The Government has announced a proposed minimum tax of 30% on the taxable income of discretionary trusts from 1 July 2028. Under the proposal, trustees would pay the tax upfront, unless higher rates apply, with beneficiaries – other than corporate beneficiaries – receiving non-refundable tax credits for the amount paid by the trustee.

Note: The measures are currently proposed only and will require legislation to pass Parliament before becoming law.

Key proposed changes include:

• Introduction of a minimum 30% tax rate on the taxable income of discretionary trusts from 1 July 2028.
• Trustees being responsible for paying the minimum tax, unless higher rates apply.
• Beneficiaries, other than corporate beneficiaries, receiving non-refundable tax credits for tax paid by the trustee.
• Expanded restructure rollover relief from 1 July 2027 for eligible entities transitioning out of discretionary trust structures.

Proposed exclusions from the minimum tax regime

The proposed minimum tax would not apply to several trust types, including:

• Fixed and widely held trusts, including fixed testamentary trusts
• Complying superannuation funds
• Special disability trusts
• Deceased estates
• Charitable trusts.

Certain income categories are also proposed to be excluded, including:

• Primary production income
• Certain income relating to vulnerable minors
• Amounts subject to non-resident withholding tax
• Income from assets of testamentary trusts existing at the time of announcement.

At this stage, the Budget Papers provide limited detail on how the proposed regime would operate in practice.

Non-refundable credits may impact lower-income beneficiaries

The Budget Papers state that beneficiaries, other than corporate beneficiaries, would receive non-refundable credits for tax paid by the trustee. If implemented as described, this may operate more like a minimum floor tax rather than the current trust tax credit mechanisms where beneficiaries may receive refunds for excess tax paid.

This could have implications for lower-income beneficiaries. For example, individuals with taxable income below current marginal tax thresholds may effectively pay tax at 30% on trust income, despite ordinarily being subject to lower marginal tax rates.

The mechanism for collecting the proposed minimum tax remains subject to consultation. However, the measures may accelerate the timing of tax payments compared to the current system, where tax is generally assessed after beneficiaries lodge their individual tax returns.

Restructure rollover relief proposed

To support businesses and investors wishing to move away from discretionary trust structures, the Government has also announced proposed rollover relief for restructures undertaken over a three-year period from 1 July 2027.

According to the Budget Papers, the relief is intended to assist eligible entities restructuring from discretionary trusts into alternative structures such as companies or fixed trusts.

Without further legislative detail, the practical operation and broader implications of the proposed measures remain unclear.

We will keep updating our communications as further changes are announced. If you would like to discuss how these proposed trust tax changes may affect your structures or succession planning, please contact our accountants for advice tailored to your circumstances.