The Government has released draft legislation to implement the core components of the 30 per cent minimum tax on discretionary trusts announced in the 2026-27 Budget.
The Government has been clear that a range of trusts will be excluded from the minimum tax including charitable trusts, special disability trusts and complying superannuation entities, as well as primary production income and certain income relating to vulnerable minors. Deceased estates and all discretionary testamentary trusts established for genuine testamentary purposes will also be excluded.
Election option
As an alternative to restructuring, discretionary trusts that are in existence at 1 July 2028 will be able to elect into a new regime for tax purposes. These trusts will be able to choose to make fixed distributions to pre-nominated beneficiaries, and not have the minimum tax apply as a result.
Trustees will be able to nominate individuals and entities that are capable of benefiting under the trust at 1 July 2028, including eligible companies and trusts, with no limit on the number of beneficiaries that can be nominated. This means, for example, a trust could nominate to distribute future income to an eligible company with this income taxed only as income of the company in future.
The election would not require a restructure and is not expected to result in state and territory stamp duties.
Nominated beneficiaries can only be added or changed later where a nominated beneficiary passes away or there is a family breakdown.
The election will be in place until it is revoked by the trustee, or is automatically revoked. An election will be automatically revoked where the trustee makes distributions inconsistent with the election.
Upon revocation, the trustee will be subject to the highest marginal tax rate plus Medicare levy in that income year, with the minimum tax applying to subsequent income years.
Support for charitable giving
Charitable trusts and all distributions from trusts to registered charities and deductible gift recipients will be excluded from the minimum tax. The exclusion also extends to distributions to other income tax-exempt entities, like sporting clubs, up to a reasonable cap to be finalised following consultation.
Based on identified distributions to relevant beneficiaries, distributions from discretionary trusts to charities and deductible gift recipients are estimated to account for less than 5 per cent of total charitable donations and bequests in 2024. The exemptions in the draft legislation are intended to ensure there is no disincentive for these distributions to continue.
A new definition of fixed trust
The Government has made it clear that fixed trusts and widely held trusts will be excluded from the minimum tax on discretionary trusts.
To support this, a new fixed trust definition will be introduced, which applies more broadly for tax purposes. It will ensure that a trust can be considered a fixed trust if there are no material discretionary elements.
The new definition will ensure that trusts such as bare trusts, managed investment trusts and other widely held trusts are not captured by the minimum tax.
Roll-over relief
Roll-over relief will be available for three years from 1 July 2027 to assist taxpayers that wish to restructure out of a discretionary trust into other arrangements, such as a company or a fixed trust.
This will provide relief from income tax consequences, including capital gains tax for those that choose to restructure.
The rollover relief is designed for a full restructuring out of a discretionary trust, with a targeted exception for primary production assets given primary production income is excluded from the minimum tax.
Refunds for excess franking credits
After the trustee has offset its income tax liabilities, they will be able to obtain refunds for franking credits that remain and relate to income subject to the minimum tax. The tax treatment of corporation distributions flowing through trusts that do not relate to income subject to the minimum tax will be unaffected.
