30% Minimum Tax for Trusts – DRAFT LEGISLATION RELEASED
The May 2026 Federal Budget announced sweeping changes to the tax landscape for SME’s and private groups, including the proposed 30% minimum tax for discretionary trusts that is proposed to commence from 1 July 2028.
What has changed since the Budget?
However, in what has become an all too often occurrence with these proposed changes, the lack of consultation both before and after the Budget changes were announced has led to another raft of changes to what was originally proposed.
In the May Budget announcement, it was proposed that from 1 July 2028 trustees of a discretionary trust will be required to pay a minimum tax of 30% on the trust’s taxable income.
Which trusts are affected?
The minimum tax only applies to discretionary trusts, and not to fixed trusts, widely held trusts, special disability trusts, deceased estates, charitable trusts, or complying superannuation funds.
Since the Budget announcement, the Government later announced that “genuine” testamentary trusts would also be excluded. Essentially that means that income derived by the testamentary trust from assets that originated directly from the deceased estate will not be subject to the minimum tax.
What counts as a fixed trust?
The recently released draft legislation then provided more detail on what is a fixed trust for the purposes of the exclusion. Again, that detail is lacking in that it merely draws on existing ATO guidance on what is a fixed trust (PCG 2016/16) wherein a trust is a fixed trust if:
- the trust’s beneficiaries have fixed entitlements to all of the income and capital of the trust; or
- there are no material discretionary elements affecting the entitlements or rights of the trust’s beneficiaries.
The draft legislation sets out a non-exhaustive list of matters that may suggest that there are no material discretionary elements such as powers to vary entitlements or rights or issue new entitlements or rights but only where those powers “significantly” vary or affect existing beneficiaries.
This definition still leaves too much uncertainty and room for interpretation in our view and will no doubt require the review and possible variation of many Unit Trust deeds to determine whether they can meet the fixed trust exclusion.
Are any types of income excluded?
The minimum tax will not apply to primary production income, certain income relating to vulnerable minors and amounts already subject to non-resident withholding tax.
How would the 30% minimum tax work?
The trustee will be liable to pay the minimum tax, with beneficiaries including their full share of the trust’s taxable income in their tax return. Beneficiaries, with the exception of corporate beneficiaries, will be able to claim a nonrefundable credit for the minimum tax paid by the trustee. Unfortunately, even after some intense lobbying, the Government has not sought to directly address the punitive double taxation of corporate beneficiaries by allowing a refundable tax credit but has attempted to do so via an election.
The proposed Excluded Election Trust (EET)
The Excluded Election Trust (EET) was designed to enable existing trusts to remain as they are and not be subject to the 30% Minimum Tax.
The stated intention is to enable the trust to avoid restructure costs, including state duties and the disruption of moving assets or a business from the trust to another entity.
It would also enable the trust to distribute to a corporate beneficiary without being subject to the double taxation of trust AND corporate tax without offset.
Whilst there appears to be significant argument on whether state duties will be avoided, the key condition is a fixing of future income and capital distributions from the trust based on the beneficiaries of the trust that are in place as of 1 July 2028.
Example: how the EET election could restrict future distributions
For example, as at 1 July 2028 the beneficiaries of the Trust include Mum, Dad, 1 adult child and one child under 18 and a corporate beneficiary.
The Trust makes an election to distribute 25% of income and capital to Mum, Dad and the Adult child, with the remaining 25% to the corporate beneficiary.
This sets in stone this distribution pattern from 30 June 2029 until the death (or divorce) of one of the adult beneficiaries. Any changes to the distribution pattern will trigger a revocation of the election (forever) and the trustee will be taxed on that year’s net income at 47%. The 30% minimum tax will then kick in from the following year.
As a result, you can never add the other child as a beneficiary when they reach 18, grandchildren cannot be included in future years, the same 25% of capital must be distributed to the corporate beneficiary, trapping that in the corporate structure and the trustee is unable to exercise any discretion where one of the nominated beneficiaries is in greater or lesser need or risk in a particular year.
Many trust lawyers are of the view that making this election fetters a trustee’s discretion thereby putting the trustee in breach of their fiduciary duties under the Trust Deed.
It is safe to say that this attempt to “fix” the original proposal is destined for more changes before it makes its way into the final legislation.
What if a trust does not make the EET election?
Finally, if the Trust is not excluded and does not want to make the election to be an EET, an expanded rollover relief will be available from 1 July 2027 to assist small business “and others” that wish to restructure their affairs out of discretionary trusts and into other ownership structures.
The rollover relief will be available for 3 years from 1 July 2027 and will provide relief from income tax and capital gains tax consequences.
Importantly, this rollover requires ALL trust assets to be disposed of over a 3-year period from 1 July 2027 to 1 July 2030, with written notifications required to be made to the ATO.
A four-year clawback of the rollover is also provided for where the transferee has material discretionary rights or interests that, in the ATO’s view, change the continuity of ownership of the underlying assets. Think class or Alphabet shares on issue from a company.
As has been widely discussed, state duties will still apply where the rollover is chosen and in WA, the transfer duty cost will continue to be punitive for those trustees that choose to use this rollover to move assets out of trusts.
Where things stand now
Again, we expect more changes to be announced as the Government continues its “whack a mole” approach to tax reform.
The reaction from our client base has been pragmatic as everyone is aware that there will be further changes as the legislation is debated in Parliament.
Whilst we are fielding some calls on the best business or investment structure post these and the new CGT rules, it is important to carefully consider the final form of these rules and if the CGT changes are anything to go by, there will be a number of further refinements before the final legislation is introduced into Parliament. In our experience, in tax, the early bird rarely catches the worm!
Want to discuss the proposed Trust Changes?
If you would like to discuss any of these proposed Trust Changes, please contact your Maroo Advisory advisor.
