Key points:
- The proposed minimum trust tax could reshape how family groups structure wealth, investments and succession planning.
- For many discretionary trusts, the biggest question is whether existing structures remain fit for purpose.
- Early consideration may provide greater flexibility if the reforms proceed.
The Federal Government has released exposure draft legislation introducing a proposed minimum tax regime for discretionary trusts. While the rules are not yet law and may change before being introduced into Parliament, they could have significant implications for many family groups and private businesses that use discretionary trust structures.
1. What is the proposed minimum tax on trusts?
The proposed % tax is a 30% tax on certain income earned through discretionary trusts. Non-corporate beneficiaries (e.g. individuals and other trusts) would be entitled to credit for the tax paid by the trustee which is to be non-refundable to ensure that a minimum 30% tax is paid on trust income.
For many family groups, this represents a significant change to the way discretionary trusts are currently taxed as a flow-through vehicle in most cases.
2. Which trusts could be affected?
The proposed tax is set to apply to discretionary trusts. Most ordinary family discretionary trusts are expected to fall within the scope of the new rules.
Certain trusts are excluded, including fixed trusts, deceased estates, complying superannuation entities and special disability trusts. The exposure draft provides an expanded definition of fixed trust, which potentially allows more trusts to satisfy this definition (and be excluded from the tax) than under the existing rules. Treasury also proposes to allow affected trusts to make a one-time only election to be excluded from the rules by nominating beneficiaries with fixed percentages to income and capital.
3. When will the new rules commence?
The minimum tax on discretionary trusts is proposed to apply from the 2028-29 income year, with transitional restructuring relief set to be available for restructures undertaken and completed between 1 July 2027 and 30 June 2030.
Although these dates are proposed, it is important to remember the legislation is still in draft form and the details may change.
4. What income would be subject to the minimum tax?
The tax applies to what the legislation calls “minimum tax income”, which starts with the trust’s net (taxable) income (including net capital gains) and then excludes certain categories of income.
Key exclusions may include:
- qualifying primary production income
- certain income of testamentary trusts
- certain distributions to charities and deductible gift recipients
- income subject to non-resident withholding tax
- accumulated trust income on which the trustee is taxable
5. Can beneficiaries receive a credit for tax paid by the trust?
In many cases, individual beneficiaries and beneficiaries that are other trusts may be entitled to a tax offset for their share of the tax the trustee has paid on the minimum tax income that is also included in the beneficiary’s assessable income.
However, the offset is proposed to be non-refundable, meaning beneficiaries on lower marginal tax rates would not receive a refund of the excess tax paid on the trust income. Critically, the offset will most likely not be available to offset any liability for the Medicare Levy which makes the tax a 32% minimum tax in most cases.
6. What does this mean for corporate beneficiaries?
One of the more significant aspects of the proposal is that companies will not be entitled to claim a tax offset for the minimum tax paid by the trustee of a discretionary trust.
As a result, distributions from a discretionary trust to a company could potentially result in multiple layers of taxation (up to 70% tax by the time the trust income is paid out as a franked dividend to the company’s shareholders), making existing trust-to-company distribution strategies prohibitive.
7. How are franked dividends affected?
The proposed rules would change how franked dividends are treated when received through a discretionary trust tax. Rather than the franked dividend income flowing through to beneficiaries in the usual way, the trustee would generally deal with the franking credits at trust level by applying them against its liability to pay the 30% minimum tax. A non-corporate beneficiary will then be entitled to a share of the non-refundable minimum tax offset rather than a refundable franking credit offset.
If the franking credits exceed the minimum tax liability, it would then be the trustee that may be eligible for any refund on excess franking credits, instead of the beneficiaries. As the refund occurs at the trustee level, this mechanism results in a minimum tax of 30% on the dividend received (net of any trust expenses or losses).
8. Is there a way to remain outside the minimum trust tax regime?
Potentially. The draft legislation introduces the concept of an “Excluded Election Trust” (EET). This proposes to allow trusts existing on or before 1 July 2028 to be able to elect out of the minimum tax if they nominate beneficiaries (including certain corporate beneficiaries) and their fixed proportions of both income and capital (which must be the same) and continue to distribute accordingly. Essentially, the discretionary trust chooses to operate like a fixed trust, without having to transfer assets or actually change its trust deed.
Such an election is a one-time only election to be made in the 2028-29 income year with only limited scope to make variations, such as on death and divorce of a nominated beneficiary. The requirements are highly prescriptive and there are significant consequences if the rules are not properly complied with.
9. Should business owners be considering a restructure?
Many family groups may wish to review whether their current trust structures remain appropriate if the legislation proceeds. To assist with this transition, the exposure draft includes a temporary roll-over relief regime that may allow assets to be transferred to a new structure without immediate income tax consequences.
The relief is subject to detailed conditions and would not remove other potential costs such as stamp duty, GST or legal expenses. However, as the legislation may contain other concessions, reviewing the final form of the legislation is recommended as a part of the restructure process.
10. What should trustees and family groups do now?
For now, there is no immediate action required because the legislation remains in exposure draft form. However, trustees should begin understanding how the proposed rules may affect:
- new acquisitions and business activities
- discretionary trust structures
- succession and estate planning arrangements
- trust distributions to companies and loss entities
- family trust groups with multiple trusts
- future restructuring opportunities
Early planning may provide more flexibility if the legislation proceeds substantially in its current form.
