The current Australian Government revealed several proposed taxation changes in Budget 2026 that it intends to implement from July 2027.
There are already countless blogs, mainstream commentators, tax professionals, and finance influencers dissecting, praising, criticising, or outright torching these proposals. I won’t attempt to replicate that analysis here. Instead, I want to explore a more theoretical question specifically related to taxing discretionary Family Trusts:
Are there still structures and mechanisms available that could largely neutralise the intended effect of these proposed changes?
Before continuing, a very important disclaimer:
I am not a taxation lawyer, accountant, or financial adviser. Nothing in this article is taxation advice. The scenarios, examples, and methods discussed below are purely illustrative thought experiments and should not be relied upon in any way. Always seek advice from a licensed professional regarding your specific circumstances.
The Starting Scenario
Consider a discretionary family trust with $1 million in invested assets returning 9% annually, producing $90,000 in income. Assume the household consists of two adults, each earning $90,000 in salary from their primary employment.
Under the current system, the trust distributes its income equally, with each individual receiving $45,000. This results in taxable income of $135,000 per person, made up of $90,000 salary plus the trust distribution. After tax, each individual retains approximately $101,000, resulting in total household after-tax income of roughly $202,000 annually.
Under the proposed Budget 2026 changes, assume trust income is taxed internally at 30% before distribution. The trust would pay $27,000 in tax on the $90,000 income, leaving only $63,000 available for distribution. Split equally, each individual receives $31,500.
Each person’s taxable income would therefore become $121,500, consisting of their $90,000 salary and $31,500 trust distribution. After tax, each individual retains approximately $92,000, reducing household after-tax income to roughly $184,000 per annum.
At face value, the proposed policy appears to work as regaled by commentators, reducing the benefits of distributing investment income through discretionary trusts.
Reframing Distributions as Wages
But what if the trust simply stopped making distributions altogether?
Instead of distributing profits, the trust could theoretically employ the two individuals and pay them wages of $45,000 each. In that case, the wages become deductible to the trust, reducing trust taxable income to effectively zero and avoiding the proposed 30% tax entirely.
The individuals would then each earn:
- $90,000 from employer #1
- $45,000 from employer #2 (the trust)
Their taxable income returns to $135,000 each, placing them back in approximately the same after-tax position as the current system, with household after-tax income again sitting around $202,000 annually.
In other words:
The proposed changes, that is minimum 30% tax on income inside the trust, may potentially be neutralised simply by changing the character of the payments from “distributions” to “wages”.
The “Loophole” Appears
This is where the structure becomes more interesting.
Because each individual now receives income from multiple sources, they may no longer derive more than 80% of their income from a single payer. That raises the question of whether they could potentially qualify as a Personal Services Business (PSB) under ATO rules. (ATO Personal Services Business)
Again, this is highly fact-specific and professional advice would absolutely be required. But as a theoretical exercise, assume they do qualify.
Now suppose each individual claims approximately $25,000 in business-related expenses against that income. Examples commonly debated in these scenarios include travel, rideshare costs, home office expenses, airfares, technology, meals, and entertainment.
Whether such claims would actually survive ATO scrutiny is a completely separate issue. But hypothetically, each individual’s taxable income would fall from $135,000 to roughly $110,000 after deductions.
That creates an interesting outcome. Each person may end up with approximately $85,000 in after-tax cash income while simultaneously consuming or benefiting from $25,000 of pre-tax deductible expenses. Economically, the household’s effective benefit could rise toward $220,000 annually.
The Paradox
If this theoretical structure worked as described, the outcome becomes somewhat paradoxical.
Under the current system, the household retains roughly $202,000 after tax. Under the proposed Budget 2026 changes, that falls to approximately $184,000. Yet under the “wage + PSB” structure, the household’s effective economic benefit could potentially increase to around $220,000.
For people who have discretionary family trusts, are these changes a boon camouflaged to appear as a bane?
Which naturally raises several questions. If trust distributions can simply be replaced with wages, why wouldn’t taxpayers do it? If PSB status can be self-assessed under certain conditions, where exactly are the boundaries? And if deductibility ultimately depends on documentation and substantiation, how aggressively can taxpayers push interpretation before the ATO intervenes?
Sophisticated taxpayers rarely respond to tax changes passively, they work around them or restructure.