Australia’s 2026-27 federal budget introduces a baseline 30% tax on discretionary trust income, potentially causing effective tax rates up to 60% for companies receiving trust distributions. This could disrupt established business structures and raise tax burdens beyond the top personal income rate.
- 30% tax introduced on discretionary trust income at trustee level
- Bucket companies face double taxation, possibly pushing rates to 60%
- Small businesses may incur higher costs and complexity amid reforms
What happened
The 2026-27 Australian federal budget includes a new tax rule applying a baseline 30% tax on discretionary trust income at the trustee level. This aims to remove incentives for beneficiaries to split income among family or associates to reduce tax liabilities.
Critically, individual beneficiaries will receive non-refundable tax credits for tax already paid at the trust level, whereas corporate beneficiaries, including bucket companies, will not receive such credits. This distinction creates a scenario where bucket companies may effectively pay tax twice on the same income, significantly increasing their tax burden.
Why it matters
Accounting experts caution the proposed tax framework could lead to effective tax rates of 55% to 60% for bucket companies, well above Australia's highest personal income tax rate of 47%. This unexpected level of taxation threatens to disrupt long-standing trust and company structures used by many small businesses.
Beyond tax concerns, bucket companies often serve purposes beyond tax minimisation, such as smoothing income streams for entrepreneurs with variable earnings and protecting assets from business risks. The reforms may therefore hurt genuine business needs while attempting to address tax fairness.
What to watch next
The government’s draft legislation will provide further clarity on how double taxation of bucket companies will be addressed. The reforms are set to take effect from July 1, 2028, with lawmakers prioritising other tax reforms ahead of detailed trust legislation.
Meanwhile, small business owners and accountants seek guidance on potential rollover relief and restructuring costs, including possible stamp duties at the state level when moving away from trust structures. The evolving policy and regulatory environment will be critical to watch for those affected by these significant tax changes.