30% minimum tax to apply to discretionary trusts
The Government has announced in the 2026–27 Federal Budget that it will introduce a 30% minimum tax on discretionary trusts to “improve the fairness of the tax system and help fund new tax cuts for workers”. This is a significant change to the long-standing approach to taxing discretionary trusts, where trust net income is generally taxed in the hands of presently entitled beneficiaries at their own marginal rates. The measure is estimated to increase receipts by AU$4.5b over the five years from 2025–26, with the ATO to receive AU$66m over the same period to support implementation.
From 1 July 2028, the trustees of an in-scope discretionary trust will be required to pay a minimum tax of 30% on the taxable income of the trust. Beneficiaries (other than corporate beneficiaries) are expected to receive non-refundable credits for the tax payable by the trustee, which should generally allow individual beneficiaries on higher marginal rates to use those credits to reduce their own tax payable on the distribution.
The treatment for corporate beneficiaries appears to be different and further detail is expected as the design of the measure is settled. However, it would appear that the measures are intended to prevent the minimum tax being avoided by cycling income through a ‘bucket’ company. For example, corporate beneficiaries will not receive non-refundable credits for tax payable by the trustee, to avoid them converting these to refundable franking credits to avoid the minimum tax.
The measure is targeted, and the Budget materials confirm that a number of trust types and income categories will sit outside its scope. Excluded trust types include:
- fixed and widely-held trusts, including fixed testamentary trusts
- complying superannuation funds
- special disability trusts
- deceased estates; and
- charitable trusts.
Income categories falling outside the scope of intended operation include:
- primary production income
- certain income relating to vulnerable minors
- amounts to which non-resident withholding tax applies; and
- income from assets of discretionary testamentary trusts existing at the date of announcement.
Where discretionary trusts form part of a broader family group structure that also holds an self-managed super fund (SMSF), consideration will need to be given to whether restructuring decisions made in response to the trust measure have flow-on consequences for the SMSF, including non-arm’s length income (NALI), in-house asset and sole purpose test considerations.
Transition measures—Rollover relief
To assist taxpayers who decide that a discretionary trust is no longer the most appropriate vehicle for their affairs, the Government will provide expanded rollover relief for three years from 1 July 2027 to support small businesses and others that wish to restructure out of a discretionary trust into another entity type, such as a company or a fixed trust. The detail of how the expanded rollover relief will interact with the existing small business, restructure rollover and other CGT rollovers is yet to be released. Any potential overlay with state-based duty regimes and restructure relief will also need to be considered.
Where to from here?
Given the proposed start date of 1 July 2028, there is meaningful lead time for consultation, drafting and passage of the enabling legislation; however, this is a substantial reform and is expected to be a legislative priority for the Government. The lack of detailed information released means there are many questions to be answered, including:
- How distributions to corporate beneficiaries are to be taxed and implications for the franking accounts of corporate beneficiaries?
- How franking credits derived by a trust exceeding the minimum tax liability are to be dealt with?
- Whether small businesses currently operating via discretionary trusts may be worse off under the proposed measures given the differential in base rate entity tax rates?
- The extent of any rollover relief measures, including potential relief to be offered by State Governments in respect to the transfer of dutiable property?
Affected trustees, advisers and family groups will no doubt be considering what the change is likely to mean for them—including how distributions are made, who the beneficiaries are, and whether the existing structure remains the most appropriate. However, decisions about restructuring should not be rushed. It is expected that many groups will want to use the period to 1 July 2028, and the rollover relief window from 1 July 2027, to take stock and consider their options. Decisions will also likely need to take into account other measures announced in the Budget, including reforms to capital gains tax.
While the measure does not commence until 1 July 2028 and several important exclusions apply, the introduction of a 30% minimum tax fundamentally changes the tax outcome for many discretionary trusts and warrants review of existing structures.
