Treasury Trust Tax Update: Chalmers’ Draft Legislation Preserves the Bucket Company
In a major reprieve for Australian family businesses and high-net-worth investors, Treasurer Jim Chalmers has released draft exposure legislation softening the Federal Government’s proposed 30% minimum tax on discretionary trusts.
Key Tax Takeaway: The draft exposure bills introduce a fixed distribution election that allows existing discretionary trusts to avoid the upcoming 30% trustee-level minimum tax—effectively saving the widely used "bucket company" strategy from crippling double taxation.
The Backstory: May 2026 Budget vs. September Draft Legislation
When the Government first announced its 30% minimum tax on discretionary trust income in the May Budget, tax advisors warned of a lethal blow to corporate beneficiaries:
- The Original Budget Proposal: Corporate beneficiaries ("bucket companies") were set to receive no tax credits for the 30% tax paid at the trustee level. When profits were eventually passed down to individuals as franked dividends, the combined effective tax rate could have spiraled toward 55% to 70%.
- The September Draft Compromise: Under the draft rules, existing trusts (created before 1 July 2028) can make a one-time election to lock in fixed distributions to pre-nominated beneficiaries (such as individuals or bucket companies). Doing so exempts the trust from the new 30% minimum tax framework altogether.
How the Fixed Distribution Election Works
By making a fixed distribution nomination, a trust can continue distributing profits to a corporate beneficiary to cap tax at the 25% or 30% corporate rate without triggering trustee-level double taxation.
- Grandfathering Window: The election is available to trusts created before 1 July 2028.
- Saves Restructuring Costs: Trustees who elect into fixed distributions avoid needing to wind up their family trust or transfer assets into a company, preventing massive capital gains tax and state stamp duty liabilities.
- Preserves Asset Protection: Crucially, tax experts note that a fixed distribution election under the draft rules does not convert a discretionary trust into a standard unit trust. The core asset protection barrier that shields underlying trust assets from personal creditors remains intact.
The Catch: Loss of Annual Flexibility & Harsh Penalties
While the draft legislation saves bucket companies, it comes with a strict trade-off: loss of discretionary flexibility.
- One-Time Nomination: Trustees make the election once and are locked into those distribution proportions permanently. Revocation or alteration is generally prohibited except under limited life events, such as death or divorce.
- Severe Non-Compliance Penalties: If a trustee distributes income outside its fixed nomination, the trust immediately loses its exemption. In year one of the breach, the trustee is hit with a penal tax rate of 47% on all trust income, before defaulting into the standard 30% minimum tax regime in subsequent years.
Comparison: Trust Options Under the Draft Rules
| Feature | Option A: Fixed Distribution Election | Option B: Standard Minimum Tax Trust | Option C: Restructure to Company |
|---|---|---|---|
| Trustee Tax Rate | Standard marginal rates of beneficiaries | 30% minimum trustee tax | 25%–30% corporate tax rate |
| Bucket Company Viable? | Yes (Preserved without double tax) | No (Triggers double tax up to 70%) | N/A (Direct corporate ownership) |
| Income Flexibility | Locked in permanently | Retains annual discretionary flexibility | Fixed profit allocation via shares |
| Restructure Costs | None | None | Potential stamp duty / advice costs (backed by 3-yr rollover relief) |
What Should Family Businesses Do Next?
The release of this exposure draft represents a significant pivot, but business owners and investors should refrain from making permanent structural alterations until the legislation is finalized.
- Review Existing Distribution Patterns: Audit how consistently your trust distributes to individuals versus bucket companies. If your allocations rarely change year-to-year, the fixed election may be an ideal fit.
- Evaluate Future Flexibility Needs: If your family circumstances or business earnings fluctuate wildly, locking into fixed percentages could create tax inefficiencies down the track.
- Assess the 2027 Rollover Window: For groups where a fixed election is unsuitable, the Government’s expanded three-year restructuring rollover relief (starting 1 July 2027) remains an alternative path to move assets into a company structure.
