Discretionary trusts lose their tax mojo

Mike Taylor

Managing Editor and Publisher

14 May 2026

Tuesday night’s Federal Budget has done what 25 years of tax reform reviews have recommended and neutralised the tax advantage of discretionary trusts over companies, according to Holding Redlich Tax Partner, Dhanushka Jayawardena.

Jayawardena said that with both vehicles now sitting at or around 30%, and small business companies sitting below that at 25%, the case for a discretionary trust collapses to non-tax considerations.

“Asset protection and succession planning remain valid reasons to choose a trust. Tax efficiency is no longer one of them,” he said. “We expect a meaningful migration into corporate structures over the three-year rollover window, and a near-universal default to companies for new structures from 2026 onwards.”

“This has been sold as a housing affordability measure, but the housing market is the smaller half of the story. The 50% discount disappears for every asset class held by Australian individuals, partnerships and trusts such as listed shares, private company scrip, units in funds, infrastructure interests, private equity.

“The single largest change to the taxation of Australian savings since 1999 has been announced under the banner of helping first home buyers,” Jayawardena said.

“Returning to indexation sounds simple until you remember why we abandoned it in 1999. Every long-held asset now needs a 1 July 2027 cost base, and the taxpayer gets to choose between a professional valuation and the ATO’s formula. Five years from now, the valuation evidence on a 2027 disposal may well be the single most-litigated issue in the CGT regime.

“The 30% minimum tax on capital gains is the quieter half of the package and the part that will catch sophisticated investors off guard. It removes the long-standing strategy of timing disposals into low-income years such as retirement years, sabbatical years, business loss years.

“The headline says negative gearing is going. The reality is more nuanced. Investors who buy new builds keep negative gearing in full, including the ability to offset losses against salary income. The Government has not abolished a tax concession so much as repurposed it as a supply-side incentive.”

Holding Redlich Partner, Andrew Stone said the 50% CGT discount being replaced by with an inflation index model held significant implications for fund managers.

“For funds already in market, continuous disclosure obligations are relevant. This may require careful review of offering documents and providing updated disclosure, particularly in relation to the transitional arrangements leading up to 1 July 2027.

“Investor redemptions are potentially a key consideration, including the possibility of increased investor redemptions, and whether asset disposals before 1 July 2027 are desirable or required, whether other sources of liquidity are available, and the possibility of needing to gate or freeze redemptions. Investor best interest is central to all of those considerations.

“Product issuers may also wish to review constitutions and trust deeds for optimisation with the new tax arrangements. In addition, arrangements with investment managers and fund administrators are also relevant to ensure delivery of services that are consistent with the new tax rules. Appropriate tax reporting and unit price calculations being key risk areas. Fund models and distribution assumptions may also need to be reviewed.

“For investment funds not currently in market, there may be questions around new product demand, including whether demand for income strategies may be stronger than capital growth strategies, and what options are available for investors seeking tax effective capital growth strategies.

“There is also potential for innovation in real asset strategies, including housing-related fund structures, particularly build-to-rent and land lease.

“For Australian Financial Service Licence holders more broadly, consideration of compliance and risk frameworks are in play to ensure they are fit for purpose and up to date, as are staff training arrangements. It will be vital to ensure representatives are adequately trained to provide accurate financial product advice having regard the effect of the new tax laws.”