From 1 July 2028, a minimum 30 per cent tax rate will apply to discretionary trust distributions. Around 350,000 small businesses currently operate through these structures. Many of them are in construction. The clock on deciding what to do is already running.

The 2026-27 federal budget contains a lot of moving parts. The headlines have gone to negative gearing, capital gains tax and the fuel excise cut. But for a significant number of small construction businesses, the most consequential announcement sits in a quieter section of the budget papers.

From 1 July 2028, the federal government will introduce a minimum 30 per cent tax on the taxable income of discretionary trusts. This is not a minor adjustment. It is the most significant change to trust taxation in Australia in decades, and it affects the structural foundations of how many builders, subcontractors and construction business owners have organised their finances.

How Discretionary Trusts Work in Construction, and Why They Have Been Popular

A discretionary trust, sometimes called a family trust, is a legal structure where a trustee holds business assets and income on behalf of beneficiaries. The trustee has discretion each year to decide how to distribute the trust’s income among those beneficiaries, which is typically family members.

The reason this structure has been widely adopted in construction is straightforward. Construction is a high-risk industry. Contracts go wrong. Disputes happen. Clients pursue builders through the courts. A discretionary trust creates a legal separation between the business operations and the personal assets of the business owner. If the business faces a claim, personal assets held outside the trust are generally better protected.

The tax flexibility is the second reason. A builder running a profitable year through a discretionary trust can distribute income to a spouse, adult children or other family members in lower tax brackets, reducing the total tax paid across the family unit. That is not a loophole. It has been lawful and deliberately available for decades. Discretionary trading trusts, specifically set up to run trading activities including construction, have been a standard business structure recommended by accountants across the industry.

The numbers confirm how embedded this has become. According to the ATO, over 1.02 million trusts were operating in Australia in 2022-23. The number of discretionary trusts has more than doubled over the past 20 years. Treasury estimates around 350,000 active small businesses currently operate through discretionary trust structures. In 2022-23 alone, around 1.8 million individuals reported a total of $71.3 billion in trust net income, representing around 11 per cent of all tax filers.

Construction is specifically named in practitioner literature as one of the primary industries where discretionary trading trusts are used, alongside hospitality and professional services. The structure is not niche in this sector. It is common.

The number of discretionary trusts in Australia has more than doubled in 20 years. Construction is specifically named as one of the primary industries where they are used. This change is not a fringe issue for a small number of businesses.

What Is Actually Changing From 1 July 2028

Under the current system, trust income flows through to individual beneficiaries who pay tax at their own marginal rates. The trust itself does not pay tax on distributed income. A distribution to a family member on a lower income attracts a lower marginal rate. The tax efficiency comes from that flexibility.

Under the new system, the trustee will be required to pay a minimum 30 per cent tax on the trust’s taxable income before distributions are made. This tax operates at the trustee level, not the beneficiary level. The change is fundamental. It shifts the trust from a flow-through vehicle, where tax is paid by beneficiaries at their own rates, to a partially entity-taxed vehicle, where a minimum rate is collected at the source.

Non-corporate beneficiaries will receive a non-refundable credit for the tax paid by the trustee. The word non-refundable is critical. If a beneficiary’s marginal tax rate is above 30 per cent, they will pay top-up tax and the credit reduces their liability. If a beneficiary’s marginal tax rate is below 30 per cent, the credit applies against their liability but any excess is lost. They cannot get a refund of the difference.

This creates a particularly sharp outcome for distributions to low-income beneficiaries, the very situation that has historically driven much of the tax planning value in these structures. A distribution to a family member earning under $45,000 who would have paid little or no tax on their share of income will now generate a 30 per cent tax paid by the trustee with a non-refundable credit that may only partially offset the beneficiary’s liability.

Leading accounting firm BDO has noted that a trustee distributing income of $15,000 to a low-income beneficiary would face 30 per cent tax on that amount, whereas an individual earning $15,000 directly would fall below the tax-free threshold and pay nothing. That is the bluntness of this reform.

For construction businesses distributing income to beneficiaries already on the 32 cent or higher marginal rate, the practical impact is more limited. The credit system ensures they are not paying significantly more overall. The businesses where the impact is sharpest are those that have been distributing to spouses, adult children or other family members with lower independent incomes.

A distribution to a family member earning under $45,000 who would have paid little or no tax on that income will now generate a 30 per cent tax at the trustee level with a non-refundable credit. The income-splitting benefit that has driven this structure’s popularity is effectively removed.

What Is Not Changing: The Exceptions

Not all trust structures are captured by this reform. Understanding the exclusions matters because some businesses may already be in an excluded category, and others may be restructuring toward one.

Fixed trusts and widely held trusts are excluded. A fixed trust is one where beneficiaries have defined, fixed entitlements to income rather than entitlements subject to trustee discretion. Unit trusts, where unitholders receive income proportional to their units, are generally fixed trusts. If a construction business is already structured through a unit trust with fixed entitlements rather than a discretionary trust, it sits outside the scope of this reform.

Charitable trusts, complying superannuation funds and special disability trusts are excluded. Deceased estates are excluded. Primary production income from agriculture is excluded, which reflects the political reality of how sensitive any trust reform has been historically in farming communities.

Importantly, the four small business CGT concessions are entirely preserved. If a construction business holds eligible active assets in a discretionary trust and the owner eventually sells the business, the existing CGT concessions that allow them to halve or completely disregard capital gains on the sale of those assets remain intact. The trust tax reform does not touch the CGT exit provisions.

The government has also confirmed that distributions relating to vulnerable minors and amounts subject to non-resident withholding tax are excluded from the minimum tax.

Corporate beneficiaries are treated differently and more harshly. Under the current system, some businesses distribute trust income to a corporate beneficiary, sometimes called a bucket company, at the 30 per cent corporate tax rate, retaining earnings within the structure. Under the new system, corporate beneficiaries will not receive a credit for the tax paid by the trustee. Baker McKenzie has identified this as effectively spelling the end of bucket company strategies, because the income would be taxed at the trustee level at 30 per cent and then potentially taxed again at the corporate level with no credit to offset the first payment. That is economic double taxation by design, and it is clearly intentional.

The Rollover Relief Window: Why Three Years Is Less Time Than It Sounds

The government is providing rollover relief for three years from 1 July 2027 to 30 June 2030. This relief is designed to allow businesses structured through discretionary trusts to transfer assets out of the trust and into a company or fixed trust without triggering income tax consequences, including capital gains tax on the transfer itself.

On paper, three years sounds manageable. In practice, the construction industry will recognise immediately why it is not.

Restructuring a business out of a discretionary trust involves multiple legal processes, each with its own timeline and cost. The trust deed must be unwound. New entity structures must be established. Assets must be formally transferred. Contracts, licences, bank accounts, trade credit relationships and insurance policies all need to be updated to reflect the new entity.

Then there is stamp duty. Pitcher Partners, in their analysis of this reform published immediately after the budget, has flagged this as one of the most significant practical constraints on the rollover relief. Many construction businesses are land-rich, holding plant, equipment and potentially property within their trust structure. Transferring those assets to a new entity can trigger stamp duty obligations at the state level. The federal rollover relief addresses income tax and CGT consequences, but it does not override state-based stamp duty. Whether states provide complementary relief is an open question that has not been resolved.

BDO has made the same point, noting that taxpayers may face material transactional costs that inhibit efficient restructuring if relief is not coordinated at federal, state and territory levels. For a construction business in Queensland or New South Wales with significant plant and equipment or property assets held in trust, the stamp duty calculation on a restructure could be substantial.

The ATO has confirmed the measure is not yet law. The legislation has not yet been drafted, let alone passed. The design details of how the rollover relief interacts with existing CGT rollovers and state-based duty regimes remain unresolved. That uncertainty is itself a reason not to move immediately. But it is not a reason to wait until 2028 without having assessed your position.

The rollover relief addresses income tax and CGT. It does not override state stamp duty. For a construction business holding plant, equipment or property assets in trust, the stamp duty cost of restructuring could be substantial. This is not a simple administrative process.

The 60 Per Cent Effective Tax Rate Problem

Pitcher Partners has raised a specific concern that has not received wide coverage but is significant for construction business owners who are personally on higher marginal tax rates.

Under the new rules, a trust distributes income and pays 30 per cent tax at the trustee level. The non-corporate beneficiary receives a non-refundable credit. If that beneficiary is on the top marginal rate of 47 per cent, they receive the credit and pay top-up tax of 17 per cent. So far, the total tax on that income is 47 per cent, the same as if they had earned it as a wage.

But where the structure becomes especially punishing is in situations where the effective rate can exceed 60 per cent. This occurs when the 30 per cent minimum trust tax interacts with other income, means-testing or arrangements in ways that the current draft design does not fully address. Pitcher Partners has flagged this as a potential outcome in specific circumstances, though the full mechanics will depend on the final legislation.

This is not a reason for panic. But it is a reason why getting qualified tax advice before the legislation is finalised, and again once it is, is not optional. The construction businesses most exposed are those with complex distribution arrangements involving corporate beneficiaries, multiple beneficiaries across different income levels, or significant retained earnings.

What Treasury Says About the Impact on Small Businesses

The government’s own figures, reported by SmartCompany citing Treasury data, indicate that around 350,000 active small businesses currently operate through discretionary trust structures. Of those, the government says approximately 40 per cent are not expected to pay any additional tax as a result of the reform or face any need to restructure. Those are businesses where beneficiaries are already on marginal rates of 30 per cent or above, and the credit system largely neutralises the impact.

That leaves around 60 per cent of the affected small business population in a position where the change either increases their tax burden or makes their current structure less efficient than an alternative. That is not a small cohort.

The measure is expected to raise $4.5 billion in additional government revenue over five years. The ATO is receiving $66 million to support implementation. Neither figure suggests the government expects compliance to be simple or voluntary participation in restructuring to be universal.

What Construction Business Owners Should Do Now

This measure does not take effect until 1 July 2028. The rollover relief window does not open until 1 July 2027. The legislation has not yet been drafted. In that context, the right response is not to rush into a restructure but to begin the assessment process with full information.

The first question is whether your structure is captured at all. If your business operates through a fixed or unit trust rather than a discretionary trust, the reform does not directly apply. If your trust distributes primarily to beneficiaries already on marginal rates above 30 per cent, the credit system limits the practical impact on your overall tax outcome.

The second question is what restructuring would actually involve for your specific business. That means understanding what assets are held in the trust, what the stamp duty implications are in your state, what the legal and accounting costs of restructuring are, and whether a company structure would deliver the benefits the government describes, including access to the 25 per cent small business tax rate and dividend imputation.

The third question is timing. The rollover relief window is three years. Restructuring a business out of a trust properly, accounting for legal transfers, stamp duty negotiations, updating all external relationships and managing the transition without disrupting operations, takes longer than most business owners expect. Starting that process in 2027 may not leave enough runway.

The fourth question is whether the legislation as finally drafted matches the announcement. Key design details remain unresolved. PwC has noted that the practical mechanics of how the minimum tax interacts with franking credits, corporate beneficiaries and the broader CGT regime are still to be worked through. The final law may differ from the announcement in ways that matter.

The practical guidance from every major accounting firm commenting on this reform is the same: review your current structure now, get qualified advice, and do not make decisions based solely on the announcement before the legislation exists. That is sensible counsel.

Construction businesses that have used discretionary trust structures for good reasons, asset protection, income flexibility, succession planning, have not done anything wrong. The tax system permitted it. The system is changing. The window to respond is narrower than it appears on the surface.

Talk to your accountant. Not next year. Now.

For more coverage of the 2026-27 federal budget and what it means for Australian builders, follow The Good Builder. Note: this article does not constitute financial, tax or legal advice. Readers should seek qualified professional advice specific to their circumstances.

General Information Disclaimer:
This article draws on the federal Budget 2026-27 small business statement and budget papers, and publicly available analysis from Pitcher Partners, BDO, Baker McKenzie, PwC, William Buck, SmartCompany and the Australian Taxation Office. It is provided as editorial commentary for industry professionals and does not constitute financial, tax, legal or structural advice. The legislation implementing this measure has not yet been drafted or passed. Business owners should seek qualified professional advice specific to their individual circumstances before making any structural decisions.

Author: TGB Editorial