A new era for discretionary trusts? Unpacking the proposed 30% minimum tax

jump to key proposed changes, final word

Introduction

In September 2026, the Australian Government released exposure draft legislation for consultation with the Australian business community and in relation to the proposed 30% minimum tax on the trustee of a Trust.

The proposed measure was first announced in the May 2026 Federal Budget and was followed by a consultation paper in July 2026.

If passed, these reforms would represent the most significant change in the taxation of Trusts in Australia in a generation and will change certain aspects of taxation in the Australian economy.

Importantly, all Trusts that hold investments or operate businesses in Australia require the review of the operation of the Trust in respect of the period from 1 July 2028.¹

This publication outlines the key features of the proposed legislation, explores planning opportunities and challenges that may arise, and highlights some of the issues trustees should consider ahead of the proposed start date of 1 July 2028.

Key proposed changes from 1 July 2028

Under the exposure draft legislation:

• the trustee of a Trust is charged with 30% minimum income tax (new s101AA of Income Tax Assessment Act 1936 (ITAA 1936).
• corporate beneficiaries are not eligible to claim refundable tax offsets for the 30% tax paid by the trustee – and which from 1 July 2028, results in adverse tax situations where a Trust declares a trust distribution to a corporate beneficiary or a ‘bucket company’ (s 101AF of ITAA 1936). From 1 July 2028, the use of corporate beneficiaries will become practically prohibitive, resulting in double taxation at a tax rate that is more than 55%, before the profits of the company are even distributed to its shareholders.
• From 1 July 2028, non-corporate beneficiaries of a ‘minimum tax trust’ will be entitled to a non-refundable tax offset if the beneficiary is entitled to a share of the income of the Trust and the minimum tax is payable by the trustee on their share of the Trusts’ net income (s 101AF of ITAA 1936).

September 2026 – exposure draft legislation

From 1 July 2028, it is proposed that where a trustee makes:

• an “Excluded election trust (EET) election” (refer below – new s102UYB of ITAA 1936) and
• a “EET nomination” (refer below – new s 102 UYB of ITAA 1936) and
• the trustee makes the beneficiaries specified in the EET nomination presently entitled to the income and the capital of the Trust in accordance with the EET nomination,
• the 30% minimum tax will not apply to the net income of the Trust (refer below – new s 102UYD of ITAA 1936).

In these circumstances, the 30% tax paid by the trustee does not apply (s102AA), and a trustee can distribute the income of the Trust to a corporate beneficiary which does not give rise to adverse income tax consequences.

Subject to there being no adverse State or Territory duty consequences arising from the EET election and EET nomination, these measures may once again make distributions from a trust to a corporate beneficiary (or “bucket company”) tax effective. This would apply where the distribution is made at a fixed rate to beneficiaries of the Trust from 1 July 2028 in accordance with the EET nomination (refer also The Australian Financial Review dated 4 September 2026, page 6).

However, if an EET election and EET nomination are made, the ownership of the corporate beneficiary is also fixed. Under section 102UYC of the ITAA 1936, shareholders’ rights generally cannot be altered, except in limited circumstances such as the death of a shareholder or a relationship breakdown.

An EET election in respect of a Trust is automatically revoked if a company specified as a beneficiary in the EET nomination is wound up (s 102UYF of ITAA 1936).

The current Australian Federal Government tax policy rationale for the above tax reforms seeks to deliver a fairer tax system, help fund tax cuts for workers and align the tax rate of trust income with the tax rate paid by workers.

For many private groups, from 1 July 2028, some of the key questions are:

• What is the average income tax expense of the existing Trust structure (including beneficiaries and owners) under current rules and before 1 July 2028?
• What is the average income tax expense of the existing Trust structure (including beneficiaries and owners) under proposed rules from 1 July 2028?
• is restructuring of the Trust required in the period 1 July 2027 and 30 June 2030,
• should an existing Trust structure make the new EET election and the “EET nomination” (refer below) – and is this regime viable in the particular Trust circumstances – for example, if the parties involved in a Trust are in a commercial dispute and cannot agree on operation, ownership of Trust assets or the administration of a Trust (refer the Victorian Supreme Court appeal case of Owies v JJE Nominees (2022) VSCA 142 and the removal of trustee of a trust and The Australian Financial Review dated 10 September 2026, page 3) – query whether an EET election can occur before 2030, and
• how the 30% minimum tax rules interact with other parts of the federal tax and state tax systems and international tax considerations.

Following consultation in July 2026, Treasury has now released the first tranche of exposure draft legislation outlining how the regime is intended to operate.

What has changed since the consultation paper

Several significant changes have been introduced since the consultation paper in July 2026.

Most notably, Treasury has proposed a new election regime for existing Trusts.

Rather than restructuring, certain Trusts that exist on 1 July 2028 can nominate fixed percentage entitlements for beneficiaries and effectively opt out of the minimum tax regime.

Treasury has also proposed a significantly broader definition of “fixed trust”, expanded exclusions for testamentary trusts, and provided further details on the roll-over relief available for a three-year period for affected trusts that choose to restructure.

The anticipated budget impact of the above change is currently unknown.  In the May 2026 Federal Budget, the measure was estimated to increase receipts by A$4.5 billion over the five years from 2025/26. Please refer to the Nexia Federal Budget publication. Any revenue impact is anticipated to be reported in the December 2026 mid-year Federal Budget update.

Which trusts are within scope of the minimum tax – an expanded definition of fixed trust

The minimum tax will apply to discretionary trusts, meaning fixed trusts are generally excluded.

The exposure draft expands the definition of a fixed trust to allow more commercial trust structures, including many unit trusts, to qualify where there are no material discretionary elements affecting beneficiaries’ rights or entitlements.

MITs, AMITs and other widely held trusts are also not intended to be captured.

In addition, deceased estates and discretionary testamentary trusts established for genuine testamentary purposes will generally remain outside the regime.

Primary production income and certain income relating to vulnerable minors is also excluded.

Furthermore, the minimum tax will not apply to the share of the net income of a Trust if share of the net income of a Trust that corresponds to a registered charity’s, DGR’s or exempt entity’s proportionate share of income of a Trust and that meets certain conditions.  Income tax exempt entities include community organisations such as sporting clubs (refer s101AE of ITAA 1936). The additional conditions of such exemptions are also subject to a Ministerial legislative instrument which at the date of this publication are not known.

New “election option” to be exempt from 30% minimum tax

One of the most significant developments in the exposure draft released in September 2026 is the introduction of an election option or mechanism that allows some Trusts to effectively opt out of the minimum tax regime.

For some existing discretionary trusts, the EET election mechanism may allow them to remain outside the regime without the need for a formal restructure.

Under this approach, a Trust that existed on 1 July 2028 can elect to nominate specific beneficiaries and essentially ‘fix’ their trust entitlements to the income and capital for tax purposes.

This option may enable affected Trusts to fall outside the scope of the regime without the potential stamp duty and legal costs associated with transferring assets to another entity.

The draft legislation requires that each nominated beneficiary must take the same share of both income and capital.

There is no limit on the number of beneficiaries that can be nominated. Eligible nominees can include individuals, trusts and certain companies, but cannot include partnerships or complying superannuation funds.

From 1 July 2028, trust income can continue to be distributed to those nominated entities and taxed in their hands, rather than being subject to the 30% minimum tax at the Trust level.

However, and importantly, this outcome comes with a loss of flexibility. In exchange for accessing this concession, trustees will have significantly less discretion over how trust income and capital can be distributed in the future.

From 1 July 2028, the nominated beneficiaries and their fixed entitlements are generally locked in, with changes only permitted in limited circumstances such as the death of a beneficiary or a family breakdown.

The election can be revoked either at the trustee’s discretion or if circumstances change. For example, revocation may be triggered if the trustee makes distributions that are not consistent with the nominated entitlements, or if a nominated beneficiary is wound up.

If that occurs, the trustee will be taxed at the top marginal tax rate in the year of revocation (including loss of CGT discount and indexation for that year), with the Trust becoming subject to the minimum tax regime in subsequent years.

A Trust deed may or may not allow for the election option to be exempt from 30% minimum tax. Trust deeds should be reviewed before 2028 and appropriate legal advice sought in each Trust’s particular circumstances.

State and Territory Duty

In the Government Factsheet dated September 2026, the fact sheet states, “The election would not require a restructure and is not expected to result in state and territory stamp duties.”. However, there is some uncertainty regarding whether adverse State or Territory duty may arise under the current proposed income tax rules and which must be considered in relation to the EET nomination – detailed consideration of such State or Territory Duty matters is outside the scope of this income tax publication.

In passing, an example in New South Wales and involving a NSW trust is as follows.  In New South Wales, query whether the above proposed EET election and EET nomination rules involving a NSW trust is an acknowledgment of trust and that may give rise to adverse NSW duty if Revenue NSW view such a nomination as a statement that purports to be a declaration of trust (refer s8AA of Duties Act 1997 (NSW)) and in the absence of any future NSW Duty reform or concessional administrative treatment by Revenue NSW.

Key observations

Given the above brief observations, it is currently unclear  what adverse Australian State and Territory Duty implications may arise (if any) of an EET election and EET nomination and such matters should be carefully considered on a case-by-case basis until further guidance (refer CPA media release dated 11 September 2026 “CPA Australia urges other states and territories to follow NSW on trust tax election”, legislative reform, or administrative concessions become available

Can a restructure be undertaken?

The exposure draft includes a temporary three-year roll-over relief for restructures undertaken between 1 July 2027 to 30 June 2030, allowing Trusts to transfer their assets into a company or fixed trust without triggering immediate income tax consequences, including CGT.

For businesses that hold significant land, goodwill or other CGT assets through Trusts, this relief may provide a practical pathway out of the regime.

However, the roll-over only addresses income tax consequences and does not remove potential stamp duty and other transaction costs associated with a restructure, which will need to be carefully assessed, and Duty advice obtained.

We understand the Federal Small Business Ombudsman has requested the current Federal Government to request state stamp duty exemptions for asset transfers triggered by the above rules (refer The Australian Financial Review dated 4 September 2026, page 6).

Existing roll-overs (such as a rollover from a trust to a wholly owned company [refer s 122-15 of ITAA 1997]) will continue to be available.

Timing of EET Election and EET nomination or rollover

The period from 1 July 2029 to 30 June 2030 will be critical in relation to the operation of a Trust and the above choices and given:

• the EET election and EET nomination must be lodged with 2028/29 income tax return by the lodgement date or due date for lodgement (s 102UYB(5) of ITAA 1936), or
• the roll over period and choice ends on 30 June 2030 (s 126-430 of ITAA 1997);
• a taxpayer will also be required to obtain appropriate Duty advice given the circumstances of the Trust and the above choices;
• hence, taxpayers will need to have an appropriate plan in place before these above dates.

Franking credits

From 1 July 2028, trustees that receive franked dividends will be required to use franking credits when paying the 30% minimum tax.

This approach ensures that any trustee that is subject to the minimum tax does not allow the franked distributions to ‘flow-through’ to the beneficiaries.

The trustee will be able to use the relevant tax offsets to reduce the trustee tax liability – and depending on the extent of the franked dividend.

Para 1.66 of the Explanatory Materials to the draft exposure legislation provides,

“A minimum tax trust receives a fully franked dividend of $70, attached to it is a $30 franking credit.
The trustee includes $100 in its assessable income and is liable for minimum tax of $30.
The trustee uses the $30 franking credit tax offset to reduce that liability to nil.

As the trustee is liable for the minimum tax, the franking credit is used by the trustee and is not available to beneficiaries. Instead, a non-corporate beneficiary can claim a $30 non-refundable offset against its income tax liability.”

Franking credits – refund of excess franking credits

A trustee may be entitled to a refund of excess dividend franking credits depending on the taxable income of the Trust, the income tax expenses payable by the trustee and the amount of franking credits received (s 67-25 of ITAA 1997).

After the trustee has offset its income tax liabilities, the trustee will be able to obtain refunds of franking credits that remain and relate to income subject to the minimum tax.

The following example provides an illustration of how excess franking credits can arise,

“A minimum tax trust receives a fully franked dividend of $140, attached to it is a $40 franking credit.
The minimum tax trust also derives a commercial property rental loss in the same year of ($40).
The trustee includes $100 in its assessable income and is liable for minimum tax of $30.
The trustee uses the $40 franking credit tax offset to reduce that liability to nil.
The remaining $10 franking credit is refundable to the trustee.

As the trustee is liable for the minimum tax, the $30 franking credit is used by the trustee and is not available to beneficiaries. Instead, a non-corporate beneficiary can claim a $30 non-refundable offset against its income tax liability.”

Next steps

While the draft rules were released in September 2026, significant uncertainty remains and further changes may be made as the consultation process continues.

The impact of the proposed regime will vary depending on each Trust’s circumstances, investments and business activities. For many groups, particularly those with complex structures, cross-border investments or significant business assets, reviewing existing arrangements may require specialist tax, legal and duty advice.

Particular care should be taken when considering restructures, EET elections and trust group arrangements, as these have broader tax, duty and loss utilisation implications.

We understand that this exposure draft represents only the first tranche of legislation, with further administrative and integrity measures expected to be released in late 2026 and 2027.

With consultation closing on 18 September 2026 and the Government intending to introduce legislation later this year, now is the time to understand how the proposed trust taxation changes could affect your structure and future plans.