The Government’s exposure draft package for the proposed 30% minimum tax on discretionary trusts provides more options than many expected following the Budget announcement. But each comes with its own compromise.
While the exposure drafts remain open for feedback until 18 September 2026, and further administrative and integrity rules are still expected, the Government has now provided considerably more detail on how the regime is intended to operate. At a glance, the exposure drafts propose:
- A 30% trustee-level minimum tax would apply from 1 July 2028.
- Non-corporate beneficiaries would generally receive a non-refundable tax offset for minimum tax paid by the trustee.
- Franking credits may be refunded to the trustee of the trust.
- Corporate beneficiaries would not receive a tax offset, essentially doubling the effective rate of tax in relation to trust income distributed to companies.
- Eligible trusts could elect into a new Exempt Electing Trust (EET) regime instead of being subject to the minimum tax.
- Three years of expanded roll-over relief would support restructuring.
- New rules would address exclusions, fixed trust status and the treatment of franking credits.
On paper, the choices appear straightforward – pay the tax, enter the EET regime or restructure. However, in practice, each pathway will require a different compromise between tax, flexibility and commercial continuity.
1. Remain discretionary and pay the tax
For some groups, this may be the best commercial answer. Discretionary trusts can respond to changing family, business and investment circumstances and may remain important for asset protection and succession planning. The real question is whether that flexibility is valuable enough to justify the potential tax cost.
The impact of the minimum tax will vary. For example, if a trust typically distributes income to adult beneficiaries whose effective tax rates are below 30%, the proposed rules may increase the family’s overall tax bill. By contrast, where trust income is distributed to beneficiaries already paying tax at or above 30%, the additional tax cost may be significantly lower. The precise outcome will depend on the trust’s distribution pattern, the beneficiaries involved and the final legislation.
Franking credits relating to income subject to the minimum tax would first be applied against the trustee’s income tax liabilities. Any remaining qualifying credits could then be refunded to the trustee. That clarification will be welcomed by many advisers, as the treatment of franking credits emerged as one of the more significant concerns following the 2026-27 Federal Budget announcement.
For trusts holding significant portfolios of Australian shares, the practical outcomes will still depend heavily on how the various moving parts of the regime interact. The interaction between the minimum tax, beneficiary tax offsets, franking credits and existing integrity provisions may produce very different outcomes across otherwise similar trusts. As a result, the real issue is unlikely to be whether a trust earns franked income, but how that income flows through the broader structure.
2. Enter the EET regime
A trust that makes the relevant election and satisfies the ongoing conditions would become an EET and sit outside the proposed minimum tax regime. Broadly, the trustee would nominate beneficiaries and fix the proportions in which they would benefit from the trust’s income and capital. Those proportions would need to match and, together, account for 100% of the trust’s income and capital. Nominated beneficiaries would generally need to be capable of benefiting under the trust deed as at 1 July 2028, although they would not need to be family members.
The EET regime is not simply a tax concession. It is a trade-off – exclusion from the minimum tax in exchange for much less flexibility over future distributions. Changes to nominated beneficiaries would generally be limited to particular circumstances, such as death or relationship breakdown. This means trustees will need to look well beyond the trust’s current distribution strategy when considering whether to make the election.
The attraction is that an existing trust may be able to retain its assets and legal structure without undergoing a formal restructure. The Government has also indicated that making an EET election is not expected to trigger state or territory stamp duty.
However, timing will matter. The trust must exist on 1 July 2028 and the election could only be made for the 2028–29 income year. The trustee would need to notify the Commissioner in the approved form by the earlier of the date on which the trust’s return for that year is lodged and its lodgement due date. Only one EET election could be made for a trust and discretionary trusts established after 1 July 2028 could not access the regime.
For many family groups, this continuity may be the EET regime’s greatest attraction. The challenge is that a distribution strategy that works today may not remain appropriate as businesses grow, family circumstances change and wealth passes between generations.
A corporate beneficiary could still be nominated, provided it qualifies as an eligible company. Broadly, there must be no material discretionary elements affecting the rights or interests of the company’s members. Changes in company ownership, member rights, succession arrangements or the trust deed could therefore affect eligibility, creating restrictions at both the trust and company levels.
There may also be wider legal implications where the election narrows the practical class of beneficiaries who can benefit under the deed. Trustees should consider their fiduciary duties and the interests of beneficiaries who are eligible under the deed but are not nominated for the election. Legal advice may be required.
The position following Commissioner of Taxation v Bendel also remains relevant. Treasury’s earlier consultation paper raised the question of whether unpaid present entitlements owing to corporate beneficiaries should be brought within Division 7A, but the exposure drafts do not provide a final legislative response. For groups using corporate beneficiaries, this remains a clear “watch this space” issue.
The consequences of getting the election wrong could be significant. An election may be revoked voluntarily or automatically, including where the trustee does not distribute income and capital in the nominated proportions or a nominated company ceases to qualify. In the year of revocation, the beneficiaries would be treated for income tax purposes as not having been presently entitled to the relevant trust income and capital. The trustee would instead be assessed on all of the trust’s net income at the top marginal tax rate plus Medicare levy. The trust would then be subject to the minimum tax in later years and could not make another EET election.
Ultimately, the question may not be whether a trust can make an EET election, but whether the arrangement will remain workable over the longer term.
3. Restructure
A third pathway is to transfer assets into a structure that falls outside the minimum tax regime, such as a company or qualifying fixed trust. To facilitate this, the exposure drafts propose expanded roll-over relief for eligible restructures undertaken during the three-year period commencing 1 July 2027.
While the roll-over may address certain federal income tax consequences, it should not be mistaken for a complete solution. Duty outcomes will vary between states and territories, and relief may be available for some business transfers but not others. GST and wider commercial issues may also remain. Financing, contracts, licences, Division 7A balances, unpaid entitlements, tax losses, franking credits, asset protection and succession arrangements may all need separate attention.
Restructuring into a company may offer greater certainty around future tax outcomes, but it cannot replicate the flexibility that has made discretionary trusts such a popular vehicle for family groups and private businesses. A fixed trust structure may provide a workable alternative in some circumstances, but it will not necessarily align with the family, commercial or succession objectives that led to the discretionary trust structure in the first place. Early industry discussion suggests the question is becoming less about whether a restructure can occur and more about whether it should. Roll-over relief may create an opportunity to reconsider existing structures, but too much remains unsettled for restructuring to be viewed as the automatic answer.
Who may fall outside the regime?
The drafts provide broader and clearer exclusions than the initial announcement. Deceased estates and discretionary testamentary trusts established for genuine testamentary purposes would remain outside the regime. Distributions to registered charities and deductible gift recipients would also be exempt, while distributions to certain other tax-exempt entities would be exempt up to a cap to be settled following consultation. Certain categories of income would also remain outside the regime, including primary production income and specified income relating to vulnerable minors.
The drafts also introduce a new fixed trust definition aimed at ensuring commercial trust arrangements without meaningful discretionary features are not inadvertently swept into the regime. Widely held trusts, managed investment trusts, bare trusts and employee share trusts are all intended to remain outside the minimum tax.
This will come as a relief to many advisers and trustees. One of the key concerns following the Budget announcement was where the line would ultimately be drawn between discretionary trusts and more traditional commercial trust structures. While the exposure drafts provide far greater clarity than the original announcement, not every trust calling itself a ‘unit trust’ will automatically qualify. As always, the detail matters. The terms of the trust deed, the rights of beneficiaries and the extent of the trustee’s powers will ultimately determine whether a trust sits inside or outside the regime.
What should trustees do now?
The measure is not yet law and important administrative and integrity details remain outstanding. Immediate restructuring may therefore be premature.
That does not mean trustees should do nothing. Groups can identify potentially affected trusts, understand how income is currently distributed and model the broad effect of the three pathways. Particular attention should be given to trusts that distribute among adult family members, distribute to corporate beneficiaries, carry on a business, hold appreciating assets or receive significant franked income.
The exercise should start with purpose, not tax rate. Why does the trust exist? Which features still matter? What would be lost by restricting distributions or moving assets? The answers to those questions may ultimately be more important than the tax outcome itself.
Where to from here?
The exposure drafts provide more options, but not necessarily more certainty. Some trusts may accept the minimum tax as the price of flexibility. Others may embrace the EET regime or use the temporary roll-over relief to pursue a different structure altogether. Whatever path is ultimately chosen, the focus should be on ensuring the structure remains fit for purpose over the next decade, not just the next tax return.
The real decision is unlikely to be about tax alone. The lowest immediate tax outcome is not always the best long-term outcome. Flexibility, asset protection, succession planning, financing arrangements and family objectives may ultimately prove more important than the tax rate itself.
As consultation continues, taxpayers and advisers alike will be watching closely. To discuss how the proposed changes may affect your trust structure, business or family group, contact your local Moore Australia office.
This article is based on exposure draft legislation released for consultation. The draft rules are not yet law and may change before enactment. This article provides general information only and does not constitute tax, legal or financial advice.
