Stop, Drop or Roll: The New Minimum Tax & Options for Trustees
The 2026-27 Federal Budget proposed that trustees of discretionary trusts would be required to pay a 30% minimum tax on the taxable income of discretionary trusts (Minimum Tax). After a consultation period with practitioners and stakeholders, Treasury released draft legislation to implement the Minimum Tax.
From 1 July 2028, the Minimum Tax will apply. The Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 (Bill) inserts new sections into the Income Tax Rates Act 1986 (Cth) (ITRA) to implement the Minimum Tax. The Bill provides trustees of discretionary trusts three options in relation to the Minimum Tax:
stop trying to avoid and pay the tax; or
drop the trust into an excluded election trust election; or
roll-over relief.
Whilst option (1) is an alternative that trustees likely wish to avoid, this article details the latter two options to minimise the application of the Minimum Tax.
What does this mean for taxpayers?
The Bill provides that the rate included in section 12AB of the ITRA equals the shortfall to 30%.
Where:
the tax equals or exceeds the Minimum Tax, the rate is nil;
no other tax is payable, the rate is the Minimum Tax rate.
This means that the draft legislation in relation to the Minimum Tax on discretionary trusts operates as a top-up on income taxed at less than 30%.
The Bill provides that section 101AF of the ITRA:
gives non-corporate beneficiaries a non-refundable 30% offset for amount reasonably attributable to minimum tax income; and
Options for Trustees of Discretionary Trusts
However, not all is lost for trustees and beneficiaries. Trustees of discretionary trusts have two mechanisms they can utilise to address the application of the Minimum Tax, including:
making an excluded election trust (EET) election; or
accessing transitional roll-over relief.
However, the mechanisms are mutually exclusive meaning that a trustee that makes an EET election cannot apply for roll-over relief and vice versa.
The EET election is available for trusts that are in existence on 1 July 2028 and can only be made in FY29. To qualify, the trustee must nominate beneficiaries and allocate 100% of the trust’s income and capital among them. Each beneficiary’s share of income must correspond to their share of capital.
The trustee must then distribute the trust’s income and capital consistently with those nominations each year. The nominated beneficiaries must have been capable of benefiting under the trust on 1 July 2028.
The transitional roll-over applies to transfers occurring between 1 July 2027 and 30 June 2030. It is intended to allow assets to be transferred out of a discretionary trust structure to a single transferee without an immediate tax consequence.
To qualify, all relevant trust assets must be transferred to a single transferee, subject to conditions concerning continuity of beneficial ownership, residency and the absence of material discretionary elements in the transferee. The transferor must also not have made an EET election.
The roll-over does not provide a permanent tax exemption; rather, it defers the tax consequences of the transfer. Importantly, if the trustee fails to transfer all relevant assets by 30 June 2030, the roll-over relief fails in respect of every asset.
Excluded Income
Certain categories of income are also excluded from the Minimum Tax, including:
primary production income;
certain income of vulnerable minors;
certain testamentary trust income;
income distributed to registered charities and deductible gift recipients, subject to specified conditions;
certain income of other exempt entities, subject to conditions and a cap to be finalised;
non-resident withholding payments; and
income that has already been assessed at the top marginal tax rate.
The explanatory materials indicate that widely held trusts, managed investment trusts, bare trusts and employee share trusts should generally fall outside the regime as a consequence of the new fixed trust definition.
For more information in relation to taxation or trust issues, please contact:
Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal
Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal
Jemimah Fitzgerald
Lawyer
T: 03 5225 5219
E: jfitzgerald@ha.legal
Prepared with the assistance of Pippa Duniam
