The End of Income Splitting? Navigating the New 30% Trust Tax Floor

On June 24, 2026, the Australian landscape for family trusts entered its most significant period of transformation since the introduction of Capital Gains Tax. For decades, discretionary trusts have been the cornerstone of investment for families and expats, primarily due to their flexibility in income splitting and asset protection. However, the 2026-27 Federal Budget, alongside recent High Court rulings, has effectively signaled the end of the simple income-splitting era. As the Australian Taxation Office (ATO) intensifies its scrutiny through Section 100A and the government introduces a 30 per cent tax floor, the traditional utility of the family trust is being fundamentally rewritten.

The New 30% Minimum Tax Rate: A Shift in Strategy

The centerpiece of the 2026 budget reforms is the introduction of a 30 per cent minimum tax rate on all discretionary trust distributions, scheduled to take effect on 1 July 2028. This 'tax floor' is designed to ensure that trust profits are taxed at a level comparable to the corporate tax rate, significantly diminishing the benefit of distributing income to beneficiaries in lower tax brackets.

Under the new model, the trustee is responsible for paying a minimum 30 per cent tax on distributions at the source. While beneficiaries will receive a non-refundable tax credit for the tax paid by the trustee, the financial advantage of distributing to university-aged children or retired parents on low marginal rates is largely eliminated. For example, a distribution to an adult child with no other income would previously have utilized the 18,200 dollar tax-free threshold and the 16 per cent marginal rate. From 2028, the effective tax on that distribution will be 30 per cent, regardless of the beneficiary's personal income level.

The Sunset of the 50% Capital Gains Tax Discount

Perhaps even more impactful for long-term investors is the abolition of the 50 per cent Capital Gains Tax (CGT) discount for trusts, effective 1 July 2027. This discount, which has been a fixture of the Australian tax system since 1999, will be replaced by a cost-base indexation model. Under the new rules, the cost base of an asset will be adjusted for inflation based on the Consumer Price Index (CPI), and the tax will be applied to the real gain rather than the nominal gain.

For assets held for short periods or during times of low inflation, this change may lead to a higher tax liability compared to the previous 50 per cent discount. Investors holding significant property portfolios or shareholdings within a trust structure will need to evaluate how these changes affect the after-tax returns of their investments. The shift toward indexation rewards long-term holding periods but removes the 'blanket' tax reduction that previously made trusts highly attractive for capital growth assets.

Section 100A and the End of 'Paper' Distributions

The ATO's focus on Section 100A 'reimbursement agreements' continues to be a critical compliance priority for the 2025-26 financial year. The Commissioner has made it clear that distributing income to low-tax beneficiaries—while the funds are actually retained by the trustee or used for the benefit of the parents—is considered tax avoidance. With new digital reporting requirements for beneficiary Tax File Numbers (TFNs) and real-time data matching, the ability to verify if distributions were physically paid has increased significantly.

Trustees must ensure that all distribution resolutions are executed by June 30 and that the beneficiaries genuinely receive the economic benefit of the funds. Failure to comply can result in the trust income being taxed at the highest marginal rate of 47 per cent, plus significant penalties. The 'Red Zone' arrangements highlighted by the ATO specifically target scenarios where adult children are credited with income that is then 'gifted' back to the parents to pay for household expenses.

Navigating the Transition: Rollover Relief and Restructuring

Recognizing the severity of these changes, the Federal Government has provided a 'rollover relief' window starting in July 2027. This window allows trustees to restructure their holdings into other entities, such as companies or different trust structures, without triggering immediate CGT events or stamp duty in most jurisdictions. This period is intended to let families move away from discretionary trusts if the 30 per cent tax floor or the loss of the 50 per cent CGT discount makes the structure unviable for their specific needs.

• Evaluate the long-term impact of the 30 per cent minimum tax on distribution strategies for low-income family members.
• Review asset portfolios to compare the projected outcomes of the 50 per cent CGT discount versus the new indexation model before July 2027.
• Analyze the potential for using the rollover relief window to transition to a corporate structure for better tax efficiency.
• Ensure all Section 100A compliance requirements are met before the June 30 deadline to avoid high-rate penalties.

The Australian trust environment is moving toward a more transparent and standardized model. While the discretionary trust remains a powerful tool for asset protection and succession planning, its role as a simple income-splitting vehicle is ending. Trustees and investors should consider their long-term objectives and seek professional guidance to determine whether their current structure remains the most efficient way to hold family wealth in this new regulatory era.

This article contains general educational information only and does not constitute personal financial, legal, or tax advice. Please consult a licensed professional before making any financial decisions.