From 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts that is distributed to beneficiaries. This tax will operate as a minimum tax at the trustee level. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.
At a high level, these measures will materially disadvantage discretionary trusts as a common ownership structure. By imposing a non‑refundable 30% minimum tax at the trustee level, the rules will remove the flexibility that is currently provided to discretionary trusts including income streaming and loss utilisation.
As a result, ordinary trust structures could produce materially worse tax outcomes than both individual and corporate alternatives. Although a deferred start date is proposed, coupled with restructuring options during a transitional period, practical constraints mean that many trusts may be unable to restructure. This will leave businesses at a significant disadvantage where they cannot restructure business or investments out of a discretionary trust.
Overview of measure
From 1 July 2028, a distribution of taxable income from a discretionary trust to a beneficiary of the trust will be taxed at 30% in the hands of the trustee. An individual beneficiary will receive a non-refundable credit for the tax paid. Broadly, if the beneficiary’s marginal tax rate prior to the distribution was already 30% or more, the measure should not result in more tax paid overall.
For individual beneficiaries on lower tax rates, broadly those whose taxable income is less than $45,000 (before the distribution), the non-refundability of the credit means a higher tax is paid overall. This is because the tax paid by the trustee of 30% will exceed the income tax that would otherwise be paid by the beneficiary. This is designed to apply to discretionary trusts being used to split income to lower taxed beneficiaries.
In order to discourage the use of corporate beneficiaries, no credit for tax paid by the trustee will be available for a distribution from a discretionary trust to a company. As a result, amounts distributed to a corporate beneficiary may be taxed twice, first at 30% and then again at 30% of the remaining 70%. This produces a tax rate of 51% at the corporate level and an effective tax rate of up to 62.9% on those profits when ultimately distributed to an individual. However, depending on precise details of the measure, it may be that the company pays 30% on the full grossed-up amount, resulting in effectively 60% tax at the corporate level and 69.7% on ultimate distribution to an individual.
Franked distributions flowing through a discretionary trust will be subject to the 30% tax rate, however the credit is to be used to offset and reduce the trustee’s tax liability.
This measure is estimated to increase receipts by $4.5 billion over the next five years.
Examples
Example 1 – Company to Trust to Individual
A company earns $100 business income and pays company tax of $30 at the 30% rate.
The remaining $70 is paid as a fully franked dividend to a trust. The franking credit attached to the dividend reflects the $30 of company tax already paid. When the trust distributes the income to an individual, it is required to withhold tax at 30%, being $30. However, the franking credit of $30 attached to the distribution offsets the trustee’s 30% tax liability in full. As a result, no additional tax is payable by the trustee. While exact details are not yet available, the individual is presumably assessed on $100, being the cash distribution plus the franking credit, and has a 47% tax liability equal to $47. The credit of $30 for the trustee tax reduces this liability, leaving $17 in additional tax payable.
In total, $47 of tax is paid on the $100 of income, resulting in an overall tax rate of 47%.
Example 2 – Company to Trust to Individual with Deductions
The facts are the same as Example 1, except that the individual has $50 of deductions and therefore has taxable income of only $50. The tax liability at 47% on $50 is $23.50. For the purpose of this example, assume for simplicity that the top marginal rate of tax applies from taxable income of $0.
The trust is still required to pay tax of $30 on the distribution, which is effectively reduced to nil by the $30 franking credit attached to the dividend. As the individual will now have a non-refundable $30 credit for trustee tax, rather than a $30 refundable franking credit, the $23.50 tax liability can only be reduced to nil, rather than resulting in a $6.50 tax refund. As a result, despite the individual’s tax liability being only $23.50, the effective tax borne on the distribution is $30 representing an effective tax rate of 60% on $50 of overall taxable income.
Exclusions
The minimum tax will not apply to certain trusts and categories of income. Excluded entities include fixed trusts and widely held trusts, complying superannuation funds, charitable trusts, special disability trusts and deceased estates. In addition, specific types of income are carved out of the regime, including primary production income, certain income derived by vulnerable minors, amounts that are already subject to non‑resident withholding tax, and testamentary trusts in existence on 12 May 2026.
Roll-over relief – transitional measures
The Government has announced that it will introduce expanded roll-over relief to facilitate restructuring out of discretionary trust structures. The proposed relief is intended to ensure that, for a limited period, restructures from discretionary trusts into alternative ownership vehicles, such as companies or fixed trusts, can occur without adverse income tax consequences, including capital gains tax. The roll-over relief will be available for a three‑year window from 1 July 2027 to 30 June 2030.
This measure may provide a pathway for some groups to restructure into corporate or fixed trust structures, particularly in response to the potential for effective tax rates of 60% or more on trust distributions. However, the announcement does not address a range of practical constraints.
In particular, many businesses are land rich, meaning that any restructure may trigger substantial stamp duty costs. These and other commercial and transactional considerations may significantly limit the extent to which the roll-over relief can be used in practice.
Distributions to other trusts
The measure would seem to also apply to distributions from a discretionary trust to another trust. As the trustee‑level tax is non‑refundable, a distribution to another trust that is in a tax loss position may still be subject to tax at an effective rate of 30%, even if those tax losses are utilised. This effectively prevents trust losses being utilised against income from other related discretionary trusts.
By comparison, a consolidated group structure would appear to be taxed more favourable as it allows losses from one group member to be automatically offset against income from another member.
Small business interaction
Small businesses will be able to reduce the impact of the minimum tax by employing beneficiaries working in the business, rather than paying them a trust distribution. Payments of salary or wages to employees of small businesses will not attract the minimum tax. Small businesses that choose to restructure into a company will benefit from access to dividend imputation and a lower 25% corporate tax rate where their aggregated annual turnover is less than $50 million and no more than 80% of their assessable income is passive income.
