Trust Issues

The latest budget will have family enterprises migrate from trust deeds and into the Corporations Act. Trusts and corporate beneficiaries have been a widely utilised strategy for efficient tax planning amongst corporate structures and family groups alike, however, the latest budget announcement now renders this strategy completely self-defeating.

CGT reforms and their effect on trusts

The 2026-27 Federal Budget contains the most significant package of structural tax reforms in the last 25 years, implicating clients across property investment, family business, professional services and corporate structuring.

Three measures stand out to me, and each strikes at the heart of how private groups have arranged their affairs for a generation:

• Replacement of the 50% capital gains tax (CGT) discount.
• Limiting negative gearing to new residential builds only.
• A 30% minimum tax on discretionary trusts.

Taken together, these changes signal a clear intention to unwind the tax advantages that have long made trusts and the bucket companies the selected vehicle for Australian enterprise. Each is worth understanding in turn:

Replacing the 50% CGT discount

From 1 July 2027, the 50% CGT discount under Division 115 of the Income Tax Assessment Act 1997 (ITAA) will be withdrawn for individuals, trusts and partnerships and replaced by two mechanisms working in tandem. The first is the return of cost base indexation, broadly the regime that applied between 1985 and 1999, under which only the real, inflation adjusted gain is brought to tax. The second is a 30% minimum tax applied to that gain after indexation. The reform reaches every CGT asset, not merely residential property, so listed and unlisted shares, units in funds, private company scrip and business interests are all swept into the same net.

There is, however, time to plan. Gains accruing before 1 July 2027 retain the existing 50% discount, and the transitional rules preserve that discount for the portion of any gain referable to the period before that date. The window between now and 1 July 2027 means anyone holding appreciated assets should genuinely consider selling.

Negative gearing confined to new builds

The Budget also limits negative gearing to new residential builds. From 1 July 2027, net rental losses on established residential property can no longer be offset against other income, although new builds, build-to-rent developments, widely held trusts and superannuation funds sit outside the new limitation. Investments held before 7.30pm (AEST) on 12 May 2026, including contracts entered into before that time, are grandfathered and continue under the existing rules until they are sold. This policy direction is unmistakable: capital is being steered towards new housing supply and away from competition for existing stock.

30% minimum tax on discretionary trusts

The third measure reshapes the family group most directly. From 1 July 2028, the trustee of a discretionary trust will pay a minimum of 30% tax on the trust's taxable income, regardless of how that income is then distributed. Beneficiaries other than corporate beneficiaries receive a non-refundable credit for the tax the trustee has already paid, which preserves the present entitlement model while stripping out the streaming and income-splitting advantages that have driven trust planning for decades.

The point to sit with, and the one this article turns on, is that corporate beneficiaries receive no such credit. To understand why that single carve-out matters so much, it helps to revisit how these structures have traditionally worked.

Trusts are just an agreement

Speaking from a purely theoretical and academic sense, a trust can never own anything, it is the trustee that holds legal title to the relevant assets for the benefit of the beneficiaries. The trustee's role is to transact for the trust and manage the trust's assets always whilst acting in the beneficiaries' best interests.

A trust is simply an agreement between the trustee and the beneficiaries, and the agreement is arranged via the trust deed depending on the circumstances and purpose of the trust. In most (nearly all) commercial contexts, trusts are established to protect assets and to create efficient and flexible tax outcomes for the beneficiaries.

Bucket companies

Often referred to as a corporate beneficiary, bucket companies catch spillover income that is not distributed to the beneficiaries. Please read my article entitled, ‘A hole in the bucket company’, to learn more about this concept.

Corporate entities are taxed at a lower rate than the top marginal tax rate of 47%, so it becomes logical to syphon tax out of the trust and into a bucket company. The income also remains in the family group where it can be re-invested within the group’s other interests or saved.

Div 7A

Following the release of Taxation Ruling TR 2010/3, the Commissioner of Taxation (Commissioner) has construed Div 7A on the basis that unpaid present entitlement (UPE) owing to a corporate beneficiary, if left unpaid, could amount to “financial accommodation” or a “transaction (whatever its terms or form) which in substance effects a loan”, and was therefore a “loan” as defined in s 109D(3) ITAA. In other words, the Commissioner was of the view that unpaid income or capital of a trust estate is a loan.

Where Div 7A applies, the recipient of the loan, payment or other benefit (i.e., the trust) is deemed to have received an unfranked dividend. Unfranked dividends are, of course, deemed dividends which will be treated as trust income and distributed to the beneficiaries and taxed at their marginal rates.

The Bendel case

To understand the issues in Bendel, we need to firstly consider the relevant mechanisms of present entitlement and UPE.

Income derived from trust property will only be assessed in the hands of a beneficiary if they are, or are deemed to be, presently entitled to the income under the trust where they are typically taxed at their marginal tax rate on distributions. Otherwise, the income is assessed in the hands of the trustee.

A UPE arises where a beneficiary is made presently entitled to trust income but the trustee does not discharge its obligation to pay that amount out to the beneficiary either by transfer or set-off. The concept of UPE is aptly named because the beneficiary's entitlement is allocated but not actually paid.

The taxpayer disputed the Commissioner's characterisation, and the courts agreed. On 19 February 2025, the Full Federal Court in Commissioner of Taxation v Bendel [2025] FCAFC 15 unanimously dismissed the Commissioner's appeal, holding that a UPE is not a loan within section 109D(3) ITAA. The reasoning was pretty clear. A loan requires a transaction that creates, or in substance effects, an obligation to repay an amount, whereas a present entitlement that has simply gone unpaid carries an obligation to pay rather than to repay. The Court also held that the extended concept of financial accommodation did not capture a UPE in this context. The decision unwound more than fifteen years of administrative practice dating back to Taxation Ruling TR 2010/3.

The Commissioner was granted special leave to appeal, and the High Court upheld on 10 June 2026 by a 5:2 majority that a UPE owed by a trust to a corporate beneficiary is not a loan. For now, Bendel stands as a significant win for private groups, and on its face it strengthens, rather than weakens, the case for distributing trust income to a corporate beneficiary. That is precisely what makes the Budget so striking.

Bucket companies will be self-defeating

It is a punishing outcome for what has been one of the most widely used legitimate tax planning strategies in Australia. The government has effectively rendered the strategy self defeating without needing to legislate against it directly. These budget changes consequently mean trust payments could be taxed at 63% in some cases.

The arithmetic is what gives the measure its bite. From 1 July 2028, trust income streamed to a bucket company is first taxed at 30% in the hands of the trustee. Because the corporate beneficiary receives no credit for that tax, the remaining 70% is then taxed again at the 30% company rate, lifting the effective burden at the corporate level to roughly 51%. Once those profits are eventually drawn out to individuals, the top-up to marginal rates can carry the total cost of the income to as much as 62.9%, well above the 47% top marginal rate the structure was designed to avoid.

The bucket, in other words, now leaks faster than it fills. A vehicle built to cap tax at the corporate rate becomes one that magnifies it, and the planning logic that justified the structure for a generation quietly falls away.

Where to next…

There is, encouragingly, a silver lining, and a finite one. The Budget pairs these measures with a three-year restructure rollover, running from 1 July 2027 to 30 June 2030, that allows eligible groups to move assets out of a discretionary trust and into a company or fixed trust without crystallising a CGT liability along the way. For many family enterprises, that window is the opportunity to migrate to a structure built for the new regime, and to do so on their own terms rather than the Commissioner's.

These budget reforms reinforce the importance of understanding the relationship between corporate structuring and tax obligations.

The right answer depends on the underlying assets, your succession plan, and how income flows through the family group.

For assistance and guidance with structuring your business and family group in light of these changes, please contact DSA Law – Lawyers & Consultants.