Back in the Federal Budget, the government announced plans to introduce a 30% minimum tax on discretionary trusts. 

At the time, there were more questions than answers. 

Now we’ve seen the consultation paper, and while there is still a long way to go before any legislation is introduced, we have a much clearer picture of how the Government intends these rules to operate.

The important thing to remember? 

These rules are still not law. 

The Government is consulting with industry until 31 July 2026 before drafting legislation, so there is still time for changes.

That said, the consultation paper gives us a good indication of where things are heading. 

 

what’s changing? 

 

The government’s objective hasn’t changed. 

It wants to reduce the tax flexibility available through discretionary trusts by introducing a minimum 30% tax on trust income from 1 July 2028.

The consultation paper fills in a number of the gaps that were left after Budget night, particularly around: 

  • how the minimum tax will work
  • who will be affected
  • how beneficiaries will be treated
  • proposed restructuring relief
  • what exceptions may apply.

Some of the details are exactly what we expected. 

Others are likely to have a much bigger impact than many people anticipated. 

 

bucket companies are off the menu 

 

One of the biggest changes relates to corporate beneficiaries, commonly referred to as bucket companies. 

Under the proposal, companies will not receive the minimum tax offset paid by the trustee. 

In simple terms, that largely removes the tax benefit of distributing income to a bucket company in the way many trust structures currently operate.

For many clients, this will be one of the most significant practical changes. 

The result is that there will be many who relied on bucket companies looking to restructure their business and/or investments from trusts to companies. 

 

franking credits could become trapped 

 

Another area receiving plenty of attention is franking credits received from a trust as a shareholder. 

The consultation paper allows trustee to use available franking credits before paying the new minimum 30% tax. 

However, excess franking credits will no longer flow through to beneficiaries in the same way they do today. The classic example of when this will be relevant is when a trust owns the shares in the trading company and potentially incurs deductions in the trust [such as interest on a loan to buy the shares] which it has historically offset against dividend income. Based on the proposals, these deductions could create excess franking credits in the trust. 

Treasury is currently seeking feedback on whether those excess credits should be refunded to the trustee or carried forward for the trust to use in the future. One thing that is clear, is that they will not flow through to the beneficiaries to use in their individual names.

Until that question is resolved, there remains uncertainty for many trust structures that hold significant franked investments [such as shares in a trading company]. 

 

is it really a 30% minimum tax? 

 

Not exactly. At a trust level yes, but by the time is it distributed to individuals, not exactly. 

The consultation paper confirms the minimum tax offset cannot be used to reduce a beneficiary’s Medicare levy. 

That means many individuals could effectively face a combined tax outcome closer to 32%, rather than a flat 30%.

It’s a subtle detail, but an important one. 

 

many may consider restructuring 

 

Recognising the impact these changes could have, the Government has proposed a three-year rollover relief period beginning 1 July 2027. 

The intention is to allow discretionary trusts to transition into other structures, such as companies or fixed trusts, without triggering immediate income tax consequences.

That sounds positive. 

However, there are still unanswered questions. 

One notable omission is how state-based stamp duty will interact with these restructures. Depending on the assets involved, that could become a significant cost that sits outside the Federal tax rules. 

As always, the structure itself is only one part of the equation. 

 

there are still important carve-outs 

 

The consultation paper also confirms some important exclusions. 

These include: 

  • primary production income
  • charitable trusts
  • complying superannuation funds
  • deceased estates
  • certain income distributed to vulnerable minors
  • discretionary testamentary trusts established for genuine testamentary purposes [subject to the proposed conditions]

Exactly how these exclusions will operate will depend on the final legislation. This could be interesting for trusts that earn a mix of primary production and say investment income. 

 

don’t make changes just yet 

 

This is probably the most important takeaway. 

We’ve now got far more detail than we had on Budget night, but this is still a consultation paper. 

Treasury is actively seeking feedback from industry before legislation is drafted, which means aspects of the proposal may still change.

If you currently operate through a discretionary trust, this is a time to understand what these proposals could mean -not necessarily to restructure immediately. 

The right structure depends on far more than tax. 

Asset protection, succession planning, commercial flexibility, financing and future growth all need to be considered alongside any tax outcome.

As we’ve said from the beginning, the devil will be in the detail. 

 

final thoughts 

“In my opinion, discretionary trusts still have a very important role to play in structuring your entity group – but it will change how we use them and where we want deductions and or assets to sit.

One thing is very clear; there will be more companies formed and the government will be happy about that because they are so much more regulated than trusts.”

These proposals represent one of the biggest potential changes to discretionary trusts we’ve seen in years. 

Whether every aspect survives consultation remains to be seen, but business owners should be paying attention. 

 

we’re here to help 

If you’d like to understand how these trust tax changes may impact you or your business, our team is here to help. 

Reach out to your usual contact at businessDEPOT, email oneplace@businessdepot.com.au or give us a buzz on 1300 BDEPOT. 

 

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