Choosing the right trust structure can have important implications for an Australian business, particularly when it comes to distributions, tax planning, asset protection and long-term succession.

The difference between a discretionary trust and a fixed trust has also become increasingly relevant following the Australian Government’s proposed changes to the taxation of discretionary trusts.

From 1 July 2028, the Government proposes to introduce a minimum tax rate of 30% for discretionary trusts, subject to certain exceptions. The Government has also proposed rollover relief for eligible businesses that choose to restructure from 1 July 2027. Fixed trusts and certain other trust structures are excluded from the proposed discretionary trust minimum tax.

For business owners considering their existing structure or setting up a new one, understanding how discretionary and fixed trusts differ can help when discussing options with an accountant and legal adviser.

What Is a Discretionary Trust?

A discretionary trust is a structure where the trustee generally has discretion over which eligible beneficiaries receive distributions and how much they receive, subject to the trust deed and applicable tax laws.

This flexibility has traditionally made discretionary trusts attractive to many Australian families and business owners.

For example, a trust may have several eligible beneficiaries. Depending on the circumstances and the trust deed, the trustee may have flexibility to determine how income is distributed between those beneficiaries from year to year.

This can be useful where:

• Family circumstances change
• Business income varies
• Different beneficiaries have different tax circumstances
• The business owner wants flexibility over future distributions
• Family wealth and succession planning are important

However, this flexibility also comes with administrative and tax responsibilities. The trustee must operate the trust in accordance with its deed and comply with the relevant tax rules.

What Is a Fixed Trust?

A fixed trust generally provides beneficiaries with fixed or predetermined interests in the trust’s income or property.

Rather than giving the trustee broad discretion over who receives distributions, the beneficiaries’ interests are generally established by the structure of the trust.

However, determining whether a trust qualifies as a fixed trust for Australian tax purposes can be technically complex.

The Australian Taxation Office (ATO) has specifically recognised that it can be difficult for some trusts to satisfy the technical definition of a fixed trust.

This means business owners should not assume that simply describing a trust as “fixed” makes it a fixed trust for every tax purpose.

The trust deed, legal structure, and applicable tax rules all need to be considered.

Discretionary Trust vs Fixed Trust: What Is the Difference?

The key difference is generally the way beneficiaries’ interests are determined.

A discretionary trust provides the trustee with greater flexibility to determine distributions between eligible beneficiaries.

A fixed trust generally provides beneficiaries with predetermined interests.

The exact treatment depends on the trust’s legal and tax circumstances.

Why Is the Difference Important in 2026?

The proposed changes to discretionary trust taxation have made the distinction particularly important.

Treasury states that from 1 July 2028, a minimum tax rate of 30% will apply to discretionary trusts, with some exceptions. Treasury also states that other trusts, including fixed trusts, are exempt from the proposed measure.

The proposed reform is intended to change the tax treatment of discretionary trust income and reduce opportunities to use discretionary trusts to achieve lower tax outcomes.

However, this does not mean that every business owner with a discretionary trust should immediately consider moving to a fixed trust.

There are several other factors to consider.

Why Business Owners Value Discretionary Trusts

One of the biggest advantages of a discretionary trust can be flexibility.

A business owner may not know what their financial or family circumstances will look like several years into the future.

A discretionary trust can potentially provide flexibility in distributing income between eligible beneficiaries, provided the distributions are permitted under the trust deed and relevant tax laws.

For example, a family’s circumstances may change as children become adults, family members enter or leave employment, or business income changes.

That flexibility can be valuable.

Moving to a structure with fixed beneficiary interests may reduce that flexibility.

What Are the Potential Advantages of a Fixed Trust?

A fixed trust can provide greater certainty about beneficiaries’ interests.

Depending on the structure, beneficiaries may have predetermined interests rather than relying on the trustee to decide how distributions are allocated.

This can potentially be useful where:

• Ownership interests need to be clearly defined
• Investors require predetermined interests
• The business structure requires greater certainty
• Distribution flexibility is less important
• The structure is designed around specific ownership proportions

However, a fixed trust is not automatically better simply because of the proposed discretionary trust tax changes.

The appropriate structure depends on the purpose of the trust and the circumstances of the people involved.

Does a Fixed Trust Mean Equal Distributions?

Not necessarily.

This is an important distinction for business owners.

A fixed trust is not simply a discretionary trust where the trustee decides to distribute income equally every year.

The underlying legal and tax characteristics of the trust matter.

The ATO’s guidance demonstrates that whether a trust qualifies as fixed for tax purposes can involve specific technical requirements.

Business owners should therefore obtain professional advice rather than attempting to change distribution percentages and assuming this creates a fixed trust.

Should You Change From a Discretionary Trust to a Fixed Trust?

There is no universal answer.

A business owner considering a restructure should look at the entire situation rather than focusing solely on the proposed tax rate.

Important considerations can include:

• Current and expected business income
• Existing trust distributions
• Beneficiaries
• Asset ownership
• Asset protection
• Succession planning
• Investment activities
• Future business growth
• Tax consequences
• Legal implications
• State and territory taxes
• Financing arrangements
• Costs of restructuring

The proposed reforms include rollover relief for eligible small businesses and others that choose to restructure, with the relief available for three years from 1 July 2027.

However, rollover relief does not mean every cost or consequence associated with restructuring should be ignored.

Don’t Choose a Trust Structure Based on Tax Alone

Tax is an important consideration, but it should not be the only consideration when selecting a business structure.

A business owner may value the flexibility of a discretionary trust for family or succession planning.

Another business may require greater certainty around ownership interests.

The right structure needs to reflect the broader objectives of the business and its owners.

As John Saade has discussed in the CEO Breakdown series, changes to trust taxation can have consequences beyond simply calculating the tax payable.

Business owners need to understand what they may gain and what they could potentially give up when changing structures.

What Should Australian Business Owners Do Now?

If you currently operate through a discretionary trust, there is no need to make a rushed decision based solely on the proposed reforms.

Instead, consider taking these steps:

Review Your Existing Trust Deed

Understand how the trust currently operates, including who the beneficiaries are and what distribution powers the trustee has.

Review Previous Distributions

Look at how income has historically been distributed and whether that flexibility remains important to your business and family.

Model the Potential Impact

Ask your accountant to assess how the proposed changes could affect your circumstances if they become law in their current form.

Consider Alternative Structures

Depending on your circumstances, alternatives could include a fixed trust, company or another structure.

Each option has different tax, legal and commercial considerations.

Obtain Professional Advice

A trust restructure can have significant consequences. Discuss the proposed changes with your accountant and, where appropriate, a lawyer before making structural changes.

Final Thoughts

The difference between a discretionary trust and a fixed trust goes beyond simply deciding whether distributions are flexible or predetermined.

A discretionary trust can provide valuable flexibility, while a fixed trust can provide greater certainty around beneficiaries’ interests.

The Australian Government’s proposed 30% minimum tax on discretionary trusts from 1 July 2028 makes the issue particularly relevant for business owners reviewing their structures. However, the fact that fixed trusts are proposed to be excluded from the regime does not automatically make them the right choice for every business.

Before changing an existing trust, business owners should consider the tax, legal, commercial, asset protection and succession implications.

The best structure is not necessarily the one with the lowest immediate tax bill. It is the structure that appropriately supports the business owner’s broader objectives.

Frequently Asked Questions About Discretionary Trusts and Fixed Trusts

What is the main difference between a discretionary trust and a fixed trust?

A discretionary trust generally gives the trustee greater discretion over distributions to eligible beneficiaries, while a fixed trust generally provides beneficiaries with predetermined interests.

Is a fixed trust exempt from the proposed 30% discretionary trust tax?

Treasury’s current proposal states that fixed trusts and certain other trusts are excluded from the proposed 30% minimum tax applying to discretionary trusts from 1 July 2028. The final legislation and technical requirements should be confirmed before making any structural decisions.

Is a fixed trust better than a discretionary trust?

Not necessarily. A fixed trust may provide greater certainty, while a discretionary trust can provide greater flexibility. The appropriate structure depends on the business, beneficiaries, asset protection requirements, tax circumstances and long-term objectives.

Can a discretionary trust be changed into a fixed trust?

A restructure may be possible in some circumstances, but the process and consequences depend on the trust deed, proposed arrangement and applicable tax and legal rules. Professional advice should be obtained before making changes.

Does distributing trust income equally make a trust a fixed trust?

Not necessarily. The way income has been distributed does not, by itself, determine whether a trust qualifies as a fixed trust for tax purposes. The legal and tax characteristics of the trust need to be examined.

When is the proposed 30% minimum tax for discretionary trusts expected to begin?

The Australian Government has proposed that the 30% minimum tax for discretionary trusts will apply from 1 July 2028, subject to specified exceptions.

Is there rollover relief if I restructure my discretionary trust?

The Government has proposed rollover relief for three years from 1 July 2027 to support eligible small businesses and others that choose to restructure out of discretionary trusts.

Talk to Latitude Accountants

Choosing between a discretionary trust and a fixed trust can have long-term implications for your business, family and wealth.

At Latitude Accountants, we help Australian business owners with accounting, taxation, business advisory, tax planning and business structuring.

If you’re concerned about the proposed discretionary trust tax changes or want to review whether your existing structure remains appropriate, our team can help you understand your options.

Book a free upfront consultation with Latitude Accountants.

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Latitude Accountants has offices in Sydney Olympic Park, Marrickville, Melbourne and Loxton and works with businesses across Australia.

Disclaimer

This article provides general information only and should not be considered professional, financial, accounting, legal or tax advice. The discretionary trust tax changes discussed in this article are proposed measures and may change before legislation is enacted. Trust taxation and the classification of a trust can be technically complex. Business owners should obtain professional advice based on their individual circumstances before establishing, changing or restructuring a trust.