The Proposed 30% Minimum Tax on Discretionary Trusts: What the First Draft Reveals

The Proposed 30% Minimum Tax on Discretionary Trusts: What the First Draft Reveals

Discretionary trusts have long played an important role in Australian wealth planning, offering flexibility in distributing income and managing family assets. The Government is now proposing a significant change to their taxation.

In September 2026, the first tranche of exposure-draft legislation was released for consultation following the measure’s announcement in the 2026–27 Federal Budget. The proposed minimum tax would commence on 1 July 2028. Importantly, the measure is not yet law and may change before enactment.

How the proposed tax would work

The proposed measure would impose a trustee-level tax intended to ensure that income within the minimum-tax base is taxed at an effective rate of at least 30%.

A non-corporate beneficiary who is presently entitled to a share of the trust’s net income would be entitled to a non-refundable income-tax credit for the minimum tax paid by the trustee on that income. Corporate beneficiaries would not receive the credit.  

Who would be affected?

The measure is directed at discretionary trusts. The exposure draft contains detailed rules governing which trusts and income would fall within the regime. Trust labels alone will not necessarily determine the outcome, so each structure would need to be tested against the final legislation.

Testamentary trusts are treated separately, and the proposed conditions are worth setting out in full

Testamentary trusts:

A testamentary trust is created under a will and takes effect after death. It may be discretionary or fixed - "testamentary" describes its origin, not how entitlements are determined. Estate planners favour them because qualifying income distributed to minors is taxed at ordinary individual rates rather than the higher Division 6AA rates that can apply to ordinary discretionary trusts.

The proposed rules would exclude qualifying testamentary trust income, subject to three limits:

1. Injected assets: Income from property added after 7:30pm on 12 May 2026 that is unrelated to the deceased estate would remain subject to the minimum tax.

2. New testamentary trusts: For trusts established on or after 1 July 2028, the exclusion would apply only to income benefiting individuals or income-tax-exempt entities. The relevant date is when the trust is established - signing a will before 1 July 2028 does not itself secure the earlier treatment.

3. Avoidance arrangements: The Commissioner could deny the exclusion where property was transferred under a scheme with a more-than-incidental purpose of avoiding the minimum tax.

The restructure rollover: a three-year window

The proposed rollover would run from 1 July 2027 to 30 June 2030 and facilitate transfers of assets from discretionary trusts to entities that are not discretionary trusts. Eligibility and the income-tax consequences would depend on satisfying the detailed conditions in the final legislation. The rollover would not automatically resolve GST, FBT or state and territory duty consequences, which would require separate consideration.

The rollover generally defers the income-tax consequences of transferring qualifying assets by preserving their tax history. However, moving the assets into an eligible structure may also remove them from the minimum-tax regime prospectively.  

The EET: an alternative to restructuring

The exposure draft also proposes an excluded election trust, or EET, regime under which an eligible trust could nominate beneficiaries and adopt fixed income and capital proportions. The trust must exist on 1 July 2028, and the election can only be made in the first income year commencing on or after that date. The election would significantly restrict the trustee’s future discretion, and departures from the nominated proportions could produce adverse tax consequences. Eligibility, permitted beneficiaries and the consequences of breaching the election should be confirmed against the final legislation.

The trustee would nominate the beneficiaries intended to receive income and capital and assign them fixed income and capital shares totalling 100%. Each beneficiary's income share and capital share must be identical. Individuals, trusts and eligible companies could be nominated.

The trust would then need to follow those proportions, subject to limited exceptions. A breach could revoke the election, subject the trustee to tax at the top marginal rate plus Medicare levy for that year, and prevent another election.

Where this leaves you

Consultation on the first tranche closed on 18 September 2026, but the measure is not yet law.  

Groups may wish to begin preliminary modelling of three potential options: restructuring under the proposed rollover, making an EET election if eligible, or remaining within the minimum-tax regime. Any implementation decision should be revisited as further details emerge and before the measure is enacted.

Estate plans involving testamentary trusts should also be reviewed to ensure their proposed beneficiaries and asset flows satisfy the draft exclusion conditions. Any planning should be revisited as further legislation is released.

If you hold wealth through a discretionary or testamentary trust, now is the time to have that conversation, while the rollover window and drafting options are still open.

Book a Trust Structure Review with CMPartners for advice specific to your circumstances.