The Government has released a comprehensive consultation paper detailing its landmark proposal to introduce a 30 per cent minimum tax on discretionary trusts, marking a significant structural shift in the nation’s wealth and business taxation framework.
Announcing the measure alongside the 2026–27 Federal Budget, the Treasury outlines a policy intended to curb tax planning opportunities, restrict ‘income splitting’, and better align the tax obligations of trust structures with ordinary salary earners.
Scheduled to take effect on 1 July 2028, the proposed reform will completely alter how trustees and beneficiaries interact with respect to taxable trust distributions.
The core policy mechanism
Under the existing tax framework, discretionary trusts operate by distributing income to various beneficiaries. These beneficiaries are then personally responsible for declaring this income and paying tax on it at their personal marginal rates. If the income is split among individuals with low incomes, the overall tax burden is substantially reduced.
The proposed model leaves the underlying assessment framework intact but levies a flat 30 per cent minimum tax directly at the trustee level on the trust’s total taxable income.
To eliminate double taxation, individual and other non-corporate beneficiaries will receive a corresponding non-refundable tax offset, the ‘minimum tax offset’, matching their proportional share of the trust’s taxable income.
However, this tax offset is strictly capped. It cannot be used to reduce an individual’s Medicare levy, it cannot be refunded, and any excess cannot be carried forward to subsequent financial years.
If the individual’s marginal tax rate sits below 30 per cent, the unutilised portion of the offset is effectively forfeited, cementing a hard 30 per cent floor on trust-derived income.
Treatment of individual beneficiaries
Trust A is a discretionary trust subject to the minimum tax. In 2028–29, Trust A has $200,000 of trust income. Trust A’s taxable income is also $200,000.
Trust A has multiple beneficiaries that the trustee typically distributes to from year-to-year. However, for 2028–29 the trustee makes only Individual A presently entitled to all of Trust A’s income ($200,000).
The trustee is liable for the 30 per cent minimum tax on Trust A’s taxable income ($200,000). Therefore, the trustee is liable for $60,000 minimum tax.
Consistent with the current law, because Individual A is presently entitled to all of Trust A’s income, Individual A will be assessed on all of Trust A’s taxable income ($200,000).
Individual A will also receive a minimum tax offset to reduce their income tax liability. As Individual A is assessed on 100 per cent of Trust A’s taxable income, they will also receive a tax offset equal to 100 per cent of the minimum tax payable by the trustee ($60,000).
Individual A does not have any other income and is subject to marginal tax rates. Therefore, before the minimum tax offset is applied, Individual A would have a $55,602 tax liability in 2028–29, and an additional $4,000 Medicare levy liability.
Individual A can then use $55,602 of their $60,000 minimum tax offset to reduce and discharge their tax liability, excluding the Medicare levy. The remaining $4,398 of the offset is not refundable and could not, for example, be used to extinguish the Medicare levy liability.
This means Individual A would only be liable to pay their $4,000 Medicare levy liability, being 2 per cent of their total taxable income of $200,000.
Restricting corporate beneficiaries
A major pillar of the reform targets ‘bucket companies’, corporate entities deliberately interposed in a trust structure solely to park profits at the flat corporate tax rate.
Under the new rules, corporate beneficiaries will still be fully assessed on their share of trust income. Crucially, however, they will be entirely barred from claiming the minimum tax offset.
Treasury notes that granting companies access to this offset would allow them to convert the minimum tax into refundable franking credits, which could then be passed back out to shareholders.
Denying the offset to corporate beneficiaries serves as the simplest mechanism to neutralise the tax advantage of using corporate shells without dismantling the broader dividend imputation system.
Treatment of corporate beneficiaries
Trust A is a discretionary trust subject to the minimum tax. In 2028–29, Trust A has $100,000 of trust income. Trust A’s taxable income is also $100,000.
Trust A has multiple different beneficiaries that the trustee typically distributes to from year-to-year. However, for 2028–29 the trustee chooses to make only Company A presently entitled to all of Trust A’s income ($100,000).
The trustee is liable for the 30 per cent minimum tax on Trust A’s taxable income ($100,000). Therefore, the trustee is liable for $30,000 minimum tax.
Consistent with the current law, because Company A is presently entitled to all of Trust A’s income, Company A will be assessed on all of Trust A’s taxable income ($100,000). Company A cannot receive a minimum tax offset to reduce their income tax liability based on the minimum tax payable by the trustee.
Company A does not have any other income and is subject to the 30 per cent corporate tax rate. Therefore, Company A will have a $30,000 tax liability.
As Company A cannot receive a minimum tax offset to reduce its income tax liability for tax payable by the trustee, it is liable to pay $30,000. Company A can create $30,000 franking credits after the tax liability is paid to the Australian Taxation Office.
The operation of the imputation system when Company A issues franked distributions to its shareholders remains unchanged.
Treatment of excess franking credits
To ensure the use of refundable franking credits does not undermine the minimum tax, trustees that receive franked dividends will be required to use their franking credits to offset their income tax liabilities.
Excess franking credits may arise where a trustee offsets its income tax liability, including any minimum tax liability, and franking credits remain. This could arise where franking credits available to the trust exceed the income tax liability of the trustee.
The Government is considering two options for the treatment of excess franking credits for trustees:
- Refunding excess franking credits to the trustee.
- Allowing excess franking credits to be carried forward to reduce the trustee’s future income tax liabilities.
Whether excess franking credits are refunded or carried forward, the trustee would receive the benefit in the form of a tax offset, consistent with existing refundable or carry-forward tax offsets, such as the tax offset for individuals in receipt of franking credits.
Tax offsets are not assessable income, subject to appropriate integrity rules. Whether the amount of the benefit the trustee receives from the tax offset for its franking credits forms part of the trust income, or how it is treated for trust law purposes, will depend on the terms of the trust deed.
Cameo: different treatments of excess franking credits
Trust E is a discretionary trust subject to the minimum tax. In 2028–29, Trust E:
- receives a $70,000 distribution from Trust D, plus $30,000 minimum tax credits in total;
- receives a $70,000 fully franked dividend from Company C, with $30,000 franking credits attached; and
- incurs $50,000 in general expenses.
This results in:
- trust income of $90,000 ($70,000 + $70,000 – $50,000) consistent with the deed; and
- taxable income of $150,000 ($100,000 taxable income of Trust D plus $70,000 franked dividends and $30,000 of franking credits from Company C less $50,000 general expenses).
Trust E has multiple beneficiaries that the trustee typically distributes to from year-to-year. However, for 2028–29 the trustee chooses to only make Individual F presently entitled to all the trust income of $90,000. This means Individual F has a proportionate share of $150,000 of Trust E’s taxable income.
Tax outcomes
The trustee has a minimum tax liability of $45,000, being 30 per cent of $150,000, in respect of its distribution to Individual F, which generates a minimum tax offset of this amount.
The beneficiary, Individual F, who was made entitled to the income of the trustee will be entitled to a minimum tax offset totalling $45,000, based on the proportion of the taxable income of the trust included in the assessable income of the beneficiary.
Use of offsets and credits
- The trustee of Trust E uses its $30,000 minimum tax offsets from Trust D and $15,000 franking credits from Company C to completely discharge its income tax liability.
- After applying those offsets and credits, $15,000 franking credits remain unused.
Option 1: Refunding excess franking credits
The $15,000 franking credits would be refunded to the trustee.
Individual F has no other income, will be assessed on $150,000 and liable to pay tax of $36,302 excluding the Medicare levy and before the application of any other tax offsets.
After applying the minimum tax offset of $45,000 from Trust E, Individual F pays no additional tax, other than the Medicare levy of $3,000.
The total tax outcome across Company C, Trust D, Trust E and Individual F is $48,000 over $150,000 taxable income.
This is comprised of:
- $30,000 company tax from Company C which gives rise to franking credits.
- $30,000 of minimum tax from Trust D which gives rise to minimum tax offsets.
- $0 minimum tax from Trust E which is offset against minimum tax offsets from Trust D.
- Less $15,000 in franking credits refunded to Trust E.
- As well as $3,000 of Medicare levy paid by Individual F.
This results in an average tax rate of 30 per cent minimum tax plus Medicare levy.
Option 2: Carrying forward excess franking credits
The $15,000 franking credits would not be refunded and instead would be carried forward by the trustee to reduce future income tax liabilities, subject to integrity rules.
Individual F’s position is the same as Option 1, no additional tax, other than the Medicare levy.
The total long-run tax outcome across Company C, Trust D, Trust E and Individual F may be as low as $48,000 over $150,000 taxable income.
Similar to Option 1, this results in an average tax rate as low as 30 per cent minimum tax plus Medicare levy, but can be higher.
Broad scope and targeted exclusions
The minimum tax is explicitly aimed at discretionary trusts. Fixed trusts, widely held trusts, deceased estates, complying superannuation funds and charitable trusts are entirely excluded from the new regime.
Furthermore, specific asset and income types will be shielded from the tax:
- Primary production: Standard farming and agricultural income concessions, including Farm Management Deposits, remain completely untouched.
- Vulnerable minors: Income distributions linked to disability, severe injury or orphans will not trigger the minimum tax.
- Testamentary trusts: Discretionary trusts established under a genuine will are exempt, provided the income originates strictly from the original deceased estate rather than assets injected after 12 May 2026.
Transition and three-year rollover relief
Recognising that many taxpayers may want to abandon discretionary structures in response to the minimum tax, the Government is offering a temporary window for tax-free restructuring.
A special, expanded rollover relief window will open for three years, running from 1 July 2027 to 30 June 2030.
Loosely modelled after the existing Small Business Restructure Rollover, this new mechanism will be available to discretionary trusts regardless of their asset size or turnover.
The rollover allows assets to be moved to fixed trusts or corporate structures without triggering immediate capital gains tax or direct income tax consequences.
To prevent exploitation, the transferee entity must enforce fixed and transparent economic outcomes, such as utilising a single class of ordinary shares rather than multiple share classes that perpetuate discretionary dividend distributions.
Operational impacts and collection challenges
The shift to taxing the trustee directly requires robust collection and compliance mechanisms.
Treasury has flagged the need for strict measures to prevent tax defaults, especially concerning assetless corporate trustees.
Proposals up for consultation include:
- Making directors of corporate trustees jointly and severally liable for the trust’s tax debts.
- Granting the ATO a direct right of reimbursement from trust assets.
- Integrating trusts into the PAYG instalment system for earlier tax collection.
Moving forward
The Treasury’s consultation window officially closed on 31 July 2026, with the Government reviewing extensive industry feedback regarding definitions, franking credit mechanisms and administrative collection methods.
While the paper serves as a policy guide and is not yet formal law, the detailed transition timeline signals a firm commitment to reshaping Australia’s trust landscape ahead of the 2028 start date.
Let’s talk
Taxpayers who have been using trusts as part of their business or investment ownership structures will need to rethink their tax strategies.
If you would like to review how these proposed changes will impact your tax affairs, please contact us to discuss.
