The foundational structure behind almost every issue on this site: how discretionary trusts are taxed today, and why that treatment is now under review.
A discretionary trust lets a trustee decide, each year, how trust income is distributed among a defined group of beneficiaries — commonly family members. That flexibility supports legitimate goals: asset protection, intergenerational succession planning, and directing income to family members based on genuine need.
It's also the reason trusts attract policy scrutiny: because the trustee chooses who receives income, distributions can in principle be directed toward beneficiaries on lower personal tax rates. Where that reflects genuine family circumstances, existing law already treats it as ordinary. Where it's structured purely to minimise tax, existing anti-avoidance provisions — Section 100A and Part IVA of the Income Tax Assessment Act 1936 (Cth) — already apply.
A discretionary trust itself doesn't pay income tax in the way an individual or company does. Instead, under Division 6 of the Income Tax Assessment Act 1936 (Cth), the trustee determines each year who is "presently entitled" to the trust's income. That income is then generally taxed in the hands of the beneficiary who received it, at that beneficiary's own personal marginal tax rate — the same progressive rate scale that applies to any other individual taxpayer. Only income the trustee doesn't distribute to anyone is taxed to the trustee directly, at the top marginal rate.
This is a meaningful design feature, not a loophole: it means genuine family distributions are taxed the same way the recipient's own income would be, whether that's a retired parent on a modest income, an adult child, or another family member. It's also why trusts are commonly used for entirely ordinary purposes — running a family business, holding an investment property across a family group, or providing for children and grandchildren over time — well outside anything resembling aggressive tax planning.
Trust taxation isn't an unregulated space. Alongside Section 100A and Part IVA, mentioned above, the ATO's Practical Compliance Guideline PCG 2022/2 sets out a risk-rating framework that explicitly separates ordinary family dealings (treated as low-risk) from arrangements built primarily to secure a tax advantage. Division 7A of the same Act addresses another common concern — unpaid present entitlements owed to corporate beneficiaries — and the High Court's 2026 decision in Commissioner of Taxation v Bendel has itself clarified exactly how far that provision reaches.
Taken together, this is a reasonably developed set of tools already aimed at distinguishing genuine family and business use of trusts from artificial arrangements. Any reform proposal has to be weighed against what this existing framework already does, not treated as though the field were previously unregulated.
The most active development in this area is Treasury's proposed minimum tax on discretionary trusts, which would apply a flat 30% trustee-level tax regardless of who ultimately receives the income or their personal tax position. Our detailed position on that specific proposal — including a case study, the interaction with existing integrity measures, and constructive recommendations — is set out in full below.
