The Government announced proposed changes to the taxation of discretionary trust in the Federal Budget in May this year.
Last week they released draft legislation for consultation before it is finalised. These laws represent a major shift in the tax landscape and have an enormous impact on how Australians structure small businesses, landholdings, investments and their estates.
The main proposal is to impose a tax of 30% on the taxable income of discretionary trusts from 1 July 2028 (i.e. the 2029 financial year).
Credit for the tax paid will be a non-refundable tax offset for the beneficiary, except where they are a corporate beneficiary.
Trusts that are affected will be called “minimum tax trusts”.
Some trusts are excluded such as:
- Fixed trusts
- Special disability trusts
- Deceased estates
- Superannuation funds
- Testamentary trusts in existence at 12 May 2026
- Testamentary trusts from 1 July 2028 which only allow distributions to individuals or tax-exempt entities
Also, some types of income are excluded such as:
- Primary production income
- The share of income distributed to a non-resident
- The share of income distributed to vulnerable children
What is the impact of the 30% minimum tax?
A 30% tax rate may not sound particularly high, given an individual earning more than $45,000 is on a marginal tax rate of 30%. Therefore, if the beneficiaries of the trust all have income from other sources exceeding $45,000 (net of any available deduction), the minimum tax will not have any negative impact.
However, if some, or all, of the beneficiaries of the trust have income below $45,000, they will likely be worse off.
To illustrate, let’s assume a minimum tax trust distributes income to an individual adult resident beneficiary who has no other income. The table below shows the additional tax at each level of distribution (excluding Medicare Levy).
| Taxable Distribution | Normal Tax Income (A) | Tax with 30% Minimum Tax (B) | Additional Tax (B-A) |
|---|---|---|---|
| $100,000 | $20,252 | $30,000 | $9,748 |
| $150,000 | $36,301 | $45,000 | $8,699 |
| $200,000 | $55,601 | $60,000 | $4,399 |
| $230,000 | $69,101 | $69,101 | $0 |
This demonstrates that a beneficiary with no other income is worse off under the new tax up to a taxable income of nearly $230,000 (the exact breakeven point being $229,320).
How would franking credits be treated under the proposed trust tax rules?
Where a minimum tax trust receives franked dividends, the trust will be able to use the resulting franking credits to pay the 30% minimum tax. If the trust has more franking credits than needed for the tax, the excess will be refunded to the trust. No franking credit will flow through to beneficiaries.
Where a minimum tax trust distributes to another minimum tax trust, credit from the first trust can be used to pay the minimum tax for the second trust. However, if the tax of the first trust exceeds that of the second (e.g. because the second trust has a loss), the excess will not be refunded or carried forward.
What options could trustees have to avoid the new 30% minimum tax?
The Government is proposing two options for trusts to avoid the new 30% minimum tax. These are:
- A rollover to a different structure, available between 1 July 2027 and 30 June 2030.
- An election to only make distributions to nominated beneficiaries, available for lodgement with the 2029 tax return.
Both options come with their own complexities, pros and cons. As the law is still in draft form, we will not go into this detail but note neither option should be taken lightly. Trusts can choose either option but not both options.
They may also choose:
- Neither option and be subject to the minimum 30% tax
- To restructure using existing rollovers or concessions, such as the small business CGT concessions
What actions should I take now?
We are providing feedback through the consultation process and expect that there will be some changes to the draft legislation. Therefore, we suggest waiting until the law is enacted before making any decisions. Once the legislation is finalised, we will be able to advise you on your personal circumstances and the available options.
Contact us to discuss any of the above changes in further detail or find out how Brentnalls SA can help you.
The content provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.
