Yesterday afternoon (3 September) Treasury released exposure draft legislation for the proposed minimum tax on discretionary trusts. The measure is intended to apply from the income year commencing on or after 1 July 2028, but is not yet law.
The proposal would impose tax at trustee level so that relevant trust income bears tax at a minimum rate of 30%. Non-corporate beneficiaries would generally receive a corresponding non-refundable tax offset, while companies would not.
This update focuses on what has changed since consultation and the practical implications for you and your clients. These are our initial observations and may evolve as the draft is scrutinised, tested and further legislative tranches are released.
Our initial observations are as follows.
1. A new election for existing discretionary trusts
A trust existing on 1 July 2028 may make a one-off excluded election trust (“EET”) election in its first income year commencing on or after that date. This may allow the trust to remain outside the minimum-tax regime without transferring its assets.
In our opinion, excitement should be moderated. The implications of the EET are likely to be more significant than the positive press it has received. For example:
a. The economic allocation is effectively permanent
The trustee must nominate beneficiaries and allocate 100% of both trust income and capital among them. Each beneficiary must receive the same percentage of income and capital and the election must be notified to the Commissioner.
The nominated beneficiaries and percentages may generally be changed only following a nominated beneficiary’s death or a specified relationship breakdown.
An EET may therefore be unsuitable where future distributions will need to respond to changing health, financial, family or succession circumstances.
b. The trust deed may not support the election
The tax election does not amend the trust deed. The deed must already permit the trustee to confer income and capital entitlements in the nominated manner. Treasury’s explanatory material itself says trustees should consider whether the election can be implemented consistently with the deed.
Every proposed EET will therefore require a deed review before the election is made.
c. There is a potential trust-law tension
The draft requires the trustee to exercise its discretion consistently with the EET nomination if the election is to remain effective. However, the election does not itself amend the deed or displace the trustee’s ordinary fiduciary duties.
Owies v JJE Nominees Pty Ltd (a fascinating case well known to some readers) provides relevant context concerning a trustee’s duty to inform itself and give genuine consideration to beneficiaries, but it did not consider the proposed EET regime. The interaction between those duties and a long-term, tax-driven nomination will require careful consideration, particularly where non-nominated beneficiaries have genuine claims on the trust.
d. Administrative failure has severe consequences
If the trustee fails to confer the nominated income and capital percentages in a year:
- the election is automatically revoked
- the beneficiaries are treated as never having been presently entitled in that year
- the trustee is assessed on all of the trust’s net income at the top marginal tax rate (i.e., 47%)
- the trust becomes subject to minimum tax in future years and
- the election cannot be remade.
This makes annual trust resolutions high-risk documents. They will need to be reconciled against the EET nomination before execution.
The notification and recordkeeping requirements resemble those associated with family trust elections (which the Commissioner has unashamedly identified as a focus area of non-compliance recently).
e. Nominated companies create additional traps
An eligible company can be nominated, but winding it up, deregistering it, changing its eligibility or making certain shareholder changes may automatically revoke the election.
An EET involving a company may consequently constrain future ownership, succession and restructuring arrangements.
f. State and Territory duty cannot be assumed away
The fact sheet suggests an EET is not expected to attract State or Territory duty. That is not a statutory exemption.
Duty and other State tax consequences should be checked separately, particularly where the election or an accompanying deed amendment effectively removes default or primary beneficiaries, changes beneficial interests or alters trust rights.
Our initial view
An EET may suit a family whose long-term economic allocation is genuinely settled and unlikely to change. It is less likely to suit a group that values discretionary succession planning, asset protection or the ability to respond to changing beneficiary circumstances.
We also note that further consideration should be given to whether an EET is in fact preferrable to converting a discretionary trust into a fixed trust, which may provide alternative benefits such as transferability during a life time or through an estate.
It should not ‘automatically’ be pursued by groups merely because it appears administratively easier than restructuring.
2. Chain of trusts: the good news
There is better news for groups containing chains of trusts.
Where a beneficiary is itself a minimum tax trust, the trustee beneficiary may use the non-refundable offset against its own tax liability, including its own minimum-tax liability. A corresponding offset may then pass to beneficiaries further down the chain.
This should mitigate duplicated minimum tax through tiered trusts. However, companies in the chain remain unable to claim the offset.
3. Transitional restructuring relief
Income-tax rollover relief is proposed for qualifying asset transfers between 1 July 2027 and 30 June 2030.
The draft law is materially unchanged from the earlier proposal, including limitations such as:
- All or nothing: all assets must be transferred
- Transferee can not have discretionary elements and
- Potential duty implications.
Other restructuring pathways should also be modelled. Depending on the group’s circumstances, existing rollovers or the small-business CGT concessions may produce a better outcome, including potentially different cost-base consequences. Eligibility, duty and other transaction costs must be tested before preferring that approach.
4. Testamentary trusts: a previously unannounced narrowing of the exemption
The fact sheet says deceased estates and all discretionary testamentary trusts established for genuine testamentary purposes will be excluded. The operative provision is materially narrower and is likely to be one of the most frequently misunderstood parts of the package.
The exclusion attaches to particular income, not to the testamentary trust as an entity. A single testamentary trust may therefore derive both excluded income and minimum-tax income in the same year. Its income will need to be analysed by source rather than treating the trust as wholly in or wholly out of the regime.
Three limitations are particularly important.
a. Estate-property tracing and the Budget-night rule
- The exclusion principally protects income from qualifying property derived from the deceased estate. This includes qualifying accumulations of income or capital and replacement property acquired when an estate-derived asset is sold in an ordinary arm’s-length transaction.
- Income from unrelated property transferred to the trustee after Budget night will generally be subject to minimum tax. Existing testamentary trusts should therefore maintain clear tracing records and obtain advice before accepting additional assets, loans or investments.
b. Testamentary trusts established on or after 1 July 2028
- For a testamentary trust established on or after 1 July 2028, the draft only excludes relevant income derived to benefit a beneficiary who is an individual or exempt entity.
- The explanatory memorandum states more broadly that, if the trust has corporate entities or other trusts as beneficiaries, its net income will be subject to minimum tax.
- There is tension between that explanation and the operative provision, which appears to focus on the beneficiary for whose benefit the particular income is derived. Until this is clarified, wills creating post-2028 testamentary trusts should be reviewed carefully before companies or other trusts are included within the beneficiary class.
- The estate-planning consequence is immediate. A will prepared today will ordinarily not establish its testamentary trust until the relevant death and subsequent administration. If the trust is established on or after 1 July 2028, the new beneficiary limitation may apply even though the will was prepared before the reform was announced.
c. Broad anti-avoidance rules
- The exclusion does not apply where income is derived under a scheme undertaken for a purpose that includes obtaining the testamentary-trust exclusion.
- A separate rule applies where the Commissioner is satisfied that property became trust property under a scheme undertaken for purposes including bringing the property within the trust and obtaining the exclusion. A merely incidental purpose is disregarded under both rules.
- These provisions make the purpose and circumstances of later asset contributions, loans, substitutions and reorganisations important, not merely the legal source of the trust.
Existing testamentary trusts
- Testamentary trusts established before 1 July 2028 are not subject to the new individual-or-exempt-entity beneficiary condition. Their income must nevertheless satisfy the estate-property tracing requirements, the Budget-night rule and the anti-avoidance provisions.
- In a system where inter vivos discretionary trusts face a 30% minimum tax and conventional corporate-beneficiary arrangements become significantly less attractive, existing testamentary trusts may become particularly valuable family structures.
- Existing testamentary trusts should not be wound up for administrative convenience without first considering the value of their pre-1 July 2028 status. Wills, beneficiary classes, existing testamentary trusts and estate plans currently in progress should now be reviewed.
5. Treatment of UPEs
Separately, I was present at the Tax Institute’s Tax Summit yesterday (3 September) where, Fiona Dillon, Chief Tax Counsel at the ATO, stated that the Government intends to legislate the previously announced but unenacted proposal to bring unpaid present entitlements owed to corporate beneficiaries within Division 7A.
It was also indicated that the measure may extend to UPEs existing when the legislation receives Royal Assent, potentially including pre-16 December 2009 UPEs.
This proposal is separate from the current exposure-draft package and no draft legislation confirming its scope, commencement or transitional treatment has yet been released. Groups should identify their existing UPEs now, but should not undertake irreversible transactions solely in anticipation of the measure.
This is a significant development that we will monitor closely.
6. Timing
Submissions on the exposure draft close on 18 September 2026.
The package is only the first legislative tranche. Further rules dealing with administration, integrity and interactions with other parts of the tax system are expected.
We will keep you updated as the proposals develop.
