Trust taxation reforms
What it could mean for wealth structures

Proposed changes to the way discretionary trusts are taxed could significantly affect how Australian families and business owners manage their investments and income.

One of the key Government’s 2026 Budget proposals is a minimum 30% tax on distributions from discretionary trusts to trust beneficiaries. If introduced, this would reduce one of the main advantages traditionally associated with trusts – flexibility to justifiably distribute investment income across family members in different tax brackets and that helps overall tax liability.

For many years, discretionary trusts have been used not just to hold investments and assets, but also to stream income within family and discretionary trust structures. This has often included allocating different types of income to different beneficiaries such as, to a beneficiary who gets the benefit of franking credits attached to a franked distribution.

If these changes proceed, that flexibility would likely be significantly reduced. In simple terms, it may no longer be as effective to rely on trusts as a way to reduce tax on investment income or family trust earnings.

This is why many people are looking at other long-term tax effective investment structures that can offer certainty.

One option gaining attention are investment bonds.

Investment bonds are designed to be tax-effective because they are generally taxed within the bond structure at the company tax rate, rather than in your personal name at your personal marginal tax rate. Importantly, once held for 10 years, the earnings’ component of withdrawals are received as non-tax assessable income, provided contribution rules are met. This means you can invest, grow your wealth, and access it later without the same ongoing personal tax reporting or annual tax impact that can apply to other structures that distribute income annually.

They also offer flexibility in terms of ownership structure, estate planning benefits, and can be a simple way to invest for long-term goals such as education, retirement, or wealth transfers to family members and others.

While discretionary trusts have traditionally been a popular tool for families and business owners, the proposed tax changes may reduce their effectiveness in tax planning. As a result, many may benefit from considering a broader mix of investment structures.

Alongside superannuation and traditional investments such as shares or property, investment bonds often play an important role as they can be a tax-efficient, long-term wealth accumulation solution that is not reliant on income distribution strategies to create tax effective outcomes.

The key takeaway is, tax rules may be changing, but there are still effective ways to structure your investments. The focus is shifting toward solutions that provide tax efficiency, simplicity, and long-term certainty.*

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Generation Life Limited AFSL 225408 (Generation Life) is the product issuer. The information provided is general in nature and does not consider the investment objectives, financial situation or needs of any person and is not intended to constitute personal financial advice. The product’s Product Disclosure Statement (PDS) and Target Market Determination (TMD) at genlife.com.au should be considered in deciding whether to acquire, hold or dispose of the product. Generation Life does not make any guarantee or representation as to any particular level of investment returns. *Generation Life’s investment bonds can be considered as providing certainty as they are governed by legislation that has changed infrequently and can be appropriately structured to bypass an estate and be protected in case of bankruptcy of the life insured.