2026-27 Federal Budget – Treasury consults on 30% minimum tax on discretionary trusts

On 8 July 2026, Treasury released a consultation paper on the Government’s 2026-27 Federal Budget proposal to introduce a 30% minimum tax on discretionary trusts from 1 July 2028. 

Although trustees of a discretionary trust will continue to decide each year which beneficiaries are presently entitled to trust income, and beneficiaries will continue to include their share of the trust’s net (taxable) income in their own returns, the fundamental change is the introduction of a new tax at the trust level. From 1 July 2028, the trustee of a discretionary trust will pay a minimum of 30% tax on the trust’s taxable income, with a corresponding non-refundable offset flowing to eligible non-corporate beneficiaries.

Which trusts are in scope and what is excluded?

The 30% minimum tax is proposed to apply only to discretionary trusts, which the current law defines by exclusion, that is, any trust that is not a fixed trust. 

Treasury acknowledges that relying on this existing boundary may capture more trusts than intended and it is seeking feedback on how best to define a discretionary trust for this purpose. The boundary between a fixed trust and a discretionary trust has long been a vexed issue, and it could be expected that any deviation from the current position will come with its own challenges.

A range of trusts and income types are also specifically proposed to sit outside the measure. The minimum tax will not apply to fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts. Primary production income of a discretionary trust will also be excluded. 

Some exclusions require closer consideration and design, including: 

• Testamentary trusts established for genuine testamentary purposes, where the income comes from assets of the deceased estate. Income from assets injected after Budget night (7:30pm AEST on 12 May 2026) that are unrelated to the estate would remain subject to the minimum tax. 
• Certain income of vulnerable minors, broadly consistent with existing concessions, so that distributions relating to disability, personal injury, workers compensation, and orphans are not taxed at the highest rate. 
• Certain income distributed to foreign residents, to the extent it comprises dividends, interest, and royalties that are subject to the foreign resident withholding tax regime. 

Treasury is also consulting on the treatment of income tax-exempt beneficiaries, such as registered charities. Because the minimum tax offset is non-refundable, these beneficiaries would generally be unable to use it, as they have no income tax liability to reduce. We note that the impact of the new capital gains tax (CGT) minimum tax changes on the philanthropic sector was raised as a concern, and amendments were made to the law during its passage through Parliament to allow deductions for charitable donations when calculating the minimum tax applicable to capital gains. If a similar carve out is made from the minimum trust tax, for example, distributions to charities could be excluded from the minimum trust tax regime in a similar manner to the way that certain distributions to non-residents will be excluded. 

How the minimum tax would work

From 1 July 2028, the trustee of a discretionary trust would pay a minimum of 30% tax on the trust’s taxable income, unless an exclusion applies. Where no beneficiary is presently entitled to the trust’s income, the top marginal personal tax rate plus the Medicare levy would continue to apply to the trustee. The paper is silent on the interaction of the 30% tax on the trust’s taxable income with the 30% minimum CGT tax that applies to individuals (including individuals that receive capital gains as beneficiaries of trusts). It would seem appropriate for capital gains to be excluded from the 30% trustee tax to avoid a double taxation outcome. 

Individuals and other non-corporate beneficiaries will receive a non-refundable tax offset (minimum tax offset) for the minimum tax payable by the trustee in respect of their share of the trust’s taxable (net) income. 

The trustee will have obligations to notify beneficiaries of their entitlements and associated minimum tax offset. Further, the 30% minimum tax will operate in a self-assessment environment where the trustee will be required to calculate, report, and pay the minimum tax. 

The Treasury paper also flags possible complementary measures to address known difficulties in collecting tax from trustees, particularly special purpose corporate trustees. These could include a right of reimbursement from trust assets for the Commissioner, making directors of corporate trustees jointly and severally liable, and earlier collection through the PAYG instalment system. Making directors of corporate trustees jointly and severally liable for the minimum trust tax would represent a significant increase in the liability exposure for trustee directors compared to the normal exposure for directors in respect of a corporate entity’s income tax obligations. 

Excess franking credits

Trustees that receive franked dividends would be required to use their franking credits to offset their income tax, including any minimum tax. Where credits remain after doing so, the paper canvasses two options:

• refunding the excess franking credits to the trustee, or
• allowing them to be carried forward against future liabilities (potentially with time limits or caps, and additional integrity rules).

Whether excess franking credits are refunded or carried forward, the trustee would receive the benefit in the form of a tax offset, consistent with the existing treatment of refundable or carry forward tax offsets. The two approaches carry quite different compliance and cash-flow implications. 

Treasury is seeking feedback on the compliance and integrity implications of each approach.

Where franking credits are made available to the trustee, a further question will arise as to how such credits (or other form of relief) can be allocated to beneficiaries. That is, to ensure that the beneficiary is not subject to tax in full on the dividend received by the trust without recognition of the underlying tax paid by the corporate entity.

Furthermore, any rules should ensure that if a trustee receives a franking credit cash refund, this cash can be distributed to beneficiaries without creating a further tax impost on that amount.

What it all means for different beneficiaries 

The effect of the minimum tax depends on the type of beneficiary receiving the distribution from the in-scope trust. 

Individual beneficiaries would continue to be assessed on their share of the trust’s taxable income at their marginal rates, and would receive a non-refundable minimum tax offset for the tax paid by the trustee. The offset cannot reduce the Medicare levy, cannot be refunded, and cannot be carried forward. For example, if a trust has $200,000 of taxable income distributed to one individual, the trustee pays $60,000 minimum tax and the individual receives a $60,000 offset. After applying the offset to their marginal tax, the individual in Treasury’s example pays no further income tax but remains liable for the $4,000 Medicare levy. It is apparent that the minimum tax rate associated with trust distributions to individuals is effectively 32% after factoring in the Medicare levy.

Corporate beneficiaries would be assessed on their entitlement but would not receive a minimum tax offset. Treasury’s concern is that allowing companies to claim the offset could let the benefit be converted into refundable franking credits and passed on to individual shareholders.

By way of example, if the trust has $200,000 of taxable income distributed to a company beneficiary which has no other income or deductions, the trustee pays $60,000 minimum tax and the company would also pay $60,000 on the distribution without any offset for the tax paid by the trustee – i.e. a total tax liability of $120,000 on the same $200,000 taxable income (representing an effective tax rate of 60% at the company level). The Treasury discussion paper indicates that the operation of the imputation system when the corporate beneficiary makes franked distributions to its shareholders remains unchanged. While the company will be able to pay a fully franked dividend to its shareholders on the after-tax trust income (i.e. $80,000), the company will continue to have excess franking credits in its franking account, but may not have any other frankable distributable profits to attach those credits.

Trustee beneficiaries would include their share of income and receive an offset. Where the beneficiary is itself a discretionary trust within the minimum tax regime, the offset must be applied against its own liability and cannot be passed on, refunded, or carried forward, maintaining a floor across chains of trusts. Where the trustee beneficiary is not within the minimum tax regime, the offset may be passed on to eligible non-corporate beneficiaries. A consequential impact of this appears to be that tax losses in a discretionary trust will no longer be effective when applied against income distributions from another discretionary trust, which is a common distribution strategy currently adopted by family groups. 

As illustrated above, the after-tax outcome of a trustee resolving to distribute income to different beneficiaries can vary widely. Because a corporate beneficiary cannot access the minimum tax offset, from 1 July 2028, distributing to a company will be taxed so heavily that it is challenging to see any practical circumstances in which such a distribution will be viable.

Expanded rollover relief

To help taxpayers move out of discretionary trust structures, the Government proposes expanded rollover relief for a three-year period from 1 July 2027. The relief would allow a restructure into another entity, such as a company or a fixed trust, without triggering CGT and other immediate income tax consequences. However, this would not relieve the group of any applicable State-based stamp duties on any restructure. This could result in a significant cost of any restructure and will need to be carefully considered. The Treasury paper is silent on the interaction of the rollover relief and State-based taxes. 

The income tax rollover would build on the existing Small Business Restructure Rollover but with important differences. It would be available to discretionary trusts regardless of size, would not require a “genuine restructure”, would extend to all trust assets (including those producing passive income), and would not require continuity of identical legal ownership provided ultimate economic ownership stays within the same family unit. However, given the nature of the entities to which the assets can be transferred the ownership of those entities by selected family members would likely need to be fixed in the desired proportions at the time of the rollover. Careful planning may be required when deciding on the appropriate ownership interests within the family group post-rollover. 

It would generally require all, or essentially all, of the trust’s assets to be transferred, and would retain integrity rules such as the requirement that both parties be Australian tax residents. The design is also intended to ensure Family Trust Distributions Tax does not arise on a qualifying restructure. 

Importantly, the relief is not intended to facilitate arrangements that simply reproduce discretionary outcomes through a different legal wrapper, for example, a company with multiple share classes that allow dividends to be directed on a discretionary basis.

Treasury is also seeking feedback on alternatives to a restructure, such as allowing a discretionary trust to make an irrevocable election to be taxed as a fixed trust. It is unclear how such an election could work in practice given the inherent flexibility in the trust deeds of discretionary trusts. 

Interaction with Division 7A and the Bendel decision 

The Treasury paper also notes the High Court’s recent decision in Commissioner of Taxation v Bendel [2026] HCA 18, handed down on 10 June 2026, in which the majority held that a corporate beneficiary’s unpaid present entitlement to trust income was not a “loan” for the purposes of the deemed dividend rules in Division 7A, contrary to the ATO’s longstanding position.

The Government is seeking feedback on how to implement the announced but unenacted 2018-19 Federal Budget measure to bring unpaid present entitlements within Division 7A, and on any interactions between that measure and the minimum tax. The practical application of such a change may be of limited long-term utility once the 30% minimum tax applies as proposed from 1 July 2028.

This consultation is an early but important signal for anyone who uses a discretionary trust to hold a business or investments. While the tax would not start until income years commencing on and after 1 July 2028, the design decisions being made now, from how a discretionary trust is defined to how rollover relief and collection will work, will shape the options available and the compliance effort required. 

Trustees and family groups should start by understanding whether their trusts are likely to be in scope and modelling the potential impact on after-tax outcomes, including for corporate and trustee beneficiaries. Whilst broad restructure relief is being provided, the costs and benefits of the restructure relief should be considered carefully by trustees and family groups - there are clear trade offs such as the loss of the CGT discount (possibly also in respect of capital gains accrued to date), potentially reduced asset protection through holding fixed interests, forfeiture of carried forward income tax and capital losses, and the costs of State-based taxes that may arise on any restructure. 

Where restructuring may be worthwhile, the three-year rollover window from 1 July 2027 will be central to planning, and it is worth considering early what a “more fixed and transparent” structure would look like in practice. Groups with existing family trust or interposed entity elections, unpaid present entitlements, or chains of trusts should pay particular attention given the added complexity. 

With submissions closing on 31 July 2026, there is a near-term opportunity to help shape the rules. The principles in the paper are not yet law, so the design may change through consultation. 

If you would like to discuss what these proposals mean for you, please speak with your usual PwC adviser.