If you are registering a new company or buying shares in an existing one, a major decision is how to hold your equity. Most in this situation will choose between investing personally, through a corporate entity, or by taking advantage of the asset protection and income streaming advantages of a discretionary trust.
Whilst each strategy has different pros and cons depending on your personal situation, discretionary trusts have historically been the “go-to” vehicle for family asset protection and tax planning. Today, there are over 800,000 discretionary trusts in a nation of 28 million people.[1]
And so there was widespread outcry when the Federal Government handed down its 2026 Budget, where it placed the tax-planning benefits of discretionary trusts squarely in its crosshairs.
This article considers how the Government’s proposed changes affect tax planning through trusts, and whether they will retain their favoured status for people starting or investing in new businesses.
Under a discretionary trust, a trustee is appointed to legally own the assets, and to distribute income and gains to beneficiaries. A settlor makes an initial gift (or settlement) of money under the trust deed, which then forms the initial trust assets.
Discretionary trusts became attractive in Australia’s economic boom after WWII, and their popularity rose in the 1970s as they a become widely recommended vehicle for family asset protection and tax planning. Australia now has over 1 million trusts, approximately 80% of which are discretionary trusts.[2]
Discretionary trusts have historically been tax-driven vehicles, with key advantages including:[3]
The 2026 Budget proposal targeted major changes to the tax benefits of trusts, noting that: ‘in 2022-23 financial year, trusts distributed over $142.2 billion in income to other entities’ which totals to ‘an average annual growth in income of 7.8 per cent since 2011-12.’[4]
The proposed changes include:[5]
Importantly, there is an three (3) year rollover relief window where trustees can elect to restructure out of a discretionary trust structure without triggering the typical CGT tax consequences and the 30% minimum tax rate. This is known as an Excluded Election Trust (EET).
With respect to the EET election, trustees can elect to make fixed distributions for pre-nominated beneficiaries to avoid the minimum tax. This nomination can only be made once and is only changeable on death or relationship breakdown. This EET election must be made in the first income year commencing 1 July 2027[6] and must be done by 30 June 2030.
Some commentators have questioned whether the election could trigger stamp duty at the state level. In NSW, varying the interests between beneficiaries of a discretionary trust is not treated as a dutiable transaction, but a change in the beneficial interests of a fixed trust can be.[7]
Because the EET election effectively converts discretionary interests into fixed interests, and the nomination requirements make this difficult to undo, state revenue authorities may argue the election gives rise to a dutiable transaction for trust property. This is an area to watch closely.
Under the existing timeline, the 30% minimum tax rate on capital gains, CPI indexation of CGT, and the rollover relief window for restructuring all begin on 1 July 2027. This is followed by the 30% minimum tax rate on trust income from 1 July 2028. The rollover relief for restructuring trusts into companies or fixed trusts then closes on 30 June 2030.
However, as of 29 October 2026, these reforms still require parliamentary approval and have not yet been enacted into law.
Key alternatives to a discretionary trust include personal ownership and ownership through a company. These are broadly compared below under the proposed reforms.
| Element | Discretionary Trust (from 1 July 2028) | Personal Ownership | Company Ownership |
|---|---|---|---|
| Income Tax Rate | Beneficiaries pay at their marginal tax rate (from 0-47%) but with minimum 30% rate | Individuals pay at their marginal tax rates (from 0 – 47%). | Companies pay flat corporate tax rate of 25% for base rate entities, or 30% otherwise. |
| Income tax flexibility | Yes. Trustee can selectively stream income to beneficiaries | Gains are subject to the individual’s own return in the year of sale. | Gains are subject to company income, charged at the flat corporate rate. |
| 50% CGT discount on disposals | No, unless eligible for IBCC discount – discussed below. | No, unless eligible for IBCC discount – discussed below. | No |
| Asset protection | Assets are held by the trustee and are not exposed to creditors. | Assets are held personally and exposed to creditors in litigation, liquidation or relationship breakdown. | Shareholder liability for debts limited to amount paid for shares. |
| Income retention | No. If profits not distributed, trustee is taxed at the top marginal rate of 47% | Individual is taxed on everything earned | Profits can be retained indefinitely at the respective flat company tax rate |
| Ownership flexibility | Flexible allocation of and to beneficiaries | None | Less flexible; requires a share transfer which can trigger CGT |
| Compliance costs | Moderate | Low as no separate structure | Moderate |
The removal of the CGT discount is particularly important for new business founders and investors, because the value of start-ups often lies in a liquidity event, such as a business sale, private equity acquisition or IPO, rather than through regular salary or dividends.
On 11 September 2026, the Government released draft legislation to implement a new Innovative Business CGT Concession (IBCC) for eligible innovative startups. The IBCC is designed to preserve the existing 50 per cent CGT for qualifying start-up founders, employees and investors.
As start-up founders and investors involved from early on usually acquire their shares at a low cost base, CPI indexation can result in very high capital gain taxes. Treasury consultation on the proposed targeted carve-out closes on 28 September 2026.
The IBCC exposure-draft requires the business be:
If you are starting or investing in an early-stage business, the fundamental appeal of using a trust vehicle is likely to survive the proposed reforms.
If you have closely related people (such as a spouse or children) with whom there are tax advantages in splitting income irrespective of a 30% minimum rate, then trusts remain attractive over individual ownership for minor tax flexibility and asset protection.
If you make an EET election, it may also help avoid the cost and complexity of restructuring. However, it reduces the income-splitting flexibility that is classically a key appeal of the discretionary trust.
If they make it into law, the proposed innovative business carve-outs are significant. If the start-up meets the early-stage criteria, investors would be able to continue to access the 50% CGT discount on disposal. If the shares are originally acquired for nominal amount and the business is sold for a significant sum, this is likely to be a major tax benefit compared to holding your interest via a company.
Ultimately the decision as to how to structure an investment in a new business depends on your specific circumstances, and you should take advice from qualified individuals in making this important decision.
Are you planning on starting or investing in a new business? This is general commentary and not legal advice. For specific advice on how to get started and the ways to hold your equity, feel free to contact us below. Edwards + Co Legal provide corporate and commercial legal advice to modern Australian businesses.
[1] Minimum Tax On Discretionary Trusts Paper, Budget 2026-2027
[2] Minimum Tax On Discretionary Trusts Paper, Budget 2026-2027
[3] https://www.bentleys.com.au/insights/trust-structures-vs-companies-tax-comparison-in-australia/
[4] Minimum Tax On Discretionary Trusts Paper, Budget 2026-2027
[5] https://www.perpetual.com.au/insights/Capital-gains-tax-changes-explained/?PreferredLocation=true
[6] https://www.pwc.com.au/tax/tax-alerts/draft-law-for-the-30-percent-minimum-tax-on-discretionary-trusts.html
[7] https://www.revenue.nsw.gov.au/about/legislation-and-rulings/revenue-rulings/rulings/duties/dut017-v2
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