Important Updates On The 30% Minimum Tax On Discretionary Trusts

Australian tax update | Client article

What the exposure draft legislation means for business owners and family groups

The Government has released exposure draft legislation for its proposed 30% minimum tax on discretionary trusts, giving affected taxpayers the clearest picture yet of rules that could reshape how many family groups distribute income from 1 July 2028. Announced in the 2026-27 Federal Budget and following the July 2026 consultation paper, the draft legislation released on 3 September 2026 introduces several important refinements. Notably, it proposes an elective regime that may allow existing discretionary trusts to avoid the minimum tax without a formal restructure. It will also allow affected trusts to receive a refund of excess franking credits. For family groups with trust structures, these changes will require review of current arrangements.

What remains unchanged

While the draft legislation refines several elements, the core policy is unchanged:

• Trustees of affected discretionary trusts (a Minimum Tax Trust) will pay a 30% minimum tax on trust taxable income.
• Except for companies, beneficiaries will be entitled to a non-refundable tax offset for their share of the 30% minimum tax.
• The regime is intended to reduce tax advantages from discretionary trust income splitting.
• Commencement remains 1 July 2028.

The Government continues to justify the measure on the basis that discretionary trusts can produce lower effective tax rates than those borne by wage earners with similar economic income.

Election model (Excluded Election Trust)

The draft legislation introduces a new elective regime for trusts that exist at 1 July 2028, effectively providing some grandfathering relief, albeit restricted, for existing trusts. The election is for a trust to be an excluded election trust (EET). Under this model:

• An EET election must be made in the 2028-29 income year and notified to the ATO in an approved form.
• A discretionary trust can elect to make fixed distributions to nominated beneficiaries. The election must specify the percentage of both income and capital each nominated beneficiary is entitled to (for example, the trustee cannot nominate 100% of capital to one beneficiary and 100% of income to another).
• Nominated beneficiaries must be potential beneficiaries at and in existence on 1 July 2028. A nominated beneficiary cannot be a partnership or superannuation fund, and a company must be an eligible company (broadly, one without discretionary entitlements to dividends or capital).
• If the trust complies with the election requirements, the 30% minimum tax does not apply (it is not a Minimum Tax Trust).
• An EET election remains in force until the end of the year it is revoked. It may be revoked voluntarily, and is automatically revoked if the trustee distributes contrary to the election or certain events affect a designated beneficiary (including a change in shareholder of an ‘eligible company’ other than death or a relationship breakdown of an individual shareholder).
• In the year an EET election is revoked (voluntarily or automatic), the trustee pays tax at 47% rather than the beneficiaries entitled to the income.
• Nominated beneficiaries generally cannot be varied, except where a beneficiary passes away or is involved in a relationship breakdown.
• No asset transfer or trust deed amendment is required, so the election is not expected to trigger State or Territory duty (it is a tax election only).

Practical significance

For many family groups, electing into the new EET regime may be considerably easier than transferring assets, novating contracts, refinancing facilities or dealing with State and Territory duty issues. It may be particularly beneficial for trusts distributing to a bucket company.

For example, a Family Discretionary Trust could elect to be an EET where 100% of its distributions flow to a bucket company that is 100% owned by a second Family Discretionary Trust. The first trust, as an EET, would not be subject to the 30% minimum tax. Any dividends paid by the bucket company to the second trust could be distributed to individuals. While the 30% minimum tax would apply to the second trust (reduced by franking credits), these would be subject to a non-refundable offset to the individual beneficiaries.

Trusts and income excluded from the regime

Excluded trusts

The following trusts will not be Minimum Tax Trusts, and the minimum tax will not apply to them:

• Fixed trusts (widely held trusts, managed investment trusts, AMITs, bare trusts and employee share trusts are expected to fall within the definition of fixed trusts)
• Special disability trusts
• Complying superannuation funds
• Deceased estates

Excluded income

The exposure draft also continues exclusions for:

• Primary production income
• Certain income relating to vulnerable minors
• Income relating to charitable and not-for-profit beneficiaries
• Amounts to which non-resident withholding tax applies
• Income from testamentary trusts established for genuine testamentary purposes. For testamentary trusts established on or after 1 July 2028, the net income of a discretionary testamentary trust will only be excluded where the beneficiaries are individuals or exempt entities (i.e. not companies).

Rollover relief

The Government has preserved and expanded the proposed restructuring relief. The relief:

• Applies for three years, from 1 July 2027 to 30 June 2030.
• Facilitates the movement of assets from discretionary trusts into companies, fixed trusts or individuals.
• Requires that all assets are transferred apart from limited excluded assets (for example, a CGT asset used to generate income from carrying on a primary production business).
• Requires continuity of ownership in the transferee (for example, where the discretionary trust is a family trust with a family trust election, the transferee must be owned by individuals in the family group).

Importantly, existing CGT rollover relief may be preferable to the new proposed restructure relief in some circumstances. However, the new rollover relief may provide additional planning opportunities for clients. State and Territory duty may still be an issue.

Franking credits

This has been one of the most contentious issues. The exposure draft now proposes:

• Trustees of a Minimum Tax Trust that receive franked dividends will use franking credits to pay the 30% minimum tax.
• If the trustee has excess franking credits remaining after paying the minimum tax, the trustee is entitled to a refund of the excess.

This is significant because a major concern with the proposed changes was the possibility of stranded or wasted franking credits, for example where a trust had other deductions such as interest to offset franked distributions.

Corporate beneficiaries (bucket companies)

The Government has not changed its policy direction regarding bucket companies. The draft legislation still does not allow bucket companies an offset for the 30% minimum tax, so effective double taxation arises. Apart from discretionary trusts existing at 1 July 2028 that can elect to be an EET, it will not be tax effective to distribute to bucket companies after 1 July 2028.

Practical significance

Trust groups relying heavily on corporate beneficiaries remain a key group impacted by the changes and will require review. These groups will need to consider the EET requirements or whether to restructure arrangements. Post 1 July 2028, structures that previously relied on corporate beneficiaries would generally favour holding the income-generating asset or business in a company rather than a trust. The company may still be owned by a trust for asset protection, succession and distribution flexibility reasons.

Treatment of charities and exempt entities

The exposure draft goes further than the consultation paper by proposing:

• An exemption for distributions to registered charities and deductible gift recipients (DGRs).
• Concessional treatment for certain other income-tax-exempt entities, with details still under consultation.