2026 Federal Budget: What the new 30 per cent minimum tax on discretionary trusts means for professional firms
While much of the commentary on the 2026 Federal Budget has focused on the capital gains tax (CGT) impact on the property market for individuals, the proposed 30 per cent minimum tax on the taxable income of discretionary trusts will have an impact on professional service firms.
What’s changing?
The Government will introduce a 30 per cent minimum tax on the taxable income of discretionary trusts from 1 July 2028. Trustees of discretionary trusts will be required to pay this minimum tax, and beneficiaries, excluding corporate beneficiaries, will receive non-refundable credits for the tax paid by the Trustee.
To support small businesses and others seeking to restructure out of discretionary trusts, the Government will provide expanded rollover relief for three years starting 1 July 2027. This relief will facilitate transitions into other entity types, such as companies or fixed trusts.
Why is this important for professional firms?
A large number of professional firms are structured using a general partnership and a service entity structure for asset planning and liability protection purposes. The service entity structure in most cases involves a discretionary trust providing support services to the general partnership for a service fee (with a mark-up on costs). The potential beneficiaries of the discretionary trust are usually the partners of the firm and/or nominated associated entities of the partner.
In addition, for a number of professional firms, some or all of a partner’s interest in the firm (including general partnership or corporate entities) are held either legally or beneficially via a family discretionary trust.
Under both scenarios, the discretionary trust is required to calculate its taxable income on an annual basis and allocate the trust taxable income to beneficiaries who are subject to tax at their respective marginal rate (subject to a trustee resolution). Depending on the other income of the beneficiaries, the marginal tax rate may vary from 0 per cent to 47 per cent. In most cases, no income tax is paid at the trust level.
The proposed changes seek to impose a 30 per cent tax on the taxable income at the trustee level with a non-refundable credit potentially available up the chain (apart from corporate beneficiaries). This may give rise to an increase in the effective tax rate where the discretionary trust income has historically been subject to tax at a marginal rate of less than 30 per cent.
In addition, service trusts will need to implement processes to withhold the trustee tax prior to paying distributions to partners (to date, partners have historically been distributed gross income; this may need to change).
the proposed expanded rollover relief to facilitate transitions into other entity types is welcome, there are other tax matters other than income tax and capital gains tax that will need to be considered with any transition in particular stamp duty in certain states.
The devil will be in detail, and this will only be known once exposure draft legislation and explanatory documents are released. We hope that there will be reasonable consultation process in respect of these changes.
How can BDO help
BDO has significant experience with professional firms with service entity arrangements and can help consider the impacts on firms, including calculations of the tax impact, review of structure, including potential alternatives and assistance with partner communications.
Early engagement and preparation for the proposed changes will assist professional firms in being prepared and managing stakeholders efficiently once the final legislative framework is settled.
See how BDO can support your organisation across tax, superannuation and private wealth services.
For further analysis, explore our 2026 Federal Budget insights for more information on how the Budget will affect you.
