Discretionary trusts, commonly used by Australian families and small businesses, are a step closer to facing a 30% minimum tax on relevant income.

Draft legislation released in September 2026 sets out how the proposed regime would operate from 1 July 2028. The measure is not yet law, but the exposure draft provides a clearer picture of the potential tax treatment, available exclusions and restructuring options.

Discretionary trusts allow trustees to determine how income is distributed among eligible beneficiaries. The proposed rules would not prevent these structures from continuing to operate, but they would change the tax outcome where the effective tax paid on relevant trust income falls below 30%.

Where the Measure Stands

The proposed minimum tax was announced as part of the 2026–27 Budget.

A consultation process followed, and exposure draft legislation was subsequently released in September 2026.

The measure remains subject to the legislative process and is not yet law.

The draft package deals with several key areas, including the minimum tax calculation, exclusions, restructuring relief, an elective trust regime and treatment of excess franking credits.

If enacted in its current form, the new rules would begin from 1 July 2028.

How the 30% Top-Up Would Work

The proposed regime would not automatically impose a flat 30% tax on all income earned through a discretionary trust.

Instead, the trustee would generally be assessed on the difference between the tax already attributable to relevant trust income and the 30% minimum level.

If the effective tax attributable to that income is already 30% or more, no additional minimum tax would arise.

Where the effective tax is below 30%, the trustee would be responsible for paying a top-up amount.

This creates a tax floor rather than a new standalone flat-rate regime.

A Simple Example

Consider a hypothetical trust that distributes income to an individual beneficiary.

Assume the trustee pays $12,000 of minimum tax in relation to that beneficiary's share.

If the beneficiary's personal tax liability on their total income is $9,000, a non-refundable offset would generally be available for the minimum tax attributed to them.

The $9,000 tax liability could be reduced to nil.

However, because the offset is non-refundable, the remaining $3,000 would not result in a cash refund.

This means the effective tax burden on the relevant trust income would still be maintained at the minimum level.

The example is illustrative only.

Non-Corporate and Corporate Beneficiaries Are Treated Differently

The draft provides a non-refundable tax offset for eligible non-corporate beneficiaries.

This helps prevent the same income from being taxed twice where the trustee has already paid the minimum tax.

However, the offset cannot reduce the beneficiary's tax below zero.

Corporate beneficiaries would be treated differently under the draft.

They would not receive the same offset for minimum tax paid at trustee level.

This means the tax outcome for trusts distributing to companies could differ materially from distributions made to individual beneficiaries.

The final treatment will depend on the legislation ultimately enacted.

Excess Franking Credits

The draft also addresses franking credits linked to income affected by the minimum tax regime.

Excess franking credits associated with relevant minimum-tax income may be refundable under the proposed framework.

This is intended to ensure that the minimum tax rules interact appropriately with Australia's imputation system.

The final outcome will depend on the detailed wording of the legislation and the nature of the trust's income.

What Is Excluded From the Proposed Regime?

The draft contains several important exclusions.

Charitable trusts, special disability trusts and superannuation funds are outside the proposed minimum tax framework.

Certain primary production income is also excluded.

Income connected with vulnerable minors can receive separate treatment.

Deceased estates and discretionary testamentary trusts established for genuine testamentary purposes are also excluded.

Distributions to eligible charitable and tax-exempt entities can also fall outside the minimum tax, subject to the applicable conditions and limits.

Fixed trusts are generally outside the regime because they do not involve the same discretionary allocation of income.

Why the Primary Production Exclusion Matters

The primary production exclusion may be significant for farming and agricultural businesses that use trust structures.

Many family farming groups operate through discretionary trusts for succession planning, asset ownership and income distribution.

Where income qualifies for the primary production carve-out, it may remain outside the proposed minimum tax.

However, the tax treatment will depend on how the income is classified and whether it satisfies the final legislative requirements.

This means trusts with mixed income streams may need to distinguish between excluded primary production income and other amounts potentially caught by the regime.

Rollover Relief Offers One Exit

The draft provides a proposed restructuring window from 1 July 2027 to 30 June 2030.

During that period, qualifying trusts could restructure into other entities, including companies or fixed trusts, with access to rollover relief.

The purpose of the rollover is to reduce the immediate tax cost of changing legal structure.

However, tax rollover relief does not necessarily remove every cost associated with restructuring.

Other taxes and transaction costs may still need to be considered depending on the assets involved and the jurisdiction.

The restructuring pathway is therefore broader than a simple tax calculation and may involve changes to ownership, control and future distribution rights.

The Excluded Election Trust Option

A second option under the draft is an excluded election trust.

Instead of restructuring, an eligible trust could elect to lock in its beneficiaries and their respective shares of income and capital.

The election would require the trust to nominate beneficiaries and allocate 100% of the relevant income and capital interests between them.

The beneficiaries' income and capital proportions would generally need to align.

This effectively converts the trust from a flexible discretionary structure into one with predetermined economic interests.

The Trade-Off Is Flexibility

The excluded election trust pathway preserves the legal trust structure but substantially reduces discretionary flexibility.

Once beneficiaries and their shares are fixed, future distributions need to remain consistent with the elected proportions.

An inconsistent distribution can trigger revocation of the election.

Once revoked, the election generally cannot be restored.

This means administrative or operational errors could have significant consequences.

Trustees considering this pathway would therefore need strong record-keeping and governance systems.

Existing Trusts and the Timing of the Election

The excluded election trust option is proposed to be available only to trusts that meet the relevant existence requirements at the commencement date.

The election is expected to be made during the 2028–29 financial year under the draft framework.

That gives existing trusts a limited decision window after the minimum tax begins.

Trustees may therefore need to compare three broad options: remain discretionary and potentially pay the minimum tax, restructure into another entity, or elect to lock in beneficiaries and their shares.

Questions Still Remain

The exposure draft does not settle every implementation issue.

Some concepts used to identify discretionary features require further detail.

Collection mechanisms may also be addressed through additional legislation or administrative rules.

The interaction with other tax provisions, including rules governing private company payments and loans, may also require further clarification.

These unresolved areas mean the practical impact can vary significantly between trusts depending on their assets, beneficiaries, income sources and existing structures.

Why the Choice of Structure Matters

The proposed minimum tax changes the trade-off between flexibility and tax outcomes.

A traditional discretionary trust allows a trustee to respond to changing family or business circumstances.

The excluded election trust option preserves the entity but restricts that flexibility.

Restructuring into a company or fixed trust creates a different legal and tax profile.

Remaining within the discretionary trust regime preserves flexibility but may result in a minimum 30% tax outcome on relevant income.

The appropriate outcome therefore depends on the structure and objectives of each trust rather than the minimum tax rate alone.

Key Dates to Watch

The proposed restructuring window would open on 1 July 2027.

The minimum tax is proposed to begin on 1 July 2028.

The excluded election trust option would operate under the timetable set out in the final legislation.

The proposed rollover period would close on 30 June 2030.

Until the legislation passes, however, these dates remain part of a proposed framework rather than final law.

The key next step is the introduction of final legislation following the consultation process.