Draft law for the 30% minimum tax on discretionary trusts

Treasury has released for consultation a package of exposure draft law and explanatory materials that aims to give effect to the Government's 2026-27 Budget announcement that a 30% minimum tax will apply to the income of discretionary trusts. The draft law confirms the start date of 1 July 2028 and, importantly, sets out the detail of two ways in which affected trusts can respond - a three-year rollover to restructure out of the discretionary trust, or an election to remain outside of the minimum tax regime by locking in the trust’s nominated beneficiaries and their distribution proportions indefinitely.

The draft law also responds to some concerns raised in response to the July 2026 Treasury consultation paper. A codified definition of fixed trust will replace the existing definition for most income tax purposes and distributions to charities, deductible gift recipients (DGRs) and other income tax exempt entities will be carved out of the minimum tax, and trustees with excess franking credits after paying the minimum tax will be entitled to a refund. However, a corporate beneficiary will still not be entitled to an offset for minimum tax paid by the trustee, so distributing to a company is expected to remain materially more expensive than distributing to an individual (unless the trustee makes the election to nominate it as a beneficiary with a fixed entitlement to the income and capital indefinitely).

Although further tranches of law are expected, trustees and family groups now have enough detail to begin modelling their position and comparing the three practical paths available: restructure under the rollover (or other available rollovers under the tax law), elect into the new excluded trust regime, or accept the minimum tax.

What has been released?

The package comprises three sets of exposure draft provisions and accompanying explanatory materials. The first introduces the minimum tax itself, through amendments to the existing tax law. The second provides transitional three-year rollover relief for trusts that restructure. The third introduces an electable regime that allows a trust to remain in place, but effectively on pre-nominated fixed terms, and not be subject to the minimum tax.

The three components operate on staggered timelines, and the interaction between those dates will drive much of the planning in readiness. The minimum tax will apply with effect from income years commencing on or after 1 July 2028. The three-year rollover window opens a full year before the minimum tax applies, so a restructure, completed during the 2027-28 year can remove exposure to the tax altogether, while the election to be an excluded election trust (EET) can only be made in the first income year commencing on or after 1 July 2028.

The minimum tax applies to a "minimum tax trust", which is defined by exclusion. A trust is a minimum tax trust unless it is a fixed trust, a special disability trust, the estate of a deceased person, a complying superannuation entity, or a kind of trust determined by the Minister by legislative instrument. 

The explanatory materials indicate that widely held trusts, managed investment trusts, attribution managed investment trusts, corporate collective investment vehicles, bare trusts, employee share trusts, worker entitlement funds and exempt entities such as charitable trusts, are expected to fall outside the regime either because they are fixed trusts or are already excluded by the operation of other rules.

The expected exclusion of exempt entities such as charitable trusts appears to follow from their existing income tax exemption rather than from any express carve-out in the minimum tax provisions. A foreign trust that lacks a sufficient connection to Australia, for example, a trust with no Australian sourced income and no ultimate Australian resident beneficiary, and a trust estate established for statutory purposes under Australian law, are not addressed by the draft provisions themselves. To the extent such a trust is not a fixed trust, it would remain a minimum tax trust unless and until the Minister makes a determination excluding it. The explanatory materials specifically contemplate that it may be appropriate to exclude these types of trusts. 

The most significant change from the consultation paper is that there will be a new definition of fixed trust. The existing definition in the trust loss rules, which is incorporated into many other part of the tax law, is to be repealed and replaced with a definition under which a trust is fixed if beneficiaries have fixed entitlements to all of the income and capital of the trust, or if there are no material discretionary elements affecting the entitlements or rights of beneficiaries. The definition draws on the Australian Taxation Office's existing guidance and safe harbours by including a non-exhaustive list of indicators that there are no material discretionary elements. The new definition will apply across most parts of the income tax law, and not only for the purpose of identifying a minimum tax trust. This is a welcome and long overdue clarification of an issue that has caused difficulty. Having said that, beneficiaries of a trust that qualifies as a fixed trust under the new definition should not be assumed to have fixed entitlements or fixed interests that are required for some purposes of the tax law (for example, the superannuation non-arm's length income rules (NALI) and the 45-day rule for franking credit entitlements). 

Under the proposed definition of a fixed trust, residual or administrative trustee powers, and powers to admit new members or issue new units, provided they cannot be used to significantly vary existing entitlements or significantly affect the value of existing interests, should not prevent a trust from being fixed. The explanatory materials indicate that minor or consequential impacts of adding new beneficiaries or issuing new units are not, of themselves, considered to impact the rights and entitlements of existing beneficiaries.

The 30% minimum tax applies to "minimum tax income", which builds on the existing concept of the net income of the trust estate and is also defined by exclusion. The following amounts that comprise the net income of the trust will be excluded:

• taxable primary production income as already defined in the income tax law (accordingly, this will not cover any income such as rents or agistment fees derived from the mere holding of primary production land)

• certain income of vulnerable minors 

• net income corresponding to the entitlement of a registered charity, a DGR or another income tax exempt entity (subject to any conditions that may be determined by Ministerial instrument) 

• amounts to which non-resident withholding tax applies (broadly, unfranked dividends, interest and royalties, but not foreign source income to which a non-resident beneficiary is entitled), and 

• the income of a discretionary testamentary trust established for genuine testamentary purposes as a result of a will, codicil, order or intestacy.

The testamentary trust exclusion carries three integrity limitations:

• Income from property injected after 7.30pm (ACT time) on 12 May 2026 that is unrelated to the deceased estate remains subject to the minimum tax. 

• For testamentary trusts established on or after 1 July 2028, the exclusion only applies where the beneficiaries are individuals or exempt entities. This means the net income of a testamentary trust with corporate or trust beneficiaries would be caught. 

• The Commissioner may also deny the exclusion where income arises from property which has been transferred to the trust under a scheme entered into or carried out for a purpose, other than an incidental purpose, to avoid the minimum tax.

The trustee is assessed on, and liable to pay, the minimum tax where the trust has net income for the year. Consistent with its description as a minimum tax, it operates as a top-up. Where no tax would otherwise be payable by the trustee on minimum tax income, the rate is 30%; where tax is payable at less than 30%, the rate is the shortfall; and where tax is already payable at 30% or more, the rate is nil. The trustee is not liable for the minimum tax where no beneficiary is made presently entitled, because the trustee is already taxed at a higher rate under section 99A.

Non-corporate beneficiaries are entitled to a non-refundable offset equal to 30% of the portion of their entitlement that is minimum tax income. 

Corporate beneficiaries, including companies receiving a distribution as a partner in a partnership, are not entitled to the offset, so the effective cost of distributing to a company remains materially higher than the cost of distributing to an individual. 

The draft law allows for the offset to flow through trust beneficiaries. Where the beneficiary is itself a minimum tax trust, the non-refundable offset is applied against that trust's own liability and a corresponding offset flows to its non-corporate beneficiaries. 

DGRs and income tax exempt beneficiaries are not entitled to any offset since the income to which they are made presently entitled is not subject to the minimum tax.

When it comes to franking credits attached to any dividends or distributions included in the trust’s minimum tax income, the draft law adopts the more favourable of the two options that were canvassed in the July consultation paper. Specifically, franking credits included in the trust's assessable income must be applied against the minimum tax, with any excess refundable to the trustee. This also means that franking credits received by a trustee subject to the minimum tax no longer flow indirectly to beneficiaries. Accordingly, since non-corporate beneficiaries receive the non-refundable 30% minimum tax offset rather than the franking credit, the position of individual beneficiaries on marginal rates below 30% will need to be modelled carefully as their positions will be notably different under the new minimum trust tax regime. 

Transitional rollover relief for three years from 1 July 2027 is provided to support those that wish to restructure from a discretionary trust that would be subject to the 30% minimum trust tax into another entity, such as a company or a fixed trust. Where the rollover relief applies, the transfer has no direct income tax consequences. Where the restructure is completed in the 2027-28 income year, the trust can avoid the minimum tax entirely.

The rollover is available for the transfer of assets by the trustee of a minimum tax trust to a single transferee which may be a company, an individual, a partnership or the trustee of another trust but cannot be an exempt entity, a complying superannuation entity or the trustee of another minimum tax trust, during the three-year period from 1 July 2027 to 30 June 2030. The transferor and transferee must also satisfy residency requirements.

Although the rollover is voluntary, both parties must choose the rollover in the approved form and notify the Commissioner, the choice cannot be revoked, and only one choice can be made for each trust. Where the relief applies, the transferee inherits the transferor's tax cost and history, and family trust distribution tax does not arise. The relief is a deferral rather than an exemption.

Unlike the small business restructure rollover on which it is modelled, there is no genuine restructure test and no size limit, and the relief extends to passive investment assets. The trade-off is that all required assets must be transferred within the three-year window, failing which relief is denied for the entire restructure. Assets that are not required to be transferred include assets incapable of transfer such as carried-forward losses, CGT assets used in a primary production business, assets reasonably required to meet trust liabilities or wind-up costs, and assets with an original cost of $1,000 or less. The carve-out for primary production assets responds directly to feedback that an all-assets rule would jeopardise existing primary production concessions. 

Continuity requirements apply in relation to each transaction occurring under the restructure. For a family trust, every individual with a direct or indirect interest in the transferee just after the transaction must have been both a beneficiary and a member of the family group just before it. For trusts without a family trust election, continuity requirements are to be set by legislative instrument, and until an instrument is made that pathway should be considered not available. 

An integrity rule prevents the rollover being used to reproduce discretionary outcomes in a new wrapper. Relief is not available if there are material discretionary elements affecting the rights or interests of the transferee's members at any time from the last required transfer until the end of the fourth income year afterwards. The explanatory materials give the example of a company with “alphabet” shares where directors choose the class and amount of dividends, which would ordinarily be a material discretionary element.

Trustees should also keep in mind that the rollover does not affect goods and services tax, fringe benefits tax or state and territory duties, which can for some structures continue to represent a significant cost of restructuring.

The third component of the draft law, being the excluded election trust (EET), was newly announced and responds to feedback that restructuring existing trusts is not always practical or affordable. The trustee of a minimum tax trust in existence on 1 July 2028 may elect for the trust to be an EET, in which case the minimum tax does not apply. The election can only be made in the first income year that the rules apply, i.e. the 2028-29 income year, only once, and cannot be made if the trustee has chosen to apply the rollover. Trustees seeking to be relieved of the minimum trust tax must therefore choose between the two paths.

The EET election must be accompanied by a nomination specifying each beneficiary the trustee intends to make presently entitled and their share of income and capital, which must be the same proportion for both and must total 100%. Nothing can be left unallocated or reserved for later determination. Nominated beneficiaries must be capable of benefiting under the trust deed as in force on 1 July 2028.  Complying superannuation entities and partnerships cannot be nominated, and a company can only be nominated if it is an "eligible company", meaning there are no material discretionary elements affecting the rights of its members.

The timing of the election requires care, and it is important to distinguish between the time by which the election and nomination must be made and the time by which the Commissioner must be notified of them. The EET election can only be made in the first income year commencing on or after 1 July 2028, being the 2028-29 year for a trust with a 30 June year end, or the first income year beginning after 1 July 2028 for a trust with a substituted accounting period, and the EET nomination must accompany that election. Notification is a separate step: the trustee must notify the Commissioner of both the election and the nomination in the approved form by the earlier of the due date for lodgment of the trust's tax return for the income year in which the election is made and the date on which that return is in fact lodged.

In practical terms, the election is effectively a commitment to distribute income and capital of the trust in the nominated proportions each year. It can only be varied where a nominated beneficiary passes away or where two nominated beneficiaries experience a relationship breakdown.  

Trustees will continue to have obligations under the relevant deed to make an annual resolution to determine which beneficiaries are presently entitled to the income and capital of the trust, and those resolutions must now be made in favour of the nominated beneficiaries in the nominated proportions if the EET is to remain in force.  While it is possible for the trustee to step outside the nomination in any year, the consequences are that the election is automatically revoked, beneficiaries made presently entitled in that year are treated as never having been presently entitled such that the trustee is taxed on all of the net income of the trust at the top marginal rate plus Medicare levy for that year, and the minimum tax applies to the trust in later years. 

Automatic revocation also follows if a nominated company or trust beneficiary is wound up, vests, is deregistered, ceases to be an object of the trust, ceases to be an eligible company, or has a change of shareholder for a reason other than death or relationship breakdown. A revoked election cannot be remade.

The explanatory materials are clear that this is a first tranche, and the gaps are as important as what has been released. Further legislation is expected to deal with the interaction of the minimum tax with the residency rules, CGT (including the interaction with the 30% minimum CGT), international taxation, and administration and reporting. 

The administrative rules will be particularly relevant. Trustees cannot yet see what the reporting requirements will be, when the tax will fall due, or whether tax collection will be brought forward through the Pay As You Go (PAYG) instalment system. The materials also do not address the collection measures canvassed during the July 2026 consultation, including the Commissioner's right of reimbursement from trust assets and joint and several liability for directors of corporate trustees, which would significantly increase those directors' exposure. 

The Government has also signalled that additional targeted integrity rules, including further anti-streaming rules for corporate distributions, will follow if evidence of avoidance emerges.

The treatment of capital gains remains the most significant unresolved question. Individuals, including those who receive capital gains through a trust, are already subject to a 30% minimum tax on capital gains under the Budget CGT reforms effective from 1 July 2027. The exposure draft materials exclude net income referrable to a beneficiary's attributable capital gains from minimum tax income only where one of the specific exclusions applies, and are otherwise silent on how the two minimum taxes interact. Without an express rule, there appears to be a risk that the same capital gain is subject to a 30% minimum tax at both the trust and the beneficiary level. In our view it would be appropriate for capital gains to be excluded from the trustee level minimum tax. 

Finally, this package does not address the announced but unenacted measure to bring unpaid present entitlements (UPEs) of private companies within the Division 7A deemed dividend rules, or the High Court's decision in Commissioner of Taxation v Bendel. The Treasurer has indicated that the legislation to address this will be progressed separately. Groups carrying historical UPEs to corporate beneficiaries therefore still face uncertainty. Although the practical significance of that measure may diminish once distributions to companies become materially less attractive from 1 July 2028 for minimum tax trusts, it will remain an issue for those which make the EET election and nominate a corporate beneficiary.

The exposure draft materials move this Budget proposal from a set of principles to a workable framework, and in some respects respond constructively to several of the concerns raised in consultation. The codified fixed trust definition, the carve-out for charitable and exempt beneficiaries, the refund of excess franking credits and the alternative EET election are meaningful improvements.

The practical question for trustees and family groups is now a choice between three paths, each with a different cost profile. There is no one size fits all solution to dealing with the proposed new tax. 

Restructuring under the rollover offers a clean exit and can remove the minimum tax altogether if completed in 2027-28, but it requires all relevant assets to move within the three-year rollover window, brings with it potential state duty and other non-income tax costs, may cost the ongoing availability of any deferred CGT discount and carried-forward trust losses, and is subject to a four-year clawback if discretion re-emerges in the new structure. It is important to remember that existing restructuring options within the tax law may still be worth considering as they may provide more flexibility and choice (for example, whether assets can be restructured on an asset-by-asset basis).

Electing into the EET regime avoids restructuring costs, but locks in fixed distribution proportions indefinitely, with an additional tax cost and ongoing 30% minimum tax trust if the trustee departs from them.  

Accepting the minimum tax preserves flexibility at a cost of at least 30%, and considerably more where income is distributed to a corporate beneficiary.

Timing matters. The rollover window opens on 1 July 2027, the EET election can only be made in 2028-29, and the two options are mutually exclusive. Groups should start modelling their position now, reviewing trust deeds, and reviewing existing family trust and interposed entity elections. Groups with chains of trusts, corporate beneficiaries or UPEs should pay particular attention, as should those relying on primary production concessions.

The measure is not yet law and the design may change through consultation, so there is a near-term opportunity to shape the rules. Submissions can be made on the draft law by 18 September 2026.

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