The hidden losers of the Federal Budget: Trust tax targets the wrong “rich”

Welcome to the hidden losers of the 2026 Federal Budget.

The narrative doesn't match the data

The political framing around the 30% minimum tax on discretionary trusts was clear: this was about closing a loophole used by the wealthy to avoid paying their fair share. And yes, complex trust structures have absolutely been used by sophisticated high-net-worth Australians to achieve tax outcomes. 

The problem is that the policy instrument chosen does not discriminate between those cases and the active small businesses that use discretionary trusts for entirely different reasons - and hits both groups with a flat, blunt mechanism that disproportionately punishes the smaller operators.

The ATO's own tax statistics tell the story. The median taxable income distributed from discretionary trusts is firmly in middle-Australia territory. Around 60% of all distributions flow to individual beneficiaries earning under $120,000 per year. These are not hedge fund managers and property developers. These are tradies, café owners, family retailers, and professional services operators who set up their trust in their early years of business on the advice of their accountant, and have been running it ever since.

The 30% minimum distribution tax - the break-even amount on that is about a $200,000 distribution. But so many trusts are used in just mum-and-dad small businesses to try to eke out an extra $5,000 to $12,000. And that's often the thing that helps those families survive.

Why they set up the trust in the first place

To understand why this reform lands so hard on small business, it helps to understand why these structures exist. The discretionary trust became a part of small-business structures in Australia for three reasons that have nothing to do with aggressive tax planning.

Asset protection. A sole trader's personal assets are fully exposed to business creditors. If the café hits a bad year, has a workplace incident, or faces a liability claim, everything is at risk - including the family home. A well-structured trust arrangement keeps the equity in personal property one step removed from the business risk. For a small business owner who cannot afford the kind of legal infrastructure a large company has, this has been a foundational risk management tool for decades.

Managing uneven income. A small business that clears $180,000 in a good year and $80,000 in a difficult one genuinely benefits from the ability to distribute income across family members who are legitimately involved in the business. A spouse managing the books. A parent covering weekend shifts. An adult child handling the social media. This is not artificial income splitting - it reflects how small family businesses actually operate, with multiple family members contributing in ways that formal employment arrangements rarely capture. It can be argued to simply pay wages but for these types of families, paying superannuation is expensive for these families.

Retirement planning. Unlike employees with compulsory superannuation accumulating over decades, small business owners have historically made irregular contributions, constrained by the cash flow demands of the business itself. Many have structured the equity in their business - and assets held through their trust - as their primary retirement vehicle. The business sale or property disposal was the plan.

The word "trust" carries connotations of inherited wealth, KC-drafted documents, and offshore accounts. The reality is far more pedestrian. The person most likely to have a discretionary trust is not a wealthy investor. They are a self-employed Australian who took a risk, built something, and used the tools their accountant recommended to protect it. From 1 July 2028, those tools become significantly more expensive - and the people least equipped to absorb that cost are the smallest operators.

The real cost - in numbers

The mechanics of the 30% minimum distribution tax are important to understand, because the impact varies significantly depending on who is receiving the distribution. And it is in the lower-income beneficiary categories - the ones the policy was supposedly not targeting - where the damage is greatest.

Under the new regime, the trustee pays 30% on the trust's total taxable income before making distributions. Beneficiaries receive a non-refundable credit for the tax paid on their share. If their marginal rate is under 30%, the excess credit is simply lost - they cannot claim it back. The tax is gone and the total tax paid through to a bucket company could be as high as 51%!

The compound hit - trusts and the property double-whammy 

For the small business owner who also holds an investment property through their trust - a very common profile - the 2026 Budget delivers not one reform but three compounding impacts.

The 30% minimum distribution tax eats into the benefit of distributing rental income to lower-income family members, effective 1 July 2028. The CGT discount on any property held through the trust and sold after 1 July 2027 disappears, replaced by indexation and a 30% minimum on the real gain. And any established investment property purchased since budget night can no longer be negatively geared against business income - losses are quarantined.

Viewed individually, each of these reforms might seem targeted and justifiable. Viewed together, they represent a profound restructuring of the financial position of a middle-income, asset-holding small business family - precisely the group that political rhetoric on both sides of parliament has long described as the backbone of the Australian economy. Notably, not one mention of "small business as the backbone of the economy" appeared in this budget. Perhaps that tells us something.

The restructuring problem - not everyone can get out 

The government did include rollover relief - a three-year window from 1 July 2027 to restructure out of a discretionary trust into a company or fixed trust, without triggering CGT at the entity level. On paper, this is a meaningful concession. In practice, for many small business owners, it is considerably harder to access than it looks.

Stamp duty is not covered by the rollover relief in most states - and for trusts holding land-rich assets, the stamp duty cost of transferring to a new entity can be prohibitive. William Buck has noted this will limit who can practically use the relief. COSBOA warns the changes risk disrupting the retirement plans of small business owners who structured their business as their primary retirement asset - exactly the people who may find the exit most difficult to afford.

The people most capable of restructuring efficiently are precisely those with the most complex, advisor-rich structures - the high-net-worth individuals the policy was ostensibly targeting. They have the capital to absorb restructuring costs, the professional infrastructure to execute quickly, and the structural flexibility to find compliant alternatives. The mum-and-dad business owner with a single trust, a family home, and an investment property does not have those options to the same degree.

It's almost like the death of the autopilot accounting firm. You have to be so on top of changes. And that's creating exhaustion, particularly in smaller firms.

What accountants need to do - and the window is already open 

Every client operating through a discretionary trust needs a review - not eventually, not when the legislation is finalised, but now. There are three categories of client conversation to have.

The triage conversation. Which clients have discretionary trusts? What is the distribution profile - who are the beneficiaries, and what are their marginal rates? How much of the current tax benefit disappears under the 30% minimum? For many practices, this first step alone will reveal the scale of what is in front of them.

The modelling conversation. For affected clients, what does restructuring actually cost - including stamp duty, CGT, legal fees, and the ongoing tax profile of the alternative structure? In some cases, staying in the trust and paying the 30% minimum will be the right answer. In others - particularly trusts whose primary purpose was distributing income to lower-rate family members - restructuring into a company or fixed trust within the rollover window makes compelling sense. More creative solutions will emerge as the detailed legislations is revealed. 

The CGT conversation. Every client with capital assets held in a trust, or held personally with a sale planned in the next five years, needs their position modelled before 1 July 2027. The transition from the 50% CGT discount to the indexation model creates a defined, time-limited opportunity to crystallise gains at the old rate for high-growth assets.

It would be easy to characterise all of this as a burden for the profession. It is also the largest wave of proactive advisory work accountants have seen in decades. This is the moment that gets the profession back to what it does best: sitting across from a client, helping them understand what has changed, and building a plan together. The accounting firms that move first, communicate clearly, and show up with structured frameworks will define their value to clients for years to come.

The bottom line

The 2026 Budget will be remembered as one of the most significant moments of tax reform in a generation. The CGT changes, the trust minimum tax, and the negative gearing restrictions are each individually significant. Together, they fundamentally alter the financial calculus for hundreds of thousands of small business owners who built their structures on the advice of their accountants, in good faith, over many years.

CPA Australia called the trust minimum "a blunt instrument." CA ANZ called it "significant." COSBOA warned it could derail the retirement plans of the very small business owners who drive employment and economic activity in every suburb and regional town across the country.

For the accountants who advise them, this is the moment. The window is open. The clients need you. The question is whether your practice has the tools and the frameworks to show up for all of them - at scale, and before the window closes.

For more on the Federal Budget and what it means for Aussie accountants, tune in or watch the recording of the 2026 Federal Budget Deep Dive: How to explain the changes to clients. Presented by David Boyar and Timothy Munro - Friday, 15 May 2026 at 1 PM AEST (Sydney). 

By David Boyar FCA, The Access Group