Would You Fix Your Family Trust Distributions Forever to Save Tax?
The proposed new family trust election could solve one tax problem - but create a much bigger family planning decision.
Written by: Melissa Cunliffe (CA)
For decades, one of the key advantages of a family discretionary trust has been contained in its name: discretion.
A family may establish a trust when its children are young. Years later, one child may join the family business, another may pursue a different career, grandchildren may arrive, relationships may change, assets may be sold and new investments may be acquired. A discretionary trust has traditionally provided flexibility to respond to those changing circumstances.
But proposed Australian tax reforms could force some families to consider a difficult trade-off: how much is future flexibility worth?
First: these rules are still proposed
Treasury released exposure draft legislation in September 2026 for a proposed 30% minimum tax on certain discretionary trust income. The proposal may change before becoming law.
The draft also includes an alternative for some existing trusts: an Excluded Election Trust (EET). An eligible trust could elect to remain outside the minimum-tax regime by nominating the beneficiaries intended to receive trust income and capital and fixing the percentages applying to them.
That may sound attractive from a tax perspective. The trade-off is significant.
You may effectively be deciding today who gets what tomorrow
Under the current draft, nominated income and capital proportions must align and total 100%.
A family might decide today that Mum receives 20%, Dad 20%, Child 1 20%, Child 2 20% and a family investment company 20%.
That may work perfectly today. But what happens in 10 or 20 years?
What if another child is born? What if grandchildren arrive? What if one child eventually runs the family business while another has little involvement? What if the business is sold? What if family circumstances change in ways nobody can reasonably predict today?
The current draft provides only limited circumstances in which nominated proportions could be changed. That means the decision is much more than a tax election - it is a long-term family and succession decision.
What happens if circumstances change?
If a trustee later distributes outside the nominated proportions, the EET election may be revoked under the draft rules and significant tax consequences can arise. Once revoked, the election may not simply be available again.
That makes the original decision particularly important.
The question should not simply be: “Which option pays the least tax next year?” It should be: “Which option still works for this family in 10, 20 and 30 years?”
What are the broad family trust choices?
Option 1 - Retain the discretionary trust
The family keeps the flexibility of the trust but may become subject to the proposed 30% minimum tax on relevant income.
Option 2 - Restructure
The Government is proposing expanded rollover relief for certain restructures. This may reduce immediate federal income-tax consequences but does not automatically remove state duty, finance, legal, licensing or operational consequences.
Option 3 - Make the EET election
The trust may avoid the minimum-tax regime without legally restructuring, but the family gives up a substantial degree of future discretion.
What about bucket companies?
Corporate beneficiaries have historically been used by many family groups to retain after-tax profits for reinvestment. The proposed minimum-tax rules change the economics of some of those arrangements.
The EET mechanism may preserve a role for an eligible company where it is one of the nominated beneficiaries. But again, the percentage becomes part of the fixed arrangement and future changes can be difficult.
The better question is therefore not simply “Can we still use our bucket company?” It is: “What structure gives this family the best overall outcome over the next generation?”
Why People must come first
At 4P's Future Accounting, the Future Prosperity Framework begins with People.
Before recommending a tax structure, we need to understand the people the structure exists to serve. Who is in the family? Who is involved in the business? Who may become involved? What does succession look like? What assets are intended to support retirement? What does the family mean by success?
Only then can we determine how best to Preserve what has already been created, Protect the family and the business from unnecessary risk, and position both to Prosper.
Tax matters. But tax is only one part of the decision.
What should trust owners do now?
There is no reason to rush into a restructure or election while the legislation is still proposed.
However, affected families can begin modelling the alternatives and documenting the questions that matter:
current and future family members;
business succession;
expected income and capital growth;
corporate beneficiaries;
property and other major assets;
asset protection;
estate planning;
finance and duty consequences; and
the flexibility the family may need in future.
The cheapest option next year may not be the best option over the next 20 years.
The question we should really be asking
The proposed election may ultimately be useful for some families. For others, the flexibility they would surrender could be worth far more than the tax saved.
So the real question is:
"Would you permanently decide today how your family's wealth will be shared tomorrow simply to save tax?"
For some families, the answer may be yes. For others, absolutely not. What matters is making that decision deliberately, with the family and its future at the centre.
Considering the proposed changes to family trust taxation?
Before making an election or restructuring, it is important to understand not only the potential tax saving, but also what it could mean for family flexibility, succession, asset protection and future wealth.
Book a consultation with 4P's Future Accounting today to model your options and understand which approach may best support your family and business over the long term.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
