Nathan Scott
Director
Commercial and Succession Planning
Update on 30% Minimum Tax on Discretionary Trusts
The Federal Government has now released its draft legislation to implement the proposed 30% minimum tax on discretionary trusts.
Announced as part of the 2026–27 Federal Budget, the reforms are proposed to commence from 1 July 2028 and represent the most significant change to the taxation of discretionary trusts in recent times.
It is important to note the legislation is presently in draft form and may change before it is introduced into and passed by Parliament. However, the draft legislation provides us with a better understanding of the proposed changes and how they will operate in practice.
How will the minimum tax work?
Under the proposed legislation, certain discretionary trusts will be subject to a minimum tax rate of 30%.
Traditionally, one of the advantages of a discretionary trust has been the ability of the trustee to determine which beneficiaries receive trust income each year.
The Government’s policy objective is to reduce the extent to which this flexibility can be used to reduce the overall amount of tax payable on trust income, compared with the tax that may have been payable if that income had been earned directly by an individual.
Under the proposed rules, trust income will generally be taxed at a minimum rate of 30%.
Where the minimum tax has been paid by the trustee, a non-corporate beneficiary who is entitled to the relevant trust income will receive a corresponding non-refundable tax offset.
The practical effect is that distributing trust income to an individual on a tax rate below 30% will generally no longer produce the same tax benefit that it does under the current system.
Importantly, corporate beneficiaries will not be entitled to the minimum tax offset. This will impact families and businesses who have previously used bucket companies to receive trust distributions and manage the overall tax payable on trust income.
Which trusts will be affected?
The new regime is directed at discretionary trusts. The draft legislation excludes a number of other types of trust, including:
- Fixed trusts;
- Special disability trusts;
- Deceased estates; and
- Complying superannuation entities, including complying SMSFs.
Types of income to be excluded
Even where a discretionary trust is subject to the new rules, some types of income will be excluded from the 30% minimum tax.
The proposed exclusions include:
- Primary production income;
- Certain income relating to vulnerable minors;
- Income distributed to registered charities and deductible gift recipients;
- Certain income distributed to other tax-exempt entities;
- Amounts subject to non-resident withholding tax; and
- Qualifying income of genuine testamentary trusts.
The exclusion for primary production income will be particularly significant for farming families who operate their business through a discretionary trust.
Testamentary trusts
The draft legislation contains an important exclusion for testamentary trusts, which are discretionary trusts established under a Will on the death of a willmaker.
Income derived from assets passing into a testamentary trust from a deceased estate will not be subject to the 30% minimum tax regime, provided the trust was established for a genuine testamentary purpose.
There are further rules designed to prevent non-estate assets being transferred into testamentary trusts to access the exemption. Further, for trusts established after 1 July 2028, the income of the testamentary trust will only be excluded from the minimum tax regime if the beneficiaries are individuals or exempt entities and the exemption will not apply where the terms of the trust permit distributions to companies or other trusts.
Subject to the legislation being passed, testamentary trusts will remain an important estate planning tool, particularly where asset protection, succession planning and tax flexibility are relevant considerations.
Electable regime for exclusion from the minimum tax
Under the draft legislation, a discretionary trust in existence at 1 July 2028 may be able to elect to become an Excluded Election Trust for tax purposes.
Under this regime, the trustee would nominate the beneficiaries who are to receive the trust’s income and capital, together with their respective fixed proportions. Provided distributions continue to be made in accordance with that nomination, the 30% minimum tax would not apply.
This potentially allows families to retain the existing trust and avoid the costs and complexity of transferring its assets into a new structure to avoid the minimum 30% tax. However, the flexibility that a discretionary trust offers in distributing income and capital will be effectively surrendered for tax purposes.
The nominated proportions must account for 100% of the income and capital of the trust, and must continue to apply in future years. The ability to change nominated beneficiaries is effectively limited to the death of a nominated beneficiary or relationship breakdown.
If the trustee distributes inconsistently with the election the election may be automatically revoked, the trustee may become liable for tax at the highest marginal tax rate for that income year, and the trust may then become subject to the 30% minimum tax in subsequent years.
The election will therefore need to be considered carefully before it is made.
Importantly, the election will not be available to new discretionary trusts established after 1 July 2028 and such trusts will be subject to the minimum 30% tax regime.
Three-year restructuring window
For families who determine that a discretionary trust is no longer the appropriate structure, the Government is proposing transitional roll-over relief.
The relief is proposed to operate from 1 July 2027 until 30 June 2030, and will allow the transfer of assets from affected discretionary trusts into structures with more fixed economic ownership such as a company or fixed trust.
The proposed roll-over is broader than the existing small business restructure roll-over under Subdivision 328-G. It is not limited to small businesses and can potentially apply to trusts holding investment assets as well as business assets.
While the proposed roll-over can provide relief from income tax and CGT liability when restructuring, transferring assets out of a trust can have numerous other legal and taxation consequences including:
- State stamp duty on any transfer of dutiable assets such as land;
- Financing and mortgage arrangements;
- Loss of asset protection; and
- Succession and estate planning consequences.
The availability of the roll-over relief should therefore not by itself determine whether a restructure should occur.
What should families and businesses be doing now?
There is no need for families to immediately restructure their trusts. The proposed minimum tax does not commence until 1 July 2028 and the legislation remains in draft form.
However, it is important for families with significant business, investment or property assets held through discretionary trusts to begin reviewing their structures.
Depending upon the circumstances, the best course of action may be to stick with the existing discretionary trust and accept the minimum tax, utilise the proposed election regime and move towards fixed distributions, restructure into a company or fixed trust during the transition period, or retain structures where the relevant income falls within one of the exclusions (such as primary production income).
Any decision should take into account more than tax. Asset protection, succession and estate planning, financing arrangements and other liability associated with any restructure such as stamp duty will also need to considered.
The Government’s consultation period on the draft legislation is open until 18 September 2026. The legislation may change following consultation and before it passes parliament and is enacted.
How can we help?
At Beck Legal, our Wills, Estates & Succession Planning and Commercial teams work with clients and their accountants to develop and implement structures that address not only taxation considerations, but also the longer-term ownership, control and succession of family wealth and businesses.
We will continue to monitor developments and update our communications as further details emerge. In the meantime, if you would like to discuss these proposed changes and what they may mean for you or your estate planning, please do not hesitate to contact our team on 5445 3333.
