The fixed distribution election and your trust deed

One of the two ways a discretionary trust can stay outside the proposed 30 per cent minimum tax is an election. Under Schedule 3 of the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026, a trust can elect for income tax purposes and, for as long as it continues to make distributions to pre-nominated beneficiaries in line with an upfront nomination, it is exempt from the minimum tax. The bill was introduced on 14 October 2026 and is not yet law, so what follows reflects the Government’s description of the measure rather than settled rules.

The Treasurer’s second reading speech makes three points about the election that matter to anyone responsible for trust documents. It does not require a restructure. It does not restrict a trust’s discretionary powers. And it is not expected to result in state or territory stamp duty being payable. In other words, the election is designed to sit on top of an existing trust rather than replace it, which is the main reason it is likely to appeal to family groups that do not want to move assets. In practice, though, an electing trust must distribute in exactly the nominated shares every year, so the trustee’s discretion is effectively given up for as long as the election stays in force. Duty is a state and territory matter, so the stamp duty statement is an expectation rather than a guarantee.

The bill as introduced sets out the main mechanics, although they can still change in Parliament. Only trusts in existence on 1 July 2028 can elect, and the election is made once, in the trust’s first income year starting on or after that date. The trustee nominates beneficiaries and a fixed percentage share of income and other earnings for each, totalling 100 per cent, and must distribute in exactly those shares every year. Changes are only allowed on the death of a nominated individual or a family law relationship breakdown. If the trust departs from its nomination, the election is revoked, the trustee is taxed on all of that year’s net income at the top marginal rate plus Medicare levy, the minimum tax applies from the next year, and the trust cannot elect again.

What can be done now is to make sure the deed would support a nomination if the client decides to make one. Start with the class of beneficiaries. The people or entities a trust nominates will have to be people the trustee can actually distribute to under the deed. If a family member, a new spouse or a company in the group is not clearly within the class, that is worth knowing early. The bill also limits who can be nominated to individuals, certain companies and an eligible class of charities, and a change in a nominated company’s shareholders or its winding up can end the election.

The income definition is the second thing to check. A commitment to distribute fixed shares of income and other earnings only works cleanly if it is clear what income means. Deeds drafted before the High Court’s 2010 decision in Bamford often define income in ways that no longer line up with how trust income is taxed, and that gap becomes harder to manage once the shares are fixed in advance.

Third, look at anything that could cut across a long-term nomination. A vesting date in the next decade will end the trustee’s discretion and fix the takers under the deed, whatever has been nominated. A foreign persons exclusion added for land tax or duty purposes can prevent distributions to a family member who has moved overseas. Appointor and trustee succession provisions matter more when the arrangement is meant to run for years.

Finally, check the power of variation. Under the bill as introduced, the deed must authorise the election, so many deeds will need a variation before the trustee can elect, and a review often turns up other things to fix at the same time, and the power of variation decides whether they can be fixed without a court application. If a variation is needed, it should be done before the election is made so the two documents agree.

CoSec Partners prepares trust deed variations for $418 per deed including GST, drafted and signed off by Key Legal, an independent external law firm. Variations can be ordered online. Whether a trust should make the election at all is a tax question for the client’s adviser, and we do not give that advice. What we can do is make sure the deed is ready for whichever decision they reach.