The proposed 30% minimum tax on discretionary trusts, and where it is up to

In the 2026–27 Budget, handed down on 12 May 2026, the Government announced a minimum tax of 30 per cent on discretionary trusts for income years starting on or after 1 July 2028. Treasury released exposure draft legislation on 3 September 2026, with consultation closing on 18 September. The Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 was then introduced into Parliament on 14 October 2026, together with a companion bill setting the rate. The bills have been referred to the Senate Economics Legislation Committee, which is due to report by 13 November 2026. At the date of this article the measure is not law, and the detail can still change as the bills move through Parliament.

The mechanics as the Government has described them are fairly simple. The trustee pays the 30 per cent minimum tax on the taxable income of the trust. Beneficiaries other than companies then receive a non-refundable offset for the tax the trustee has paid on the income they are entitled to. A beneficiary whose own marginal rate is above 30 per cent uses the offset against their own tax, so their position is broadly what it is now. A beneficiary on a lower rate cannot get the unused part of the offset back, because it is non-refundable. The practical result is that trust income distributed to an individual will bear tax of at least 30 per cent.

Corporate beneficiaries receive no offset at all. That is the feature most likely to change how family groups that distribute to a company are arranged, and it is the part of the measure to look at most closely once the final legislation and explanatory material are available. The exposure draft also provided for refunds of franking credits that relate to income subject to the minimum tax and remain after the trustee has offset its own tax liability; that should be confirmed against the bill as introduced before relying on it.

A number of trusts and types of income are outside the measure. The Government has said fixed trusts, charitable trusts, special disability trusts and superannuation funds are excluded, as are primary production income and certain income relating to vulnerable minors. Deceased estates are excluded. Income of a discretionary testamentary trust is excluded only to the extent it comes from the deceased estate’s assets (or property transferred to the trust before 7.30 pm on 12 May 2026), and a testamentary trust set up on or after 1 July 2028 will only qualify if the will limits its beneficiaries to individuals, exempt entities or a special disability trust. Existing wills are not grandfathered, so wills that create testamentary trusts should be reviewed with the client’s lawyer and tax adviser. Distributions to registered charities and deductible gift recipients are exempt, and distributions to other income tax exempt entities such as sporting clubs are exempt subject to a cap and conditions to be set by legislative instrument.

Because the exclusion for fixed trusts carries so much weight, the package includes a new definition of a fixed trust. Its stated purpose is to keep commercial trusts without material discretionary elements outside the minimum tax, such as many widely held and managed investment trusts (employee share trusts are excluded separately). For a family unit trust, whether it meets the new definition will turn on what its deed says about the rights attaching to units, so the deed is the place to start.

Trusts that would otherwise be caught have two routes out. The first is an election, in Schedule 3 of the bill, under which a trust that keeps making distributions to pre-nominated beneficiaries in line with an upfront nomination is exempt from the minimum tax for as long as it does so. The Treasurer has said the election will not require a restructure or restrict a trust’s discretionary powers, and is not expected to result in state or territory stamp duty. The second is expanded rollover relief, available for three years from 1 July 2027, for restructuring out of a discretionary trust into another arrangement such as a company or a fixed trust. Under the bill as introduced, a trust can use one route or the other but not both. The election is only open to trusts in existence on 1 July 2028 and must be made once, in the trust’s first income year starting on or after that date, and the rollover window runs from 1 July 2027 to 30 June 2030. We cover each in a separate article.

Separately, the CGT changes announced in the same Budget are now law under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. From 1 July 2027 the 50 per cent CGT discount for individuals, trusts and partnerships is replaced by cost base indexation, and individuals face a minimum 30 per cent tax on certain capital gains, in each case for gains accruing from that date. Anyone weighing a restructure will need to consider both measures together, which is another reason the decision belongs with the client’s tax adviser.

Whether to act before the law is settled is a question for the client’s tax adviser, and some restructures cannot easily be undone. Some parts of the bill already turn on dates that have passed or are close, such as the 12 May 2026 cut-off for property added to testamentary trusts and the one-off election window, so the paperwork should be put in order now. For each discretionary trust, that means locating the original deed and every variation, confirming who the trustee and appointor are, checking the class of beneficiaries, the income definition and the vesting date, and confirming whether the deed contains a power of variation and what limits it places on that power. Whichever route a client takes in 2027 or 2028, every one of those questions will be asked.

CoSec Partners prepares trust deeds, deed variations, corporate trustee companies and the company and unit trust structures used in restructures, with deeds drafted and signed off by Key Legal, an independent external law firm. We do not give tax advice, and nothing in this article is advice about whether a particular trust should elect, restructure or do nothing. That decision belongs with the client’s tax adviser, and we are happy to work alongside them on the documents.