with combined effective rates reaching 62 to 70%.

What is the restructure rollover window?

The Government has proposed a 3-year CGT and stamp duty-free rollover from 1 July 2027 to 30 June 2030. It allows asset transfers out of discretionary trusts into structures that are not discretionary trusts, such as fixed unit trusts or companies.

Should I sell my investment property before the trust tax starts?

Not necessarily. If your property was owned before 12 May 2026, negative gearing is grandfathered for life. The rollover window lets you move the asset to a different structure without a CGT event. The decision depends on your distribution strategy, property type, and whether you use a bucket company. Get specific advice before acting.