Overview
The Australian Government has released a consultation paper setting out how its proposed 30% minimum tax on discretionary trusts could operate. Announced in the 2026–27 Federal Budget and proposed to commence from 1 July 2028, the measure would represent one of the most significant changes to trust taxation in decades.
While Treasury has framed the proposal as a response to income-splitting concerns and a way to improve equity within the tax system, the implications extend far beyond a new tax rate. By introducing trustee-level taxation as a general feature of the regime, the proposal challenges the long-standing treatment of discretionary trusts as flow-through vehicles.
The central question raised by the consultation paper is therefore not whether integrity concerns exist, but whether a broad trustee-level minimum tax strikes the right balance between addressing those concerns and preserving the legitimate benefits of trust structures. For family groups, SMEs and advisers, the proposal may represent not only an anti-income-splitting measure, but the beginning of a broader rethink of the role discretionary trusts play within Australia’s tax system.
Key proposed changes
1. Trustee-level minimum tax
The core feature of the proposal is a 30% minimum tax imposed at the trustee level. Beneficiaries would continue to be assessed on trust distributions, but the tax paid by the trustee would operate as a non-refundable offset. As a result, beneficiaries with tax rates above 30% would pay additional tax, while those below 30% would generally be unable to recover any excess tax paid by the trustee.
The broader significance lies in the shift in policy approach. Rather than trustee taxation being the exception, it would become a core feature of how discretionary trusts are taxed.
2. Corporate beneficiaries
One of the most controversial aspects of the proposal is the treatment of corporate beneficiaries, or “bucket companies”. Under Treasury’s preferred approach, corporate beneficiaries would not receive a credit for tax paid by the trustee, reflecting concerns that trust income can currently be channelled through companies to cap tax at the corporate rate.
The implications could be significant. Bucket companies have long been used by family groups and SMEs to retain profits, manage cash flow and support reinvestment. If enacted, the proposal could substantially change the attractiveness of these arrangements and may, depending on the final design, give rise to concerns about economic double taxation.
3. Franking credits and distributions
Treasury is also seeking feedback on how franking credits should operate under the proposed regime, including whether they can offset trustee-level tax, how excess credits should be treated, and the interaction with distributions to tax-exempt entities.
These issues are particularly important for trusts deriving significant franked dividend income. For many stakeholders, one of the most significant practical questions will be whether refundable franking credits effectively become non-refundable when earned through discretionary trust structures. The answer could have a material impact on investment trusts and family groups with substantial share portfolios.
4. Exclusions and carve-outs
The proposal includes several exclusions, reflecting Treasury’s intention to target discretionary trusts used for income-splitting rather than all trust structures. Excluded entities are expected to include:
- Fixed trusts and widely held trusts;
- Superannuation funds;
- Charitable trusts and deceased estates;
- testamentary trusts (established under a will); and
- Special disability trusts.
Excluded income is expected to include:
- Primary production income;
- Income relating to vulnerable beneficiaries; and
- Income subject to non-resident withholding tax.
The scope and operation of these exclusions will be critical in determining whether the measure remains appropriately targeted and avoids unintended consequences.
5. Expanded rollover relief
The Government has proposed expanded rollover relief from 1 July 2027 to support taxpayers wishing to restructure out of discretionary trust arrangements. However, the effectiveness of the measure will depend on its final design and whether state and territory duty relief is also available. Without broader relief, restructuring may remain commercially unattractive for many family groups and SMEs.
6. Interaction with Division 7A and Bendel
The consultation paper also acknowledges the High Court’s decision in Commissioner of Taxation v Bendel and references the previous Government’s unenacted proposal to bring unpaid present entitlements within the Division 7A regime. This suggests the proposed 30% minimum tax should not be viewed in isolation. Rather, it forms part of a broader policy focus on trusts, companies and the integrity rules that apply within private groups.
Where is this really going?
For decades, discretionary trusts have been a cornerstone of many family and SME structures, valued for their flexibility, asset protection and succession planning benefits.
It is that same flexibility, however, that lies at the centre of the Government’s concerns. Treasury argues that discretionary trusts can facilitate tax outcomes that are not available to ordinary salary and wage earners, creating what it sees as an integrity gap within the tax system.
A more targeted measure could have focused on certain income-splitting arrangements. Instead, the consultation paper adopts a much broader framework. Whether that broader approach is necessary to address the perceived integrity concerns, or sweeps in arrangements beyond the intended target, is likely to be a central issue during consultation.
The proposal also has the potential to influence how family groups and privately owned businesses structure their affairs in the future. If enacted, some taxpayers may revisit the relative attractiveness of companies, fixed trusts and other structures. Yet structural change is rarely straightforward. Tax outcomes must be weighed alongside duty consequences, asset protection objectives, succession planning considerations, financing arrangements, contractual obligations and family governance issues. What works for one group may be entirely inappropriate for another.
Who is most affected?
The impact of the proposal will depend on how a trust is used, who benefits from distributions, whether corporate beneficiaries are involved and the nature of the trust’s income.
- For individuals and family groups – distributions to beneficiaries taxed below 30% may become less effective, potentially increasing the overall tax burden.
- For structures using corporate beneficiaries – the proposed denial of credits could significantly reduce the attractiveness of bucket company arrangements and prompt a reassessment of existing structures.
- For small businesses – while Treasury expects most small businesses to remain unaffected, those relying on discretionary trusts for tax planning, reinvestment or family group structuring may need to carefully model the impact.
- For trustees and advisers – the proposal would add complexity, particularly around minimum tax calculations, credit allocation, franking credits and corporate beneficiary arrangements.
Much will depend on the final legislative design, but for affected taxpayers the consultation paper provides a clear signal that existing trust arrangements may warrant closer review.
Going forward
For now, the most prudent course is preparation rather than action. Taxpayers should seek to understand their potential exposure, but until the consultation process is completed and the final legislation is known, caution is warranted.
This is not a minor integrity measure or technical amendment. It has the potential to fundamentally reshape the taxation of discretionary trusts, with key questions still unresolved around corporate beneficiaries, franking credits, rollover relief and the scope of proposed exclusions. The strong reaction from professional and industry groups suggests the consultation process is likely to be closely contested before legislation is introduced.
The real question is no longer whether change is coming, but how far it will go. The answer will have significant implications for family groups, privately owned businesses and the advisers who support them. As Treasury works through stakeholder feedback, the challenge will be finding a balance between integrity, simplicity and the continued viability of long-established trust structures. Moore Australia will be watching that debate closely.
