Treasury’s proposed minimum tax on Discretionary Trusts: Our submission and key concerns

Treasury’s consultation paper considers one of the most significant reforms to the taxation of discretionary trusts in decades and has important implications for private business groups, investors and family enterprises.

Pitcher Partners has lodged a detailed submission in response to the consultation paper. While we understand the Government’s policy objective of addressing perceived income splitting through discretionary trusts, we have significant concerns regarding the design of the proposed regime and its broader economic consequences. We have also proposed an alternative framework which, in our view, achieves Treasury’s stated objectives in a simpler and more targeted manner.

What is the government proposing?

Overview

In the May 2026 Federal Budget, the Government proposed a 30% minimum tax on discretionary trusts from 1 July 2028. While beneficiaries would continue to be assessed on trust distributions under the existing trust taxation rules, trustees would also be required to pay a new trustee-level tax equal to 30% of the trust’s taxable income. Individual beneficiaries would generally receive a corresponding non-refundable tax offset for their share of the tax paid by the trustee.

The proposal extends well beyond a simple minimum tax. Treasury is proposing a comprehensive new framework dealing with trust classification, corporate beneficiaries, trust-to-trust distributions, excess franking credits, collection mechanisms, transitional restructuring relief and the interaction of the regime with Division 7A following the High Court’s decision in Bendel.

Corporate beneficiaries

One of the most significant aspects of the proposal is the treatment of corporate beneficiaries. Under Treasury’s model, a company receiving a trust distribution would continue to be taxed on that income but would not receive a credit for the minimum tax already paid by the trustee. As a result, the same income can be taxed multiple times before ultimately reaching an individual shareholder, resulting in effective tax rates on income well above the top marginal tax rate of 47%. Critically, the proposal means that income derived by discretionary trusts cannot be reinvested at the corporate rate through the use of a corporate beneficiary.

Restructuring relief

Recognising that many taxpayers may seek to move away from discretionary trust structures, Treasury has proposed introducing a rollover to facilitate restructuring during a three-year rollover period commencing on 1 July 2027. The relief is intended to facilitate the transfer of assets from discretionary trusts into companies or fixed trusts (in which none of the owners are themselves discretionary trusts) without immediate income tax consequences and is designed to encourage a transition to structures with more fixed and transparent ownership arrangements.

Bendel and Division 7A

The consultation paper also seeks feedback on the Government’s response to the High Court’s decision in Bendel. Treasury is considering legislation that would treat unpaid present entitlements owing to corporate beneficiaries as Division 7A loans, effectively bringing those arrangements within the existing Division 7A integrity framework.

What are the key concerns?

Tax losses may be lost

A significant issue arises for groups that have trusts with existing tax losses within family trust elected structures. Many taxpayers have accumulated losses and structured their affairs based on the current ability to utilise those losses within family groups. Under Treasury’s proposal, tax may be imposed before the benefit of those losses can be realised. In many cases, losses may be consumed without delivering the economic value that would otherwise arise under the current law. Any restructuring relief for transfers of assets out of discretionary trusts would not assist those taxpayers in utilising past tax (or capital) losses if they are merely left behind in the discretionary trust.

The proposal would also affect future losses that arise in one family trust which may not be utilised against income distributed to it from another family trust unless a 30% tax is paid on the income. Groups that are structured with multiple discretionary trusts may therefore become inefficient from a tax perspective.

Widespread restructuring will be required

The proposal effectively encourages many businesses and investment groups to restructure away from discretionary trust arrangements. While Treasury has proposed rollover relief, many groups face practical barriers to restructuring, including stamp duty costs, financing arrangements, trust law issues, contractual restrictions and significant implementation costs.

Corporate beneficiaries are subject to punitive outcomes

The proposal adopts a particularly harsh approach to corporate beneficiaries. The inability of corporate beneficiaries to access minimum tax offsets can give rise to effective tax rates that make use of such beneficiaries prohibitive,. In our view, this extends far beyond addressing the stated integrity concerns regarding income splitting and risks penalising legitimate business and investment structures.

What did we propose?

A withholding model rather than a new Trust Tax Regime

Our submission outlines an alternative withholding model which seeks to target the identified integrity concern, namely discretionary income splitting, without introducing the complexity, restructuring requirements and unintended consequences associated with Treasury’s proposal.

Under the model, a 30% withholding tax would apply to discretionary distributions made by trusts. Rather than imposing a new trustee-level tax based on the classification of a trust, the regime would focus directly on discretionary distributions themselves. As a result, there would be no need for complex rules distinguishing between fixed and discretionary trusts, nor the introduction of fixed trust elections and related integrity measures.

Targeting the relevant integrity concern

A key concern with the Treasury Model is that it seeks to tax the consequences of income splitting rather than the conduct that gives rise to it. In contrast, a withholding model directly targets discretionary distributions themselves, being the mechanism through which income splitting occurs.

The model would be supported by a targeted integrity rule that treats arrangements that are effectively discretionary as discretionary distributions. This would ensure taxpayers cannot replicate discretionary outcomes simply through the use of multiple classes of units or other legal structures that achieve the same economic result.

Character retention rules

The model would also include a character retention rule. Under this rule, income derived from a discretionary distribution would retain its character as it passes through interposed trusts, companies and other entities. This ensures that the withholding rules cannot be circumvented merely by routing trust income through alternative structures before it is ultimately distributed to individuals.

Preserving existing tax losses

The model would contain a number of targeted exclusions. Most importantly, distributions within Family Trust Election (FTE) groups would generally be excluded from the regime.

This allows existing family groups to continue utilising trust losses generated under the current law. In our view, preserving the economic value of existing tax losses is a critical transitional issue and one that has not been adequately addressed under the Treasury Model.

Corporate beneficiaries

The model would continue to permit the use of corporate beneficiaries, recognising that they provide an important source of working capital and investment capital for many Australian businesses and family groups. Rather than imposing a second layer of tax, integrity concerns would be addressed through the character retention rule and the existing Division 7A framework. Consistent with the Government’s announced response to Bendel, unpaid present entitlements owing to corporate beneficiaries could be treated as Division 7A loans.

Simpler and more sustainable reform

In our view, a withholding model provides a simpler, more targeted and more administratively efficient framework. It preserves the value of existing tax losses, avoids widespread restructuring, significantly reduces consequential amendments throughout the tax law, and focuses the integrity measure on the arrangements Treasury has identified as giving rise to concern.

Examples

The following examples demonstrate the outcomes under the Treasury Model as compared to the proposed Withholding Model.

Facts

Assume a discretionary trust derives $500,000 of taxable income. The trustee distributes:

• $100,000 to a trust within the same Family Trust Election (FTE) group that has carried forward tax losses of $150,000;
• $200,000 to a corporate beneficiary; and
• the remaining $200,000 equally to Mr and Mrs Smith.

Outcome under the Treasury Model

Under the Treasury Model, the trustee would be required to pay 30% minimum tax on the entire $500,000 of taxable income, resulting in a trustee-level tax liability of $150,000.

The $100,000 distributed to the trust within the FTE group would carry with it a proportionate share of the minimum tax offset. However, because the receiving trust has $150,000 of carried forward tax losses, the distribution would be fully sheltered by those losses, and no tax would be payable by the trust. As the offset is non-refundable, the trust would effectively utilise $100,000 of existing tax losses without obtaining the corresponding economic benefit that would arise under the current law.

The $200,000 distributed equally to Mr and Mrs Smith would each carry a proportionate share of the trustee-level minimum tax offset. As they each receive $100,000 of trust income, they would each receive a $30,000 non-refundable minimum tax offset. Assuming both beneficiaries are subject to the 47% marginal tax rate, their tax liability would be $47,000 each. After applying the offset, each beneficiary would be required to pay a further $17,000 of tax. The total tax on this component is therefore $94,000, representing an effective tax rate of 47%.

The most significant outcome arises in relation to the $200,000 distribution to the corporate beneficiary. The company would be assessed on the full $200,000 distribution and, assuming a 30% corporate tax rate, would pay a further $60,000 of company tax. Unlike individual beneficiaries, the company would not receive any credit for the trustee-level minimum tax already paid in respect of that income. Consequently, the underlying $200,000 of trust income is subject to $60,000 of trustee tax and a further $60,000 of company tax, leaving only $80,000 of after-tax profits available for distribution.

Assume the company subsequently distributes the $80,000 after-tax profit equally to Mr and Mrs Smith as a fully franked dividend. Each shareholder would receive a $40,000 cash dividend and a $17,143 franking credit, resulting in grossed-up assessable income of approximately $57,143. Assuming both beneficiaries are subject to the 47% marginal tax rate, each would have a tax liability of approximately $26,857. After applying the franking credit of $17,143, each shareholder would be required to pay a further $9,714 of tax.

As a consequence, the corporate beneficiary component results in total tax of approximately $139,428, comprising $60,000 of trustee tax, $60,000 of company tax and $19,428 of shareholder tax. This represents an effective tax rate of approximately 69.7% on the underlying $200,000 of income distributed by the trust.

Outcome under a Withholding Model

Under a withholding model, no withholding would apply to the $100,000 distribution to the trust within the FTE group, as distributions within the FTE group would be excluded from the regime. The receiving trust would therefore be able to utilise its carried forward tax losses against the distribution in accordance with the existing rules.

Similarly, no withholding would apply to the $200,000 distribution to the corporate beneficiary. The company would be assessed on the distribution and pay $60,000 of company tax, leaving $140,000 of after-tax profits. If the amount remained unpaid, the unpaid present entitlement would be treated as a Division 7A loan.

The remaining $200,000 distributed equally to Mr and Mrs Smith would be subject to the withholding regime. The trustee would therefore withhold and remit $60,000 of tax. Mr and Mrs Smith would each receive a $100,000 distribution and a $30,000 non-refundable trust tax offset. Assuming both beneficiaries are subject to the 47% marginal tax rate, each beneficiary would have a tax liability of $47,000. After applying the $30,000 trust tax offset, each beneficiary would be required to pay a further $17,000 of tax. The total tax on this component is therefore $94,000.

Assume the company subsequently distributes the $140,000 after-tax profit equally to Mr and Mrs Smith. Under the character retention rule, the dividend would retain its character as discretionary trust income and carry with it the associated $60,000 trust tax offset. Each shareholder would therefore receive a $70,000 cash dividend, be assessed on a grossed-up amount of $100,000, and receive a $30,000 trust tax offset. Assuming both beneficiaries are subject to the 47% marginal tax rate, each beneficiary would have a tax liability of $47,000. After applying the $30,000 trust tax offset, each beneficiary would be required to pay a further $17,000 of tax. The total tax on this component is therefore also $94,000, representing taxation at the beneficiaries’ marginal tax rates.

Importantly, unlike the Treasury Model, the tax outcome is the same regardless of whether the income is distributed directly to the beneficiaries or temporarily retained through a corporate beneficiary.

Comparison of outcomes

Conclusion

The examples above demonstrate the fundamental difference between the two approaches. Under the Treasury Model, the group incurs total tax of approximately $263,428 on economic income of $400,000, producing an effective tax rate of approximately 65.9%. This outcome arises largely because tax is imposed at multiple levels and because existing tax losses can be consumed without delivering their full economic benefit.

By contrast, a withholding model results in total tax of $188,000, equivalent to an effective tax rate of 47%, being the marginal tax rate of the ultimate individual beneficiaries. Importantly, this outcome is achieved while both avoiding widespread restructuring and directly targeting the conduct Treasury has identified as giving rise to its integrity concerns.

In our view, a withholding model can achieve Treasury’s stated policy objectives in a simpler, more targeted and more commercially sustainable manner.