Budget changes - Minimum Tax on Discretionary Trusts
The Federal Government has announced a proposal to introduce a minimum tax rate of 30% on discretionary trust income, effective from 1 July 2028. This represents a significant change to how discretionary trusts are taxed and how income distributions may be used within family and business structures.
What Is Changing?
From 1 July 2028, trustees of discretionary trusts will be required to pay a minimum tax of 30% on the trust’s taxable income, regardless of which beneficiaries ultimately receive that income.
Key features of the proposal include:
The trustee pays the tax, not the beneficiary
Individual and non-corporate beneficiaries receive a non‑refundable tax credit for the tax paid by the trustee
The 30% rate operates as a minimum “floor” tax, rather than a prepayment of tax
Corporate beneficiaries are excluded from receiving credits, consistent with existing integrity rules.
How This Differs from the Current System
Under the current rules:
Trust income is generally taxed in the hands of beneficiaries
If tax is paid by the trustee on behalf of a beneficiary, it can often be refunded when the beneficiary lodges their tax return
Under the proposed minimum tax:
The 30% tax cannot be refunded, even if the beneficiary’s marginal tax rate is lower
This makes the tax outcome final, similar to a withholding tax
Key takeaways:
This change materially reduces the effectiveness of discretionary trusts for distributing income to lower‑income family members, adult children, or retirees.
No grandfathering relief will apply. This means existing discretionary trust structures will be captured under these new rules from 1 July 2028.
However, discretionary trusts can still be effective for distributing income across multiple beneficiaries who are taxed at or above the 30% marginal tax rate, particularly for asset protection, succession planning and managing family income at comparable tax rates.
Practical Impact on Beneficiaries
The 30% minimum tax rate broadly aligns with the marginal tax rate that applies to taxable income between $45,000 and $135,000.
As a result:
Beneficiaries with taxable income below $45,000 may effectively pay more tax on trust income than on their other income
Beneficiaries who would otherwise pay little or no tax cannot recover excess tax paid by the trustee
Income splitting outcomes will be significantly narrowed
This is a deliberate policy outcome aimed at reducing the tax arbitrage traditionally available through discretionary trusts.
Impact on "Bucket Companies"
The minimum tax is intended to curtail the use of bucket companies, by preventing trusts from avoiding the 30% floor tax. The details of how this will apply to corporate beneficiaries of trusts are still to be confirmed.
Timing and Cash‑Flow Implications
The Government materials suggests the tax will be collected earlier, likely through trustee‑level withholding.
In practice, this means:
The trustee may need to withhold and remit tax to the ATO when making distributions
Tax may be paid before beneficiaries lodge their personal tax returns
Trust cash flow and distribution planning will become more important
This approach is consistent with existing trustee tax mechanisms that apply to non‑resident beneficiaries or beneficiaries under a legal disability.
What You Should Be Thinking About Now
Although the changes do not commence until 1 July 2028, they may have significant long‑term implications. You may wish to consider:
Whether discretionary trusts remain appropriate for your circumstances
The impact of a 30% minimum tax on distributions to lower‑income beneficiaries
Cash‑flow implications of trustee‑level tax payments
Whether restructuring during the proposed rollover relief period may be beneficial
Early review is particularly important for family groups with multiple trusts, business income flowing through trusts, or succession planning strategies already in place.
Further important information
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Fixed trusts and widely held trusts (including fixed testamentary trusts)
Complying superannuation funds
Special disability trusts
Deceased estates
Charitable trusts
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Primary production income
Certain income relating to vulnerable minors
Income subject to non‑resident withholding tax
Income from assets of discretionary testamentary trusts that existed at the time of the announcement
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Recognising the impact of these changes, the Government has announced expanded rollover relief for a three‑year period from 1 July 2027.
This is intended to support:
Small businesses and family groups
Trustees who wish to restructure out of discretionary trusts
Transitions into companies or fixed trusts, without triggering immediate tax costs
While details are still limited, this relief may provide an important planning window for family groups.
As your trusted advisors, we will work with you to optimise your position.
This information is general in nature and based on Budget announcements and factsheets. Final outcomes will depend on legislation yet to be passed.