30% minimum tax on discretionary trusts: new draft legislation released
The Australian Government has released draft legislation providing much more detail on the proposed 30% minimum tax on certain discretionary trusts, first announced in the 2026-27 Federal Budget and proposed to apply from 1 July 2028.
Some of the most important points in the draft are:
- Which trusts are expected to sit outside the new regime
- How distributions to companies would be treated
- What the 30% minimum tax could mean in practice
- The two main options available, electing into a more fixed distribution regime or restructuring during the transitional roll-over period.
The legislation is still in exposure draft form, so the final rules may change before they are introduced and passed by Parliament.
What does the 30% minimum tax mean in practice?
In practice, the proposed rules would mean:
- Discretionary trusts would still allow trustees to decide which beneficiaries receive trust income each year, but relevant trust income would generally be subject to tax of at least 30%
- The tax would generally be paid by the trustee
- If tax is already payable by the trustee at a rate below 30%, the new tax would operate as a top-up so the relevant income is taxed at a minimum rate of 30%
- A non-corporate beneficiary who receives the relevant income may then be entitled to a non-refundable tax offset for the minimum tax paid by the trustee
- Distributing trust income to an individual whose tax rate is below 30% would generally no longer provide the same tax outcome as it can under the current rules.
What about distributions to companies?
Corporate beneficiaries would not be entitled to the minimum tax offset.
This means businesses and family groups that currently distribute trust income to a corporate beneficiary will need to consider how the proposed rules may affect that strategy. The draft legislation is specifically designed so the effect of the minimum tax cannot simply be removed by distributing relevant income through a corporate beneficiary.
Which trusts would be affected?
The proposed minimum tax is directed at discretionary trusts.
A number of trusts would fall outside the new regime, including:
- fixed trusts
- special disability trusts
- deceased estates
- complying superannuation entities
- certain other trusts prescribed under the legislation.
The draft also proposes a broader definition of a fixed trust, intended to ensure trusts without material discretionary elements are not unnecessarily caught by the new rules.
Some types of income would also be excluded
Even where a discretionary trust falls within the new regime, not all of its income would necessarily be subject to the minimum tax.
Proposed exclusions include certain:
- primary production income
- income relating to vulnerable minors
- charitable and not-for-profit distributions
- amounts subject to non-resident withholding tax
- income from genuine testamentary trusts.
The primary production exclusion will be particularly relevant for farming businesses and families operating through discretionary trust structures.
What about testamentary trusts?
The draft legislation contains specific rules for testamentary trusts, being trusts established as a result of a will, codicil, court order or intestacy.
Qualifying income derived through a genuine testamentary trust would be excluded from the minimum tax.
For testamentary trusts established on or after 1 July 2028, additional conditions would apply, including that the relevant beneficiary receiving the qualifying income must be an individual or an exempt entity. The draft also includes integrity provisions intended to prevent arrangements designed primarily to bring income within the testamentary trust exclusion.
This means testamentary trusts are expected to continue to have an important role in estate and succession planning, although the detailed conditions will need to be considered once the legislation is finalised.
Option 1: elect into a more fixed distribution regime
One of the most significant developments in the draft legislation is a new election for certain existing discretionary trusts.
A relevant trust that exists on 1 July 2028 could elect to become an excluded election trust for tax purposes. The election would need to be made in the first income year commencing on or after that date.
Under the proposed regime, the trustee would nominate:
- which beneficiaries will receive the trust’s income and capital
- the fixed percentage each nominated beneficiary will receive.
Those nominated percentages must account for 100% of the trust’s income and capital, and distributions must continue to follow those proportions while the election remains in force.
If the requirements are met, the 30% minimum tax would not apply.
This could allow some families and businesses to retain their existing trust rather than transferring its assets into a new structure. However, it would also mean giving up much of the flexibility that is normally associated with a discretionary trust.
Changes to nominated beneficiaries would generally be limited to circumstances such as the death of a beneficiary or relationship breakdown.
If distributions are made inconsistently with the election, the election would be automatically revoked and the trustee could become liable for tax on the trust’s net income for that year, with the 30% minimum tax applying in later years.
Option 2: restructure during the three-year roll-over period
Affected trusts may instead decide that a discretionary trust is no longer the most suitable structure.
The Government is proposing three years of transitional roll-over relief from 1 July 2027 to 30 June 2030 to help affected trusts transfer assets into structures with more fixed economic ownership.
The relief is broader than the existing small business restructure roll-over and may potentially apply to trusts holding business assets, investment assets or passive investments.
Where all conditions are met, the restructure would generally occur without immediate income tax consequences, with the new entity inheriting the relevant tax cost and history of transferred assets.
However, income tax is only one consideration. A restructure may also have implications for areas such as state taxes and duties, financing arrangements, asset protection, succession planning and the legal terms of the trust.
The proposed roll-over should therefore not be viewed as an automatic reason to restructure.
Corporate beneficiaries
One of the more significant areas still being worked through is the treatment of corporate beneficiaries. Many family groups currently use corporate beneficiaries as part of their distribution strategy.
The consultation paper seeks feedback on how these arrangements should be treated under the proposed rules, suggesting this remains an area where further refinement may occur before legislation is introduced.
Franking credits
Another unresolved issue is the treatment of excess franking credits. Treasury is seeking feedback on how franking credits should interact with the proposed minimum tax framework.
For taxpayers with investment portfolios held through trust structures, this could become an important consideration once further details are released.
You cannot choose both options
Importantly, the election regime and restructuring roll-over are intended to be alternative pathways.
A trustee that elects into the excluded election trust regime cannot also use the transitional roll-over for that trust, and vice versa.
Choosing between them will therefore require careful consideration of the trust’s assets, beneficiaries and longer-term objectives.
What should businesses and families do now?
There is no need to immediately restructure an existing trust.
The minimum tax is not proposed to commence until 1 July 2028, the legislation remains in draft form, and further rules are still expected.
However, businesses, investors and family groups with significant assets or income held through discretionary trusts should start considering how the reforms could affect them.
Depending on the circumstances, that may mean:
- retaining the existing trust and accepting the minimum tax where it applies
- using the proposed election and moving to fixed distributions
- restructuring during the transitional roll-over period
- continuing with the existing structure where relevant income falls within an exclusion.
The right approach will depend on more than the tax rate alone. The ownership of assets, future distributions, succession planning, asset protection, financing and other tax consequences may all be relevant.
If you currently operate a business or hold investments through a discretionary trust, speak with your AFS advisor about how the proposed rules may affect your structure and the options that could be available.
