The Government has released the first tranche of exposure draft legislation for its proposed 30 per cent minimum tax on discretionary trusts. The new details provide affected families and businesses with a clearer picture of how the reforms may operate, including a new election that could allow some trusts to remain outside the minimum tax regime. However, this additional option brings greater complexity, long-term restrictions and potentially severe consequences if the election is revoked.
The proposed trust tax changes
The proposed changes to the taxation of discretionary trusts represent one of the most significant reforms affecting private groups in decades. When the measure was announced in the 2026–27 Federal Budget, its central feature was a proposed 30 per cent minimum tax on the taxable income of certain discretionary trusts from 1 July 2028. The Government also announced that transitional roll-over relief would be available from 1 July 2027 for qualifying taxpayers wishing to restructure out of a discretionary trust.
Treasury has now released the first tranche of exposure draft legislation. It provides considerably more detail about the minimum tax and proposed restructuring roll-over. Importantly, it also introduces another possible pathway for existing discretionary trusts: the proposed excluded election trust, or EET, regime.
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The 30% minimum tax
The exposure draft proposes that, from 1 July 2028, the trustee of an affected discretionary trust would pay a minimum of 30 per cent tax on the trust’s relevant taxable income. This would not replace the existing rules under which beneficiaries are assessed on the portion of trust income distributed to them. Instead, the minimum tax would operate at the trustee level, with an eligible non-corporate beneficiary potentially receiving a corresponding non-refundable tax offset.
The proposed beneficiary offset is important, but it would not operate like a refundable franking credit. Only non-corporate beneficiaries would be eligible to claim the offset. The offset would not be refundable and could not be used to reduce the Medicare levy. Corporate beneficiaries would not receive the offset. As a result, groups that currently distribute trust income to a private company could face particularly unfavourable outcomes, as the same income is effectively ‘double taxed’.
For example, if $100 of relevant trust income were distributed to a corporate beneficiary, the trustee could pay $30 of minimum tax while the company could also pay up to $30 of company tax on that income. This could result in an initial combined tax burden of up to 60 per cent, before considering any further tax when the company’s remaining profits are ultimately distributed to its shareholders.
This proposed treatment may significantly reduce the effectiveness of corporate beneficiary arrangements commonly used by private groups to retain profits for working capital, investment or debt reduction.
Treatment of franking credits and certain types of income
The draft also changes the treatment of franked dividends forming part of the trust income, such as where the trust owns shares in a company that pays franked dividends. Broadly, the trustee would use the franking credits against its minimum tax liability rather than passing those credits through to beneficiaries in the ordinary way. Where the amount of franking credits are more than the minimum tax payable by the trust, the excess franking credits will be refunded to the trustee.
Certain trusts and types of income would be excluded from the minimum tax regime. These include fixed trusts, special disability trusts, complying superannuation funds and certain deceased estates. Proposed income exclusions include taxable primary production income, qualifying income associated with certain vulnerable minors, qualifying distributions to charities and other exempt entities, certain payments subject to non-resident withholding tax and qualifying income of genuine testamentary trusts.
The precise application of these exclusions will require careful consideration of the trust, its deed, beneficiaries and sources of income.
A significant new alternative: the EET election
A notable development since the earlier Government announcements is the proposed excluded election trust (EET) regime. Under this regime, a discretionary trust that exists on 1 July 2028 and would otherwise be subject to the minimum tax could make a once-only election to be treated as an excluded election trust. While the election remains in force and its conditions are satisfied, the trust would not be subject to the proposed minimum tax.
The trust would remain legally structured as a discretionary trust. The EET nomination would not, by itself, remove the trustee’s legal discretion under the trust deed. However, for the EET treatment to operate and continue into the future, the trustee would need to nominate in the election the beneficiaries who are to receive the trust’s income and capital, specify each beneficiary’s fixed percentage, and confer present entitlements in accordance with those percentages for each income year.
The percentages allocated to a beneficiary’s income and capital must be the same. The nominated percentages must also allocate 100 per cent of both the trust’s income and capital. The trustee could not, for example, nominate one beneficiary to receive all income and a different beneficiary to receive all capital.
The trust would then need to follow those nominated percentages for each year the election remains in force. This could allow some trusts to remain in their current legal structure and avoid the immediate legal and commercial work associated with transferring their assets to another entity. However, it could also materially restrict the economic flexibility that is often a central reason for using a discretionary trust.
An EET nomination could generally be varied only following:
- the death of a nominated beneficiary; or
- a qualifying relationship breakdown involving nominated beneficiaries.
Changes in family circumstances, business participation, personal tax rates, financial needs or succession intentions would not, by themselves, allow the nomination to be changed.
Outside the limited variation rules for death and qualifying relationship breakdowns, the nomination could not simply be updated to reflect changing family or commercial circumstances. For example, a child born after 1 July 2028 or a company or trust established after that date could not later be added to the nomination. An existing beneficiary who was not originally nominated also could not ordinarily be added merely because the family’s circumstances or distribution intentions had changed.
The decision to make an EET election would therefore involve much more than considering the group’s current distribution pattern. Trustees would need to consider whether the nominated beneficiaries and percentages would remain suitable over the longer term, including as family ownership, business involvement, succession objectives and personal circumstances change.
The trust deed and broader trust law consequences would also require careful review. It cannot be assumed that every deed permits the trustee to confer the required income and capital entitlements in the nominated manner.
Where a company is nominated as a beneficiary, additional conditions would apply. Broadly, the company would need to have sufficiently fixed rights, without material discretionary elements affecting the economic rights of its members. This may require close consideration of the company’s constitution, share classes, dividend rights and ownership arrangements.
The election would also be a time-limited choice. It could only be made in the trust’s first income year commencing on or after 1 July 2028. A trust that did not elect during that period could not decide to enter the EET regime in a later year.
An EET election would also be an alternative to the proposed transitional restructuring roll-over. A trustee could not choose both pathways for the same trust.
Revocation of an EET could result in tax at 47 per cent
The consequences of an EET being revoked could be severe.
An EET election could be automatically revoked if the trustee did not confer the required income and capital entitlements in accordance with the nominated percentages. Revocation could also occur in other circumstances, including where certain nominated trusts or companies are wound up, a nominated company ceases to be eligible or particular changes occur in the ownership of a nominated company. The trustee would also have a limited ability to revoke the election voluntarily.
Under the exposure draft, revocation of an EET can result in the beneficiaries who were made presently entitled to the trust’s income or capital being treated, for income tax purposes, as never having been presently entitled for the relevant year of revocation. The trustee may instead be assessed on all of the trust’s net income at the top individual marginal tax rate plus Medicare levy, which is currently a combined rate of 47 per cent. The trust would also be subject to the proposed 30 per cent minimum tax in later years.
This is not merely a consequence affecting future years. That potential 47 per cent outcome reinforces why an EET election should not be regarded as a simple administrative alternative. If the regime is enacted in its current form, making the election would require careful initial review, appropriate trust and corporate documentation, and disciplined annual administration.
Restructuring may be possible, but the roll-over has limitations
The exposure draft also provides more detail about the proposed transitional restructuring roll-over. The roll-over would be available for qualifying asset transfers occurring between 1 July 2027 and 30 June 2030. It is intended to allow an affected discretionary trust to transfer assets to a structure with more fixed economic outcomes without triggering the immediate income tax and capital gains tax consequences that would ordinarily arise from the transfer.
The recipient could potentially be a company, an individual, a partnership or the trustee of another trust that is not itself a minimum tax trust. However, the proposed relief contains important limitations.
First, the trust would generally need to transfer all relevant assets to a single recipient by 30 June 2030. Limited exceptions are proposed for assets that cannot be transferred, certain primary production assets, assets reasonably required to discharge trust liabilities or meet winding-up costs, and low-cost assets. If all required assets were not transferred by 30 June 2030, the roll-over would become unavailable for all assets transferred as part of the restructure. Earlier assessments could then be amended to reverse roll-over relief already claimed.
The all-assets requirement may be difficult where a trust holds several businesses, properties and investment portfolios, particularly where those assets have different financing arrangements, commercial purposes or succession objectives.
Second, continuity and residency requirements would need to be satisfied. The conditions differ depending on the nature of the trust and recipient. Some important requirements for trusts that have not made a family trust election remain dependent on future legislative instruments.
Third, the recipient structure could not contain material discretionary elements affecting its members’ economic rights during the period beginning with the final required asset transfer and ending after the fourth subsequent income year.
If that requirement were breached, the Commissioner could reverse the roll-over treatment. A restructure into a company with discretionary dividend rights, such as class shares, may therefore not qualify.
Fourth, the recipient would generally inherit the trust’s existing tax costs. The roll-over would defer accrued tax consequences rather than eliminate them or provide the recipient with a market-value tax cost.
Most importantly, the proposed roll-over deals principally with the direct Commonwealth income tax consequences of transferring assets. It would not, by itself, resolve:
- stamp duty or land tax;
- GST;
- financing and security requirements;
- contractual and regulatory approvals;
- licences and leases;
- trust law and trustee-duty issues;
- asset-protection consequences;
- estate and succession planning;
- valuations; or
- legal and implementation costs.
For many private groups, these non-income-tax considerations may be as significant, or more significant, than the tax payable on the transfer.
The roll-over should therefore not be viewed as a complete restructuring solution. It is one potential concession that may support a broader restructure where that restructure is otherwise commercially, legally and financially appropriate.
It should also be remembered that the tax laws already contain certain other CGT rollovers, concessions and discounts that may be available to allow for a tax effective restructure. All these aspects should be sufficiently considered before determining the potential actions for a particular trust.
More legislation is still to come
Although the exposure draft provides considerably more detail than was announced in the Federal Budget, it does not represent the complete regime.
Further legislative tranches are expected to address the interaction of the minimum tax with CGT, residency, international taxation, administration, reporting and additional integrity requirements. The Government has also indicated that further targeted integrity rules may be introduced where considered necessary. Some elements of the current proposals also depend on future legislative instruments.
This means it would generally be premature for taxpayers to implement an irreversible restructure or make fundamental changes based solely on the present exposure draft. However, waiting for every legislative detail before commencing any work could leave insufficient time for considered decision-making and implementation before 1 July 2028. The appropriate response is to begin the analysis and preparation process now, while preserving flexibility as the legislation develops.
What should trustees do now?
The first step is not to select an EET, restructuring or minimum tax pathway. It is to understand the current structure and what the family or business needs it to achieve.
Trustees and private groups should take stock of the following matters.
1. How the trust has been used, is currently used, and may be used
Develop a clear picture of the trust’s role across three periods:
- Historically: Consider why the trust was originally established and how it has been used, including its past distribution practices, business and investment activities, use of corporate beneficiaries and financing arrangements.
- Currently: Identify the assets, businesses, investments, contracts, licences and liabilities presently held through the trust. Consider where its income is generated, how profits and capital are distributed or retained, who currently benefits from the structure and the commercial or family objectives it supports.
- In the future: Consider how the trust may need to operate over the coming years, including anticipated business growth, acquisitions, property or investment activity, asset sales, retirement, succession events and changes in family or business participation.
Understanding the trust’s past, present and expected future role will be important when assessing whether its existing flexibility remains valuable and comparing the consequences of the minimum tax, an EET election, restructuring or retaining the current arrangements.
2. The objectives the structure needs to support
Consider the objective the structure needs to achieve. These can be many and varied, and may include:
- asset protection;
- succession planning;
- estate planning;
- tax-effective income distributions;
- tax-effective capital distributions;
- retention and reinvestment of profits;
- access to working capital;
- intergenerational ownership;
- governance and control; and
- flexibility as family and commercial circumstances change.
3. The relative importance of those objectives
Different trusts are used for different reasons. The weighting given to flexibility, tax efficiency, asset protection, control, succession and simplicity will be crucial when comparing the available pathways. For some groups, accepting the minimum tax may ultimately be preferable to surrendering flexibility or incurring the cost and disruption of restructuring. For others, an EET may warrant consideration, despite the restrictions and ongoing compliance risks. In other cases, restructuring may provide a more sustainable long-term outcome and balanced approach for the family.
There is unlikely to be one answer that is suitable for every trust. Trustees should also bear in mind that the decisions made are likely to have significant irreversible implications for decades to come. Accordingly, making a quick decision on limited information, or thinking your trust’s situation is simple, is fraught with danger.
Start preparing for significant decisions during 2027
The exposure draft gives trustees more detail and more potential pathways. It does not make the underlying decisions simple. The EET regime is a significant addition, but it requires trustees to consider fixed income and capital outcomes that may have enduring family, tax and succession consequences. Revocation of the election can potentially expose the trust’s net income for a year to tax at 47 per cent.
Restructuring may also be possible, but the proposed roll-over is subject to substantial limitations and does not address many of the commercial, state tax, financing and legal issues arising from an asset transfer. Other rollovers in the tax law, or paying the tax to undertake a more flexible restructure, are genuine alternatives warranting detailed consideration.
Doing nothing may avoid immediate disruption, but could leave a trust exposed to the minimum tax and significantly different outcomes for corporate beneficiaries, franked dividends and other distributions.
Affected families and private groups should therefore use the coming months to understand their existing structures, clarify their future objectives and assemble the information needed for a detailed review.
During the 2027 calendar year, that preparatory work should progress into a proper assessment of the available pathways and, where appropriate, planning towards implementation. The work may involve reviewing trust deeds and company constitutions, modelling future tax outcomes, assessing duty and other transaction costs, examining financing and contractual restrictions, and determining whether a restructure can be legally and commercially implemented.
The timing will require balance. Acting before sufficient legislation is available could create unnecessary tax, duty, legal or commercial consequences. Leaving the analysis and planning until shortly before 1 July 2028 could equally mean that the available options cannot be properly considered or implemented in time.
If you use a discretionary trust to operate a business, hold investments or manage family wealth, speak with your William Buck advisor about how the proposed changes may affect your structure and what preparatory work should begin now.
