Discretionary trusts and the proposed 30% minimum tax

Discretionary trusts, often referred to as family trusts, have been a popular structure for Australian families and businesses for many decades. They are commonly used to operate family businesses, hold investments and assist with succession planning. Their flexibility, together with asset protection and estate planning benefits, has made them an attractive option for many groups.

In the 2026–27 Federal Budget, the Government announced a significant proposed change. From 1 July 2028, trustees of discretionary trusts would generally be required to pay a minimum tax of 30% on the trust's taxable income.

According to the Government, the proposal is intended to better align the tax paid on trust income with that paid by salary and wage earners, while reducing opportunities to split income between family members. However, the announcement has generated considerable debate.

Professional bodies, business groups and tax advisers have expressed concerns that the changes could increase complexity and compliance costs for many genuine family businesses and investment structures.

How the proposal is expected to work

Under the proposal, the trustee would generally pay the minimum 30% tax on the trust's taxable income.

Where trust income is distributed to individual beneficiaries or certain other non-corporate beneficiaries, those beneficiaries would generally receive a non-refundable tax offset recognising the tax already paid by the trustee. This is intended to reduce the risk of the same income being taxed twice, but while maintaining the impact of the 30% minimum tax rate.

Importantly, the minimum tax would not apply to every trust. The Government has indicated that a number of trusts would be excluded, including fixed trusts, widely held trusts, complying superannuation funds, charitable trusts, deceased estates, special disability trusts and genuine testamentary trusts. Primary production income and certain income relating to vulnerable minors would also be excluded.

The Government has also stated that more than 90% of small businesses are not expected to be affected. While that may be reassuring for some taxpayers, there are still some important issues that could affect family groups using discretionary trusts.

What could this mean in practice?

One area likely to receive close attention is the use of companies as beneficiaries of family trusts.

Many family groups have historically distributed some trust income to a company. This can provide flexibility in managing cash flow, retaining profits within the business and funding future growth. Under the proposed rules, however, the corporate beneficiary would not receive a tax offset for the tax already paid by the trustee. In many cases this will mean that income distributed from a discretionary trust to a company would be subject to double taxation.

Another practical impact of the proposed change is that some family groups may find it more difficult to fully utilise existing tax losses.

While the impact will depend on each group's circumstances, the proposed minimum tax is likely to reduce some of the flexibility that currently exists when managing taxable income across a family structure within many groups.

The Government has also proposed a temporary three-year rollover period, commencing from 1 July 2027, to help restructure into alternative business structures, such as companies or fixed trusts, without triggering immediate income tax or capital gains tax consequences.

While this may assist some groups, restructuring is rarely straightforward. Depending on the circumstances, it might be necessary to consider things like stamp duty, loan approvals, financing arrangements, contract changes, licensing requirements and professional advice. Even relatively simple restructures can involve significant time and cost, so careful planning will be important.

The rules are not yet final

At this stage, the proposal remains subject to consultation. Treasury released a consultation paper in July 2026 seeking feedback on a range of design issues, including how the new rules would operate in different situations. Final legislation has not yet been introduced, meaning aspects of the proposal could still change before the rules become law.

For this reason, most groups utilising discretionary trust structures should avoid making major structural decisions based solely on the announcement. Instead, it is sensible to monitor developments while considering whether existing structures are likely to remain appropriate if the proposal proceeds.

What should you do now?

For many families, discretionary trusts are about much more than tax. They can continue to provide valuable asset protection, succession planning and business flexibility. The proposed changes do not remove those benefits, nor do they prevent discretionary trusts from continuing to be used.

However, the proposal does have the potential to change the tax outcomes for some family groups, particularly those with more complex structures or those that regularly distribute income to companies.

With the proposed start date still some time away, there is an opportunity to pause and carefully understand how the changes may affect your circumstances and consider whether any planning or restructuring might be appropriate. As the legislation develops, we can help you assess the impact on your business or investment structure and determine whether any action is warranted.

Deductions for rental properties that double as holiday homes

The ATO has updated its guidance on rental property income and expenses from 1 July 2026, including for properties that are also used as holiday homes.

Where a property is a holiday home, it must be used (or held for use) mainly to produce rental income before the owner can claim any expenses relating to its ownership and use.

If this requirement is not met, expenses that are entirely non-deductible may include:

• interest expenses;
• council and water rates;
• body corporate fees; and
• repairs and maintenance.

Where the property is used mainly to produce rental income but there is some minor private use (eg. a week or a few weekends in the off season when there are no bookings), ownership and use expenses must still be apportioned accurately to reflect the periods of private use.

ATO alert: $21 billion in lost super

The ATO is urging individuals to check whether they have lost or unclaimed super, with more than $21 billion waiting to be reunited with its owners.

Super can become lost when an account is inactive and the fund cannot contact the member, often following a change of job, address or phone number. In some cases, the balance may be transferred to the ATO to hold until it can be reunited with the individual.

The ATO reports that last year, more than $1.1 billion was returned through consolidations and direct payments to eligible individuals.

You can check for lost or unclaimed super in various ways, including through ATO online services.

ASIC launches new digital hub for small business directors

ASIC has launched the Small Business Director Essentials hub, a new digital resource bringing together practical guidance, learning modules and tools in one place.

“The new Small Business Director Essentials hub provides directors with a single place to access clear, practical, and targeted resources to help them understand and meet their obligations with ASIC as a director,” ASIC Commissioner Kate O’Rourke said.

The hub includes guidance tailored to key stages of the director journey, including a roadmap to help directors navigate their obligations, from planning and setting up a company through to operating, restructuring or closing the business.

Directors can also access practical guidance for important situations, such as responding to financial difficulty, as well as free online learning modules that can be completed at any time.

ATO motor vehicle registries data-matching program

The ATO is acquiring motor vehicle registries data from state and territory authorities from the 2026 to the 2030 income years. The information will be matched against ATO records to identify taxpayers who are not meeting their registration, lodgment, reporting, or payment obligations across a number of taxes (including GST, FBT, fuel tax credits and income tax). 

The data will also be used to support ATO compliance activities through modelling, risk profiling and case selection.

The data collected may include identification details for purchasers, sellers and other relevant parties, together with transaction dates and types, sale prices, market values, vehicle garage addresses, intended use, vehicle specifications and registration details.

The ATO expects to collect data relating to approximately 2.5 million individuals each financial year.

Tips for meeting the Payday Super timeframe

Under Payday Super, contributions must be received by an employee’s super fund within seven business days after payday.

To keep on track, the ATO recommends that employers:

• use the new member verification request (MVR) to verify that an employee’s super fund details are valid and that the fund can accept a contribution before it is made;
• check with the relevant payroll provider or clearing house that the fund is responding to MVRs;
• monitor payments, as funds have three business days to allocate or reject a payment; and
• if a payment is rejected or returned, act quickly to correct any errors and resubmit to the correct fund.

For new employees, or where an employee changes their fund, employers generally have 20 business days to make the initial contribution.

The ATO has stated that employers who genuinely try to comply will not be the focus of its compliance action during the first year of Payday Super.

Payday Super and independent contractors

The ATO is reminding businesses that Payday Super changes when super contributions must be paid, not who is entitled to receive them.

Businesses generally need to pay super where they engage an independent contractor mainly for their labour, personal effort, skills or time.

This can apply even if the contractor:

• has an ABN;
• invoices the business for their work; or
• is described as a contractor in a written agreement.

Where an independent contractor is entitled to super, the contribution must be paid for each payday and reach their super fund within seven business days after payday.

It is not mandatory to report payments made to independent contractors through Single Touch Payroll (STP). However, if a business reports them voluntarily, it must meet the STP reporting requirements, including reporting qualifying earnings and super liability information.

$1,000 standard deduction for work expenses

The ATO has recently updated its Employees guide for work expenses to remind taxpayers that the new $1,000 standard deduction cannot be claimed for the 2026 income year.

From 1 July 2026 (ie. in respect of the 2027 income year and later years), employees may choose either the standard deduction for work-related expenses of up to $1,000, or a deduction for the actual work-related expenses they incur.

Taxpayers should continue keeping records for deductible work expenses incurred from 1 July 2026. If, at the end of the 2027 income year, they choose to claim their actual expenses, they must have the required written evidence for those expenses.

Certain expenses do not form part of the standard deduction, and written evidence is required to substantiate these, such as:

• Income protection insurance premiums;
• Personal sickness insurance premiums;
• Accident insurance premiums; and
• Membership of a trade, business or professional association.

The introduction of the standard deduction also replaces the substantiation requirements for laundry expenses up to $150. However, the ATO has issued a draft Law Companion Ruling (LCR 2026/D5) which explains a proposed compliance approach for laundry expenses that would apply from the 2026-27 income year onwards.

LCR 2026/D5 provides that the ATO will accept a method for calculating laundry expenses (but not dry-cleaning costs) that applies from 1 July 2026, being $1 for a full load of work-related laundry, 50c for a mixed load, if appropriate records are kept and the laundry expenses are deductible for the individual.

SMSF and property – preparing for a smooth audit

For many SMSF trustees, property is one of the most significant assets held by their SMSF. Unlike personally owned assets, there is a legal requirement that all SMSF assets are valued each 30 June. This can be a simple process for assets that have a ready market like listed shares, however the process for other assets like property can be more onerous.

Trustees are responsible for determining the market value of fund assets. After your annual financial statements are prepared your fund auditor will need to see objective and supportable evidence that backs up how you have arrived at the market value.

Trustees have the option to use a qualified independent valuer for this and should consider this where an asset represents a significant part of the fund’s value or might be difficult to value.

Where trustees choose not to use an independent valuer, they will need to be able to support asset valuations with evidence from multiple sources. Typically, for property this may include:

• Recent comparable sales – Generally at least 3 and the properties should be genuinely comparable in terms of size and location.
• A real estate agent appraisal that also includes comparable sales.
• Net income yields for commercial property (generally not sufficient evidence on its own).

The ATO includes some helpful guidance on this in their Guide to valuing SMSF assets.

Where an SMSF holds property that meets the business real property (BRP) definition it is possible that this property can be leased to a business that is operated by a member or a related party of the SMSF. However, the fact that an arrangement like this is permitted does not mean the fund trustees can charge a non-market rate of rent.

When a rental arrangement is entered into with a related party of the super fund, that arrangement should be on arm’s length (commercial) terms and this should be supported by a rental appraisal. An easy way to think about this is – do all the lease terms reflect an arrangement that would be agreed to if the tenant was an unrelated third party?

To evidence that a related party arrangement is on arm’s length (commercial) terms an auditor should be provided with:

• A properly documented lease;
• A rent appraisal when the lease was first entered into;
• Evidence that the arrangement is operating based on the terms of the lease; and
• Evidence that where a prior lease term has expired the terms have been reset to market value – backed up by a new rent appraisal.

Although your financial year 2026 SMSF audit might not be taking place for some months, the process can be much smoother where SMSF trustees are proactive and start to compile this evidence in advance, rather than waiting for the auditor’s request.

Reminding new SMSFs of their lodgment obligations

The ATO is reminding new SMSFs of their lodgment obligations.

New SMSFs must lodge their first SMSF annual return (SAR) by 31 October 2026, and must appoint an auditor at least 45 days before the lodgment due date.

If they have engaged a registered tax agent, then their due date is extended to 28 February 2027 for the first return in most cases.

If a client's fund had no assets during its first year, they must either:

• Lodge a return not necessary form; or
• Cancel the SMSF's registration, if they no longer intend to operate the fund.

Each year, SMSF trustees must:

• Prepare the fund's accounts, including valuing the fund's assets;
• Appoint an approved SMSF auditor at least 45 days before the lodgment due date;
• Allow the auditor sufficient time to complete their independent review;
• Address any compliance issues identified by the auditor; and
• Lodge the annual return and pay any outstanding tax and the supervisory levy.

For new SMSFs, the supervisory levy is $518, covering both the establishment year and the following financial year.