Budget analysis: the minimum tax on discretionary trusts and CGT reform

The Treasurer handed down the 2026-27 Federal Budget last night.

The purpose of this update is to provide you with our preliminary views on what the measures may mean in practice and the questions that clients should be asking right now.

INTRODUCTORY COMMENTS

1. The measures are currently proposals, not yet law. They require draft legislation, public consultation and passage through Parliament. Division 296 (additional superannuation tax) showed us that Government policy announcements and draft legislation are not necessarily reflective of the final law.
2. We will try to keep our economic and political views to a minimum in this update (within reason…), however, it can not be said that this is a tax reform Budget. It is a tax collection Budget. Genuine reform reduces complexity and inefficiency in the system. This Budget increases both. This makes Bill Shorten's 2019 reform proposals look moderate.
3. The measures that were not leaked before Budget night are, in some respects, the most significant, e.g., the treatment of corporate beneficiaries, the inclusion of pre-CGT assets and the 30% minimum tax floor on capital gains.

OUR PRELIMINARY ANALYSIS OF KEY MEASURES

Minimum tax on discretionary trusts

What is it? 30% minimum tax on taxable income of discretionary trusts, payable by the trustee, from 1 July 2028. Corporate beneficiaries specifically excluded from the credit mechanism. Rollover relief proposed for three years from 1 July 2027.

• If enacted as proposed, the bucket company appears to be dead. The explicit denial of credits to corporate beneficiaries directly targets the practice of distributing to a related company to access the 25% or 30% corporate rate. If the legislation passes in its current form, the use of corporate beneficiaries does not appear to be viable once implemented.
• Trading trusts appear to be unattractive. The minimum tax fundamentally changes the economics of operating a business through a discretionary trust. Pair this with changed CGT settings (discussed below), for most clients in this position restructuring will need to be considered.
• Uptake of the proposed rollover relief will be very, very high. The three-year window from 1 July 2027 would likely generate an extraordinary volume of restructuring activity. However, capital gains tax rollover relief is just one consideration. Other implications that immediately come to mind are:
  • Stamp duty (state tax). Particularly relevant in those states that do not exempt transfers of goodwill (e.g., Qld)
  • Commercial agreements. Existing related-party loans, third party finance arrangements, leases and employment arrangements will need to be renegotiated/updated to reflect the new structure: each with its own tax and legal implications.
  • Family Trust Elections and Interposed Entity Elections. It remains to be seen how these would be dealt with by the rollover relief.
  • Trust loss rules. Existing tax losses held in a discretionary trust are subject to specific utilisation tests and may not transfer into a new entity in a useable form.
  • Back-to-back rollovers. Where assets need to pass through more than one entity, the interaction of rollover provisions becomes complex and can produce unintended CGT consequences. The Commissioner also looks unfavourably upon back-to-back rollovers, which we would expect will become very common in restructure activity.
  • Estate planning. Restructuring often gives rise to estate planning considerations that should not be neglected. This is particularly relevant given the frequent use of trusts as an estate planning tool.
• On first observations, we expect the following structuring concepts will be explored:
  • Investment / head companies, as shareholder of a trading company, used for similar purposes to a bucket company. Asset protection may be reduced from current arrangements, but the proposed adverse treatment of bucket companies may be able to be nullified.
  • Companies with different share classes.
  • Fixed trusts appear exempt from the minimum tax proposal, notwithstanding the definition of a fixed trust is more limited than one may think.
  • Partnerships with discretionary entitlements.
  • Related-party service fees and management fees.
  • Wages / salary payments to working beneficiaries fall outside the minimum tax entirely. We would expect that the wage will become structurally more popular (at least to some degree, e.g., to exceed the first $45,000 of taxable income). That said, every additional dollar of wages carries potential on-costs such as payroll tax, superannuation guarantee and workers compensation exposure.
• There are circumstances where retaining the trust structure remains worthwhile. This may depend on how prior year trust and capital losses are dealt with in the legislation. Effective use of a head company / investment company may also have the potential to allow the discretionary trust to ‘live on’.
• Although cliché, the devil truly will be in the detail. The proposal will interact with and may reduce the practical importance of many aspects of the tax system, including but not limited to franking rules, Division 7A, section 100A, trust loss provisions, the PAYG withholding regime, that will all need to be considered.

CGT reform and negative gearing

What is it? 50% CGT discount replaced by CPI cost-base indexation and 30% minimum tax on net capital gains, for individuals, trusts and partnerships, from 1 July 2027. Negative gearing on established residential properties acquired after 12 May 2026 quarantined to residential income.

• The 30% minimum tax floor is a major surprise in this Budget. It limits the effectiveness of realising capital gains in years of lower income, e.g., on retirement. Under the proposed announcement, 30% applies regardless of total income.
• Pre-CGT assets are captured and that was not anticipated. Gains accruing from 1 July 2027 on assets acquired before the CGT regime existed will be subject to the new rules. The asset's value at 1 July 2027 looks to become the cost base for the post-commencement portion.
• Given the decreased benefit of holding capital appreciating assets in a trust or individually, we expect the use of companies as an investment vehicle to become increasingly common. This would also provide compounding benefits of not paying top up tax on funds before investing, obtain the potential benefit of franking credit refunds and potentially avoid the capital gains tax floor of 30%.
• Valuations at 1 July 2027 could become critical and contested for complex assets. For straightforward assets such as listed shares, this should be more manageable. For closely held businesses, farming properties, or assets where value is driven by intangibles rather than observable market data, different valuers can reach materially different conclusions. A low valuation reduces future cost base and a high valuation may attract ATO scrutiny. The methodology adopted will need to be defensible and the instructions to the valuer relevant.
• Capital losses and the small business CGT concessions become considerably more valuable. Under the new regime, a capital loss that can be applied against a capital gain saves tax at a higher effective rate than under the current discount. The small business CGT concessions, which expressly remain unchanged, similarly become more valuable given that if eligible, the benefit remains at least a 50% discount (before considering the 15 year rule or retirement exemption, for example).
• We expect that the ATO will consequently be watching for wash sales (i.e., an arrangement involving the disposal and reacquisition of assets to generate a loss). The combination of more valuable capital losses and a higher tax burden on capital gains creates a strong incentive to crystallise losses.
• Commercial property becomes comparatively more attractive as it can continue to be negatively geared. Losses from commercial property can still be offset against other income, including salary and wages. In an environment where established residential investment becomes less tax-effective, commercial property may become a more attractive investment.
• CGT settings in superannuation appear largely unchanged by the announced reforms. This may increase the relative attractiveness of SMSFs and other superannuation structures for some clients, noting the separate implications of the recent Division 296.
• The new CGT regime structurally favours longer-term, lower-growth, higher-yield assets. From a pure tax perspective, assets generating dividends (particularly with franking credits attached) are now more attractive relative to growth assets. A capital gain taxed at 30% minimum compares unfavourably with a franked dividend where the underlying tax has already been paid at the corporate rate. We expect this to influence investment decisions for clients.
• Start-ups have been significantly impacted under the indexation model, particularly where the cost base is nominal. Businesses built on ‘sweat equity’ have little to no cost base to index. The Government has recognised this and notes in the fact sheet that consultation on the interaction of the CGT reforms with start-ups is required.
• It is worth noting the comments in the fact sheets regarding OECD's ‘endorsement’ of the proposals. The Government’s comments regarding OECD endorsement fail to mention that the OECD also consistently recommend lowering the oppressively high marginal income tax rates. According to recent ABS data, personal income tax makes up 62% of total tax collection in Australia as at FY25. The OECD average is 35%. Australia’s proportion is the second highest of all OECD countries (only Denmark takes more). In fact, it could now be argued that the proposals result in capital gains being taxed more heavily than ordinary income.

Other proposed tax measures not discussed in this email

• $1,000 standard work-related deduction (2026-27)
• Permanent $20,000 instant asset write-off for small businesses (from 1 July 2026)
• Loss carry-back for companies
• R&D Tax Incentive reform
• Revisions to FBT exemption for EVs.