Digging Deeper

An economy under real pressure

The 2026 Federal Budget landed on 12 May 2026 into a tense economy. Inflation had picked up again, driven largely by a global oil shock tied to conflict in the Middle East. Headline inflation sat at 4.2 per cent in April, down from 4.6 per cent in March, but still above the Reserve Bank’s target of 2 to 3 per cent.

The Reserve Bank raised the cash rate three times in 2026, to 4.35 per cent. In June it held steady to judge the effect. Growth is expected to slow across 2026 to 27 before recovering the following year. Treasury expects inflation to peak near 5 per cent as fuel costs flow through the economy.

This is the backdrop for the tax measures in the 2026 Federal Budget. The Government framed them as fairness measures that help fund tax cuts for workers. For business owners, they read as a clear signal. The structures that reduce tax through income splitting are now squarely in view.

A new 30 per cent tax on discretionary trusts

Here is the change in the 2026 Federal Budget that matters most for many practices. From 1 July 2028, trustees of discretionary trusts will pay a minimum tax of 30 per cent on the trust’s taxable income.

Today, a discretionary trust works as a flow-through. It pays no tax itself. Instead, beneficiaries pay tax on their share at their own marginal rates. That flexibility lets a trust stream income to family members on lower rates. The new measure removes most of that benefit.

Under the new rules, the trustee pays 30 per cent first. Beneficiaries still report their share of trust income. Individual beneficiaries then receive a non-refundable credit for the tax the trustee has already paid.

The word non-refundable is the catch. If a beneficiary’s marginal rate is above 30 per cent, they pay the difference. If it is below 30 per cent, they cannot claw the excess back. The credit simply disappears.

The measure is estimated to raise about $4.5 billion over five years. The Government points to the growth in trusts as its reason. The number of discretionary trusts has more than doubled over the past 20 years.

Not every trust is caught. The minimum tax does not apply to:

• fixed and widely held trusts, including fixed testamentary trusts
• complying superannuation funds
• charitable trusts and special disability trusts
• deceased estates

Some income is also carved out. Primary production income sits outside the measure. So does certain income for vulnerable minors, income already subject to non-resident withholding tax, and income from assets of testamentary trusts that existed on 12 May 2026.

Who the trust changes hit hardest

The impact depends on how you currently use your trust. If you already distribute to adults on the top marginal rate, the change may cost you little. They are taxed above 30 per cent anyway. The minimum tax mostly affects those who stream income to lower-taxed beneficiaries.

Two groups face the sharpest impact. The first is owners who distribute to family members on low incomes. A distribution to an adult earning under $45,000 loses the benefit of the tax-free threshold and the lowest marginal rate. For each such beneficiary, the extra cost can reach several thousand dollars a year.

The second is owners who distribute to a corporate beneficiary, often called a bucket company. Corporate beneficiaries will not receive a credit for the trustee’s tax. The aim is to stop companies converting the credit into a refund. The result can be tax at the trustee level and again at the company level. On some readings, the effective rate on those profits, once paid to an individual, can climb beyond 60 per cent.

A simple example shows how the 2026 Federal Budget changes a common arrangement. Picture a trust that earns $90,000 and splits it evenly between two adult children with no other income. Today, each pays tax on $45,000 at low rates, roughly $4,300 each. The family keeps most of the income.

From 1 July 2028, the trustee pays 30 per cent first, or $27,000. Each child still receives a credit, but their own tax is far lower than the credit, and the excess is non-refundable. The lost credit cannot be refunded. The family’s total tax jumps from about $8,600 to $27,000, even though nothing about the business changed.

No grandfathering applies. Existing trusts are captured from 1 July 2028, not just new ones. The Government will, however, offer rollover relief for three years from 1 July 2027. This is meant to help owners restructure out of a discretionary trust into a company or a fixed trust without a tax penalty on the way.

A likely shift in how income is paid

The 2026 Federal Budget changes the incentive, not the work itself. Where family members genuinely contribute to a practice, paying them a fair salary or wage remains sound. Wages are deductible to the business and taxed in the worker’s hands at their own rate. That route is unaffected by the trust minimum tax.

The Parliamentary Budget Office expects this shift to be common. It estimates that about a quarter of the forecast revenue will not appear, as owners move to paying wages or to company structures that pay franked dividends. The lesson is practical. Match how you pay people to the work they actually do, and keep records that support it. Genuine arrangements stand up. Artificial ones attract scrutiny.

Division 296 and your self-managed super fund

The second change in the 2026 Federal Budget affects superannuation. It is called Division 296, and unlike the trust measure, it is already law. It applies from 1 July 2026, with the first assessment for the 2026 to 27 year.

Division 296 adds tax to the earnings on very large super balances. The rules work like this:

• an extra 15 per cent applies to earnings on the part of a balance above $3 million
• a further 10 per cent applies to earnings on the part above $10 million
• both thresholds will be indexed over time

The tax falls on the individual member, not the fund. It sits on top of the tax the fund already pays. Only the proportion of earnings above the threshold is affected, not the whole balance.

After much debate, the final law taxes realised earnings, not paper gains. An earlier version would have taxed unrealised gains. That version was dropped. This is an important improvement for SMSF members who hold property or other lumpy assets.

SMSFs gain one useful option. A fund can elect to reset the cost base of its assets to their market value at 30 June 2026, for Division 296 purposes only. This does not trigger a capital gains tax event. It simply lowers the earnings counted for the new tax. The election must be made by the due date for the fund’s 2026 to 27 return, and once made it cannot be reversed.

The 2026 Federal Budget paired this with a sweetener for lower earners. The low income superannuation tax offset rises from $500 to $810. The income threshold for it rises from $37,000 to $45,000.