Client Note
Discretionary Trusts Update
Treasury's latest version of the new trust tax reduces some restructure pain but adds complexity, rigidity and risk
Relevant to family groups, business owners and investors using discretionary trusts
Core Message
Treasury has released exposure draft legislation for the proposed 30% minimum tax on discretionary trusts from 1 July 2028.
Following criticism of the original proposal, affected trusts may be able to choose between paying the minimum tax, restructuring into another entity, or making a new election that fixes future distributions to nominated beneficiaries.
This is presented as a practical compromise. In reality, it may replace one blunt rule with several highly technical regimes and severe consequences when trustees get the paperwork or distributions wrong.
What is Now Proposed?
• 30% minimum tax: The trustee would pay a top-up tax so relevant trust income bears tax of at least 30%.
• Non-refundable credit: Non-corporate beneficiaries receive a credit for the trustee's 30% tax, but it cannot be refunded or carried forward. If a beneficiary's own tax liability is lower than the credit, the excess is simply lost. This is the single feature that determines who actually bears the extra tax.
• Limited exclusions: Fixed trusts (the exposure draft newly confirms this covers widely held trusts, managed investment trusts, bare trusts and employee share trusts), complying superannuation entities, special disability trusts and deceased estates are outside the regime. Certain primary production, vulnerable minor, charity, non-resident withholding and genuine testamentary trust income is also excluded. Distributions to registered charities and deductible gift recipients are fully exempt; distributions to other tax-exempt bodies such as sporting clubs are exempt only up to a cap still to be finalised.
• Election option: A trust existing on 1 July 2028 may elect out of the minimum tax by nominating beneficiaries and fixed percentages for both income and capital.
• Restructure option: A three-year roll-over from 1 July 2027 to 30 June 2030 may allow a trust to move assets into a company, fixed trust or another eligible structure without immediate income tax consequences, if detailed conditions are met.
• More legislation to come: Treasury says later tranches will deal with administration, reporting, CGT, residency, international tax and further integrity rules.
The New Election: Flexibility in Name Only
The election is the centrepiece of Treasury’s revised approach. It avoids the 30% minimum tax without forcing an immediate restructure, but only by giving up much of the flexibility that defines a discretionary trust.
• The election can only be made for a trust that exists on 1 July 2028 and must be made in its first income year starting on or after that date.
• The trustee must nominate beneficiaries and allocate 100% of both income and capital among them.
• Each beneficiary’s income percentage must equal their capital percentage.
• The same entitlements must be followed each year while the election remains in force.
• The nomination generally cannot be varied except for death or a formally recognised relationship breakdown.
• The election and the restructuring roll-over are mutually exclusive.
The legal discretion technically remains, but the tax system heavily penalises its use. That distinction may satisfy legislative drafting, but it does little for families that rely on their trust to respond to changing needs, business risks, marriages, health issues, succession plans and uneven support between generations.
The Practical Choice
Pay the minimum tax: Keep the trust flexible but accept a 30% tax floor and a new layer of offsets and reporting.
Make the election: Avoid the minimum tax but lock in nominated beneficiaries and matching income and capital percentages.
Restructure: Move to a more fixed structure, subject to strict roll-over conditions and possible non-income-tax costs.
Who is Likely to be Affected?
| Family Group Position | Likely Impact |
|---|---|
| Distributions mainly to individuals above 30% | The immediate extra tax may be limited, but administration still becomes more complex. |
| Distributions to lower-income adult beneficiaries | The 30% floor may reduce or remove the benefit of lower personal tax rates. |
| Corporate beneficiaries | Companies do not receive the proposed beneficiary offset. The rules are designed to prevent the minimum tax being neutralised through corporate distributions. The exposure draft confirms intended double tax outcome of up to 62.9% total tax. Where a trust makes the newly announced “fixed distribution election” it should be possible to avoid this terrible outcome. |
| Trusts needing flexible family distributions | The election may be commercially unsuitable because beneficiaries and percentages are largely locked in. |
| Trusts holding long-term assets or businesses | Restructuring may be costly and risky despite income-tax roll-over relief. |
| Testamentary and primary production arrangements | Important exclusions exist, but the detailed conditions and integrity rules must still be checked. |
Why the Revised Design Still Concerns Us
· It changes trust taxation through several overlapping regimes rather than one clear rule.
· It pushes trustees toward fixed outcomes that may not reflect changing family and commercial circumstances.
· It gives administrative mistakes consequences that are out of proportion to the underlying conduct.
· It relies heavily on approved forms, future legislative instruments and later integrity rules that are not yet available.
· It transfers substantial implementation and professional risk to trustees and advisers.
· It proposes making directors of corporate trustees personally, jointly and severally liable for the minimum tax, mirroring the family trust distribution tax model, alongside a Commissioner right of reimbursement from trust assets.
· It asks families to make long-term structural decisions before the full regime has been designed.
Immediate Considerations
· Do not restructure or make long-term decisions based only on the exposure draft.
· Review actual distribution patterns, including companies, adult children, other trusts and charitable beneficiaries.
· Check whether flexibility remains genuinely important for succession, asset protection and family support.
· Improve trust resolutions, beneficiary records, loan records and year-end procedures now.
· Treat any future election as a permanent structural decision, not a routine tax form.
· Understand the degeneration of attitudes and policy surrounding common family group structures.
· Expect further unanticipated and unintended consequences of poorly thought out and tested policies.
· Continue to review the impact of the dramatic 2026/27 Budget changes as they continue to evolve.
· Consider longer term implications of policy trajectory and potential defense through simplification of your affairs.
Our View
The original policy was rushed and poorly targeted. The revised package acknowledges some of those problems but does not remove them. It offers more choices, while making every choice more technical and risky.
The Government describes the measure as aligning trust income with tax paid by workers. That framing understates the role of trusts in business ownership, asset protection, succession and family wealth management. A discretionary trust is not simply a device for selecting the lowest tax rate each year.
The greatest concern is not the 30% headline rate. It is the creation of another permanent election regime with severe consequences for errors, followed by further administration and integrity rules that have not yet been released.
For most established family groups, the sensible response is to map the exposure, improve trust governance and wait for the final legislation before making irreversible changes.
Source Basis and Status
This note is based on Treasury exposure draft legislation and explanatory materials released for consultation in 2026. Submissions close on 18 September 2026. The materials state that further legislative tranches are expected. The proposals are not final law and may change.
The analysis under “Our view” and other evaluative passages is Chancellors’ commentary, not a statement made by Treasury.
General information only. This note does not constitute legal, financial product or personal taxation advice. Advice should be obtained for the particular trust deed, family circumstances and proposed transaction.
General information only. This note does not constitute financial product advice, legal advice or personal taxation advice. Clients should obtain advice tailored to their circumstances before acting. Refer to the disclaimers below.
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