The Proposed 30% Minimum Tax on Discretionary Trusts – What We Know So Far
A Significant Change for Family and Business Trusts
The 2026–27 Federal Budget announced a significant proposed change to the taxation of discretionary trusts. From 1 July 2028, affected discretionary trusts would effectively be subject to a minimum tax rate of 30%.
Since the Budget announcement, the Government has released exposure draft legislation providing considerably more detail about how the new rules are intended to operate.
Importantly, the changes are not yet law. The exposure draft remains subject to consultation and further legislation is expected dealing with administrative and integrity measures.
Nevertheless, for families and businesses that use discretionary trusts, there is now enough detail to start considering what the changes could mean.
How Would the 30% Minimum Tax Work?
Under the proposed rules, the trustee of an affected discretionary trust would calculate and pay minimum tax broadly equal to 30% of the trust's taxable income.
Beneficiaries would generally continue to be assessed on their share of the trust's taxable income under the existing trust taxation rules.
Eligible individual and other non-corporate beneficiaries would receive a non-refundable tax offset for the minimum tax paid by the trustee in respect of their share of the trust income. This offset would reduce the beneficiary's own income tax liability.
In practical terms, the proposal is intended to ensure that relevant discretionary trust income bears tax of at least 30%.
What About Companies and "Bucket Companies"?
This is one of the more significant aspects of the proposal.
Under the exposure draft, corporate beneficiaries would not receive the minimum tax offset available to eligible non-corporate beneficiaries.
This is likely to materially affect the tax effectiveness of some existing arrangements where discretionary trust income is distributed to a corporate beneficiary, commonly referred to as a "bucket company".
Trusts that regularly make distributions to companies should therefore review their arrangements before the proposed rules commence.
A Simple Example
Assume a discretionary trust has taxable income of $200,000 for the 2028–29 income year and distributes all of that income to an individual beneficiary.
The trustee's minimum tax would broadly be:
$200,000 × 30% = $60,000
The beneficiary would still be assessed on their $200,000 share of the trust's taxable income but would generally receive a $60,000 non-refundable tax offset for the minimum tax paid by the trustee.
The $60,000 should therefore not be viewed simply as an additional 30% tax on top of the beneficiary's normal tax liability. The beneficiary's ultimate position would depend on their taxable income, marginal tax rate and individual circumstances.
Because the offset is proposed to be non-refundable, however, the outcome may be less favourable where the beneficiary's tax liability is below the available offset.
Which Trusts and Income Would Be Excluded?
The proposed rules are targeted at discretionary trusts rather than all trusts.
The exposure draft provides for a number of trusts and arrangements to fall outside the minimum tax regime, including certain:
fixed and widely held trusts;
complying superannuation funds;
special disability trusts;
deceased estates;
genuine testamentary discretionary trusts; and
charitable and other qualifying tax-exempt arrangements.
Certain income is also proposed to receive specific treatment or exclusion, including primary production income and certain income relating to vulnerable minors.
As with the broader proposal, the precise scope of these exclusions may change before the legislation is finalised.
A New Alternative – Fixed Distributions
One of the most important developments in the exposure draft is a proposed fixed-distribution election.
This could allow an existing discretionary trust to nominate beneficiaries and make distributions on a fixed basis, rather than continuing to exercise discretion over how income is distributed each year.
Where the requirements are satisfied, the trust may be able to remain in its existing structure without being subject to the proposed minimum tax.
This could become an important alternative for some families and businesses because it may allow them to retain the existing trust and its assets rather than undertaking a full restructure.
The trade-off is potentially significant: greater tax certainty in exchange for reduced flexibility over future distributions.
Whether this option is appropriate will depend heavily on the circumstances of each trust.
What If You Want to Restructure?
The Government is also proposing expanded restructuring rollover relief.
The proposed concession would be available for a three-year period commencing 1 July 2027 and is intended to assist eligible taxpayers wishing to move from a discretionary trust into another structure, such as a company or fixed trust, without triggering certain immediate income tax consequences.
This potentially provides a window for affected taxpayers to restructure before the minimum tax is due to commence on 1 July 2028.
However, rollover relief should not be interpreted as meaning that every restructure will be free of tax or other costs. Changing structures can have implications for stamp duty, GST, financing arrangements, asset protection, succession planning and future tax outcomes.
Don't Rush to Restructure
The announcement does not mean every discretionary trust should now be replaced by a company or fixed trust.
For many trusts, there may ultimately be three broad alternatives:
continue operating as a discretionary trust under the new minimum tax regime;
remain in the existing trust but make the proposed fixed-distribution election; or
restructure into another entity using the proposed rollover concessions where available.
The right answer will depend on factors including the trust's income, beneficiaries, use of corporate beneficiaries, assets and unrealised capital gains, succession plans, asset-protection requirements and the importance of retaining flexibility over future distributions.
For most existing trusts, we do not recommend restructuring solely because of the announcement at this stage.
What Should You Do Now?
While the proposed rules are not scheduled to commence until 1 July 2028, discretionary trust structures should not simply be ignored until then.
Now is a good time to identify trusts that are likely to be materially affected—particularly those that regularly distribute income to corporate beneficiaries—and begin modelling the alternatives.
There is still time to plan.
At Lockwood & Ward, we can review your existing trust structure, model the potential impact of the proposed 30% minimum tax and consider whether retaining the existing structure, making a fixed-distribution election or restructuring may ultimately provide the better outcome.
If you operate through a discretionary trust, speak to our team about what the proposed changes could mean for you before making any structural decisions.
This article is based on the proposals and exposure draft legislation available at the date of publication. The measures are not yet law and may change before enactment. This information is general in nature and should not be relied upon as personal taxation, legal or financial advice.
