Trusts, tax reform, and the succession trap

The 2026–27 federal budget has fired the starting gun on the most significant overhaul of trust and capital gains taxation in a generation. For decades, the discretionary trust has been the cornerstone of private wealth and business structuring. That foundation is about to be fundamentally tested. A series of interconnected reforms will force a reckoning for thousands of clients, creating both immense risk and a once-in-a-generation advisory opportunity. Accountants are on the front line.

The strategic decisions made between now and 1 July 2027 will lock in asset protection, tax, and succession outcomes for decades to come.

The Triple Threat: Budget 2026-27 Unveiled

The government's announcements create a three-pronged imperative for change, culminating in a limited window to act.

• The 30% Trust Tax Floor: From 1 July 2028, a minimum 30% tax rate will apply to income and capital gains distributed by discretionary trusts to adult individual beneficiaries. This measure is designed to neutralise the tax advantages of income splitting with low-income family members. For trusts holding high-value assets, this effectively imposes a new, higher floor on the taxation of capital gains.

• The End of the CGT Discount: From 1 July 2027, the 50% Capital Gains Tax discount for individuals and discretionary trusts will be abolished and replaced with a cost-base indexation model. While designed to tax only 'real' gains, this change removes the single most valuable CGT concession, dramatically increasing the tax payable on the disposal of long-held, appreciating assets.

• The Restructure Rollover Window: In recognition of these seismic shifts, the government has announced a three-year temporary rollover relief window. From 1 July 2027 to 30 June 2030, eligible discretionary trusts will be able to transfer assets into a corporate or unit trust structure without triggering an upfront CGT liability. This is the critical escape hatch. However, note this will trigger transfer (aka stamp) duty on market value as at date of the transfer.

The Problem: Why Restructuring is Currently Blocked

The need for a special rollover window highlights a long-standing structural problem in the tax legislation. Under current law, it is exceptionally difficult for a discretionary trust to restructure into a company on a tax-neutral basis.

The primary CGT rollover provisions, such as the scrip-for-scrip rollover in Division 124-N or the business restructure rollover in Division 615 of the Income Tax Assessment Act 1997, are built on the concept of continuity of underlying ownership. They require the ultimate economic interests in the assets to be maintained pre- and post-restructure.

Discretionary trusts, by their very nature, fail this test. The beneficiaries have no fixed or quantifiable interest in the trust's assets or income. They have only a right to be considered by the trustee. This lack of fixed ownership means the conditions for the standard rollovers cannot be met. The new, temporary rollover is therefore a crucial, and temporary, legislative workaround.

The solution's hidden Sting: The succession trap

While the rollover window provides a tax-effective exit from the new trust regime, it pushes clients directly into a significant succession planning trap.

Moving assets from a discretionary trust to a company is not a simple administrative change. It is a fundamental shift in the nature of the client's wealth.

From Trust Asset to Estate Asset In a discretionary trust, the assets are owned by the trustee and controlled by the appointor. They do not form part of the appointor's personal estate upon their death. Control passes via the mechanisms in the trust deed, typically to a successor appointor. The assets remain protected within the trust structure, shielded from challenges to the appointor's Will.

When a trust's assets are rolled into a company, the trust receives shares in that company. If those shares are then distributed to the individual controllers (the former appointors/trustees), they become their personal property.

This has profound consequences:

• Shares are Estate Assets: The shares now form part of the individual's personal estate and will be distributed according to their Will.

• Exposure to Claims: As estate assets, the shares are exposed to family provision claims from eligible persons who feel they were not adequately provided for in the Will. The asset protection wall of the trust is gone.

• Loss of Flexibility: The ability to flexibly stream income and capital to a wide class of beneficiaries is replaced by the rigid structure of company dividends.

The Embedded Tax Problem The rollover defers the CGT liability, it does not eliminate it. The capital gain is now embedded in the assets held by the company.

• Corporate Tax Rate Applies: When the company eventually sells the asset, it will pay tax on the capital gain at the prevailing corporate tax rate (currently 25% or 30%).

• CGT Discount is Lost Forever: The 50% CGT discount is a feature of the individual and trust tax systems. It is never available to a company. This means the tax paid inside the company on the sale of the asset will be significantly higher.

• Trapped Profits and Division 7A: Extracting the after-tax sale proceeds from the company creates a second layer of tax. The funds can be paid out as franked dividends (taxed at the shareholder's marginal rate) or trigger complex issues under Division 7A if taken as loans. Liquidation of the company is often the only "clean" way to extract capital, which comes with its own costs and complexities.

The Control Vacuum Without a comprehensive and binding shareholder agreement, control of the company is governed by the Corporations Act and the company's constitution. This can lead to disaster in a family context, creating risks of shareholder disputes, deadlocks, and uncertainty on the death, disability, or exit of a shareholder.

The Unit Trust Alternative: A Different Trap?

Some may see a unit trust as a better destination for a restructure. Unit trusts are generally not captured by the new 30% minimum tax on discretionary distributions, and rollovers may be more straightforward.

However, they share the same fundamental succession trap as companies. Units in a unit trust are personal property.

They are assets that form part of the unitholder's estate.

They pass under a Will and are exposed to the same family provision claims and control issues as company shares.

A robust unitholders' agreement is just as critical, and just as frequently overlooked, as a shareholder agreement.

Your Pre-Rollover Action Plan: A Checklist for Advisors

The window to act does not open until 1 July 2027, but the time for strategic planning is now. Proactive accountants should be implementing the following plan with every relevant client.

1. Client Triage: Systematically review your client base. Identify every client with a discretionary trust holding significant appreciating assets, particularly property, private company shares, or business goodwill. Prioritise those with complex family dynamics or large unrealised capital gains.

2. Financial Modelling: The first step is to quantify the threat. Model the "do nothing" scenario for each client. Calculate the future tax impact of the 30% minimum tax and the loss of the CGT discount on their specific asset base. Compare this with the tax outcomes of a restructure into a company, including the effect of the embedded CGT.

3. The Succession Conversation: This is the most critical step. The discussion must move beyond tax. You must ask the difficult, long-term questions:

• "Who do you ultimately want to control these assets in 20 years?"

• "Who do you want to benefit from the wealth, and in what proportions?"

• "What happens if one of your children gets divorced, goes bankrupt, or has a falling out with their siblings?"

• "Does the rigidity of a corporate or unit trust structure align with these goals?"

4. Structure Scoping: Once the client's succession objectives are clear, you can properly assess the destination structure. Map out the pros and cons of a company versus a unit trust (or a hybrid) against those specific goals. The right answer will be different for every family.

5. Legal & Estate Plan Integration: A restructure cannot happen in a vacuum. It is an integral part of a client's estate and succession plan. This process must be integrated with a full review and update of their Wills, Enduring Powers of Attorney, and the drafting of a binding Shareholder or Unitholder Agreement to govern the new structure.

6. Assemble the Advisory Team: No single advisor can manage this process alone. Proactively engage the client's commercial lawyer and financial planner. A unified strategy that balances tax effectiveness, legal robustness, and long-term wealth management goals is the only way to achieve a successful outcome.

Important Caveats

It is critical to remember that these reforms are, at present, budget announcements.

• Draft Legislation Pending: The measures are not yet law. The final details contained in the draft legislation may differ from the initial announcements.

• Consultation Underway: The Treasury consultation process will inevitably shape the final form of the rules, particularly the eligibility criteria and mechanics of the temporary rollover relief.

• General Information Only: This article provides a high-level strategic overview. It is not a substitute for tailored professional advice based on a client's individual financial and family circumstances.

The next three years will define the landscape for private wealth structuring in Australia.

The end of the "set and forget" discretionary trust is here.

Success for clients will not be achieved through tax advice in isolation. It demands a forward-looking, multidisciplinary approach that seamlessly integrates tax, commercial law, and strategic financial planning.

The accountants who lead these holistic conversations will prove to be the most valuable advisors their clients have.

Claire Styles, founder & principal lawyer, C Legal