Proposed 30% Minimum Tax on Discretionary Trusts: What Trustees and Family Groups Need to Know
The Federal Government has announced a significant reform to the taxation of discretionary trusts, including family trusts, proposed to take effect from 1 July 2028.
Under the proposed regime, the trustee of an affected discretionary trust will be required to pay tax at a minimum rate of 30% on the trust’s taxable income. The measure is intended to limit the ability to achieve an overall tax rate below 30% by distributing trust income among beneficiaries with lower marginal tax rates.
Although the proposal has been presented as part of the Government’s broader tax reform program, it is important to emphasise that the relevant legislation has not yet been enacted. Treasury’s consultation paper expressly states that the principles under consideration have not received final Government approval and are not yet law. Substantial matters concerning the scope and operation of the measure therefore remain subject to consultation and legislative drafting.
How the proposed minimum tax would operate
The existing framework for determining trust income and beneficiary entitlements is intended to remain broadly in place.
Trustees would continue to determine which beneficiaries are presently entitled to the income of the trust, and beneficiaries would continue to include their respective shares of the trust’s taxable income in their income tax returns.
However, the trustee would also become liable to pay tax equal to at least 30% of the trust’s taxable income, unless a higher trustee tax rate or a specific exclusion applies. An individual or other eligible non-corporate beneficiary would generally receive a corresponding non-refundable tax offset for the minimum tax paid by the trustee.
The proposed offset would:
reduce the beneficiary’s income tax liability;
not be refundable;
not be carried forward to a later income year; and
not be available to reduce Medicare levy liabilities.
Accordingly, where income is distributed to beneficiaries whose effective tax rate is below 30%, the unused portion of the trustee-paid tax may be permanently lost. The practical effect is that the trust income would bear tax at an overall minimum rate of 30%, notwithstanding the marginal rates otherwise applicable to the beneficiaries.
Where no beneficiary is presently entitled to trust income, the existing higher trustee tax rate, generally the highest marginal rate plus Medicare levy, is expected to continue to apply. The proposed measure should therefore not be understood as permitting trusts to accumulate income at a flat 30% rate.
Corporate beneficiaries and “bucket companies”
The proposed treatment of corporate beneficiaries is particularly significant.
Where a discretionary trust distributes income to a corporate beneficiary, the company would continue to be assessed on its share of the trust’s taxable income. However, unlike an individual beneficiary, the company would not receive an offset for the minimum tax already paid by the trustee.
On Treasury’s current proposal, the same trust income could therefore attract:
the 30% minimum tax payable by the trustee; and
corporate income tax payable separately by the corporate beneficiary.
Treasury has stated that this treatment is intended to prevent the minimum tax from being circumvented through distributions to “bucket companies” and the subsequent conversion of trustee-paid tax into refundable franking credits.
Family groups that presently use corporate beneficiaries as part of their annual distribution strategy should therefore obtain advice well before the proposed commencement date.
Which trusts and income streams may be excluded?
The Government has indicated that the minimum tax will not apply to certain entities and arrangements, including:
fixed and widely held trusts;
complying superannuation funds;
special disability trusts;
deceased estates;
charitable trusts; and
genuine testamentary trusts.
Certain categories of income are also proposed to be excluded, including primary production income, qualifying income relating to vulnerable minors, and particular amounts subject to non-resident withholding tax.
For testamentary trusts, the proposed exemption is expected to be subject to integrity conditions. These include requirements concerning the source of the trust assets and, for trusts established from 1 July 2028, restrictions on the persons or entities who may benefit. Income derived from unrelated assets injected into a testamentary trust after Budget night may remain subject to the minimum tax.
What constitutes a discretionary trust?
A critical issue still under consideration is how an affected “discretionary trust” will be defined.
Existing taxation legislation commonly distinguishes fixed and non-fixed trusts by reference to whether beneficiaries hold vested and indefeasible interests. Treasury has acknowledged that reliance on the existing fixed-trust definition may unintentionally capture modern commercial trusts where the trustee retains administrative or amendment powers, even though the economic interests of beneficiaries are substantially fixed.
The eventual statutory definition will therefore be important not only for traditional family trusts, but also for hybrid trusts, unit trusts with discretionary features and other structures containing powers to amend entitlements, issue interests or add beneficiaries.
The legal terms of the trust deed, rather than merely the manner in which the trust has historically been administered, may determine whether the trust falls within the new regime.
Transitional restructuring relief
The Government has also announced expanded rollover relief for a three-year period commencing 1 July 2027 to assist small businesses and others who may wish to restructure out of a discretionary trust before the new minimum tax regime commences.
The relief is intended to allow eligible taxpayers to restructure into another type of entity, such as a company or fixed trust, without triggering immediate income tax consequences, including capital gains tax, solely as a result of the restructure.
As at the date of publication, the detailed eligibility requirements and operation of the rollover have not yet been released. The Government has indicated that these matters will be finalised following consultation with stakeholders.
Importantly, the proposed income-tax rollover may not address all of the legal, taxation and commercial consequences of restructuring. Depending on the assets and entities involved, matters such as Victorian or other State duties, GST, financing and lender consents, contractual restrictions, asset-protection considerations and succession planning may also need to be considered.
Given the significance of any restructuring decision, appropriate legal, financial and taxation advice should be obtained before taking any steps to alter an existing trust structure.
What should trustees do now?
Trustees should not undertake a restructure solely on the basis of the Budget announcement. The detailed rules have not yet been finalised and the legislation ultimately enacted may differ from the Government's initial proposal.
Nevertheless, family groups and business owners can begin reviewing their existing structures and identifying matters that may require attention, including:
which discretionary trusts may potentially be affected by the proposed reforms;
the nature and value of the assets held by each trust;
how income and capital are presently distributed, including the use of corporate beneficiaries;
the terms of the relevant trust deeds and any existing succession arrangements;
the asset-protection, commercial and succession-planning reasons for retaining the existing structure;
the potential taxation and legal consequences of transferring assets to a company, fixed trust or other structure; and
whether the proposed three-year rollover period may provide an opportunity to restructure once the detailed rules are known.
Discretionary trusts remain important structures for asset protection, business succession and intergenerational wealth planning. The proposed reforms do not prohibit their continued use. They may, however, materially change the taxation considerations that have traditionally influenced how family groups hold assets, operate businesses and distribute income.
Any decision to restructure should therefore be made only after the final legislation and applicable transitional rules are known. A coordinated review involving the client's lawyer, accountant and tax adviser will generally be required before any structural changes are implemented.
KCT Legal can assist trustees, family groups and business owners to review trust deeds, succession arrangements, asset-holding structures and the legal consequences of any proposed restructure. Taxation advice should be obtained from an appropriately qualified tax adviser before implementing any changes.
This article provides general information only. The proposed minimum tax remains subject to consultation and legislation. It does not constitute legal, taxation or financial advice.