Trust in the detail, part three: The minimum tax on trusts Bill

After a short consultation period, on 14 October, the Federal Government has introduced into the House of Representatives the legislation relating to the proposed new taxation regime relating to discretionary trusts (Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 and the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026).

The proposed measures, the bulk of which would come into effect from 1 July 2028, would:

• impose a 30% minimum tax on the net income of most discretionary trusts
• deny credits for that minimum tax to corporate beneficiaries
• introduce from 1 July 2027, a broad three-year roll-over relief regime to facilitate restructures from discretionary trusts to individuals, companies, and fixed trusts
• introduce an optional excluded election trust (EET) regime allowing certain existing discretionary trusts to avoid the minimum tax by effectively pre-nominating beneficiaries and fixed distribution percentages
• replace the existing income tax definition of fixed trust with a significantly broader principles-based definition, with fixed trusts also being excluded from the minimum tax regime
• introduce a number of exclusions for testamentary trusts, primary production income, charities, deductible gift recipients (DGRs), and certain other trust structures.

These measures represent one of the most significant reforms to discretionary trust taxation in decades and have the potential to materially alter the attractiveness and commercial viability of existing trust structures. The measures are broadly consistent with the exposure draft (ED) which SW had previously provided submissions on here.

Unfortunately, the draft legislation introduced does not appear to have made any material changes recommended as part of the feedback provided by SW or other stakeholders.

How does the tax operate?

From income years commencing on or after 1 July 2028, trustees of affected trusts, referred to in the legislation as minimum tax trusts, will be liable to pay tax at a minimum rate of 30% on ‘minimum tax income’. Several categories of income are excluded from minimum tax income, including:

• primary production income
• certain income relating to vulnerable minors
• income allocated to registered charities, tax exempt entities, and DGRs
• distributions to foreign beneficiaries subject to withholding-tax and conduit foreign income rules
• eligible testamentary trust income.

Corporate beneficiaries remain adversely affected

One of the most controversial features of the proposal has been retained, namely, that a corporate beneficiary of a minimum tax trust:

• remains assessable on trust income under ordinary rules
• does not receive any offset for the minimum tax paid by the trustee.

For minimum tax income, this would generally mean that such income distributed by a minimum tax trust to a company will bear tax at 60%.

New definition of fixed trust

The Bill repeals the existing fixed trust definition and replaces it with a broader principles-based test. Under the new regime, a trust may qualify as a fixed trust where either:

• beneficiaries have fixed entitlements
• there are no material discretionary elements capable of significantly affecting beneficiaries' rights to trust income or capital.

Importantly, the following ordinary discretionary powers, commonly found in most trust deeds, will not necessarily prevent a trust from being treated as fixed:

• amendment powers
• issue and redemption powers
• administrative powers
• certain governance provisions.

Managed investment trusts

The ED legislation provides the Minister with the power, by legislative instrument, to determine that trust estates of a certain kind are not minimum tax trusts, including if the Minister is satisfied that each trust estate of that kind has widely held membership or is used for collective investment by pooling the contributions of members. We hope that this mechanism will be used to confirm that managed investment trusts (MIT) are fixed trusts, although this remains to be seen.

Testamentary trust concessions

Discretionary testamentary trusts established for genuine testamentary purposes are excluded from the proposed 30% minimum tax, as are deceased estates. This means eligible testamentary trust income continues to be taxed under the existing trust rules, including the ordinary adult tax rates available to minors on excepted trust income.

Transitional roll-over relief

Consistent with the exposure draft, a concession is provided to enable a restructure of trusts into a new vehicle. This dedicated roll-over regime is proposed to be available from 1 July 2027 to 30 June 2030.

The measure is intended to facilitate transfers of assets from discretionary trusts into:

• companies
• fixed trusts
• other eligible fixed structures.

Key conditions

The regime contains a number of requirements including:

• the requirement that all assets of the trust be transferred to the new vehicle, subject to certain limited exceptions, remains a major point of criticism, as the existence of dutiable property in a trust may significantly deter access to roll-over relief
• continuity requirements (broadly ensuring consistency of underlying ownership) must be satisfied
• residency requirements
• a requirement that no material discretionary elements exist within the resulting (transferee) structure for a prescribed period
• elections and notifications must be provided to the Commissioner.

Excluded election trusts (EETs) — alternative to restructuring

A second transitional measure is the introduction of an EET regime. Rather than restructuring, an eligible discretionary trust existing on 1 July 2028 may elect to become an EET. An EET will not be treated as a minimum tax trust subject to the 30% tax impost while the election remains effective.

An EET election can only be made for trusts that are in existence on 1 July 2028 and requires trustees to nominate:

• each beneficiary
• fixed percentages of income and non-income earnings.

The nomination generally cannot be later changed except in limited circumstances such as:

• death of a nominated beneficiary
• relationship breakdown.

Revocation consequences

If an EET fails to comply with the beneficiaries and proportions nominated in the EET election:

• the election is automatically revoked
• for the year income to which the revocation occurs, the beneficiaries are treated as not being presently entitled to the income of the trust, which means that the trustee would be assessed under section 99A at the top marginal rate plus Medicare levy
• in subsequent years, the trust would become subject to the minimum tax regime thereafter.

A trustee also has a once-only opportunity to voluntarily revoke an EET election.

One significant change introduced in the Bill which was not in the exposure draft is the requirement that the EET pay or apply the income of the trust (to the beneficiary) by the end of following income year. Where this is not the case, the EET will be automatically revoked.

SW comments

The proposed legislation represents a major change to the taxation of family groups and private investment structures. For many existing discretionary trusts, particularly those utilising company beneficiary arrangements, the following measures, in combination, may significantly increase effective tax costs:

• a trustee-level 30% minimum tax
• denial of offsets to corporate beneficiaries.

While the Government has provided both roll-over relief and the EET regime as transition mechanisms, each option contains technical requirements and potential commercial implications that should be carefully considered well before the proposed 1 July 2028 commencement date.

SW can model the impact of the minimum tax on your current structure, assess whether existing arrangements remain fit for purpose, and evaluate the three practical paths — rollover, EET election, or accepting the minimum tax — including the interaction with State duty.

Please contact your SW advisors to discuss how these proposed changes may affect you or your clients.

Contributors

Ned Galloway | Associate Director, Tax

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