21 September 2026
15 min read
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The Government has released exposure draft legislation for its proposed 30% minimum tax on discretionary trusts, giving trustees and advisers a much clearer picture of how the regime is intended to operate from 1 July 2028.
In addition to providing greater detail on the proposed minimum tax and restructuring relief, the draft legislation introduces a new excluded election trust (EET) regime, giving existing discretionary trusts a potential alternative to restructuring.
Affected trustees will therefore have three broad pathways: remain within the minimum tax regime, restructure using the proposed transitional rollover, or make an EET election and accept restrictions on future distributions.
The EET may be particularly relevant where a trust holds dutiable property, such as land, or other assets that would be costly or impractical to transfer. However, a key issue is whether making an EET election could itself trigger State or Territory stamp duty, even if the trust deed is not amended.
The Government has indicated that it does not expect an EET election to result in State or Territory duty, but the position will ultimately depend on the relevant State or Territory duty legislation. The EET also raises questions about how the trustee can exercise its discretion under the existing trust deed while complying with the requirement that distributions be made in accordance with the nominated beneficiaries and percentages. We consider these issues later in this article.
From 1 July 2028, the trustee of a trust within the regime would generally be liable for tax at 30% on its ‘minimum tax income’.
Broadly, all trusts are within the regime unless specifically excluded. Exclusions apply for fixed trusts, special disability trusts, deceased estates, complying superannuation entities and certain other trusts that are prescribed by legislative instrument. Charitable trusts are effectively outside the regime because they are not subject to income tax. Widely held trusts, managed investment trusts (MITs) and attribution managed investment trusts (AMITs) will fall outside the regime where they satisfy the definition of ‘fixed trust’.
The starting point for calculating minimum tax income is the trust’s net income. All net income is included unless specifically excluded. Exclusions apply for primary production income, certain income for vulnerable minors, qualifying distributions to charitable and exempt entities, income subject to non-resident withholding tax and certain testamentary trust income. The minimum tax also does not apply to amounts already taxable to the trustee at the top marginal rate plus Medicare levy under section 99A of the Income Tax Assessment Act 1936.
The exposure draft confirms that relief against double taxation will be available only to non-corporate beneficiaries. Where a non-corporate beneficiary is presently entitled to income on which the trustee has paid minimum tax, the beneficiary would generally receive a non-refundable tax offset equal to the minimum tax attributable to that share.
The exposure draft is consistent with the position outlined in the July consultation paper that the tax offset cannot be applied against the Medicare levy. Accordingly, taxpayers whose marginal tax rate is below 30% will not only be unable to utilise the full benefit of the tax offset, but will also remain separately liable for the Medicare levy.
The explanatory materials indicate that the non-refundable tax offset may flow through chains of discretionary trusts and ultimately be passed on to beneficiaries of the ultimate trust. This is a departure from the July consultation paper, which indicated that the offset could not generally be passed through a chain of minimum tax trusts to ultimate beneficiaries.
Consistent with the consultation paper, the franking credits attached to franked distributions that form part of minimum tax income will be used at the trustee level to offset the minimum tax, rather than flowing through to beneficiaries under the existing trust streaming rules. The draft legislation also provides that any excess franking credits can be refunded to the trustee, resolving an issue left open in the July consultation paper.
The explanatory materials state that the Government may introduce ‘further anti-streaming rules for corporate distributions’ if avoidance concerns emerge. The intended scope of any such rules is unclear, and the explanatory materials do not identify specific arrangements or explain when such rules might be introduced. Care should therefore be taken when structuring arrangements, and existing structures should be reviewed as the legislation develops.
The exposure draft does not represent the final form of the proposed regime. Further legislation is expected to deal with administrative and reporting requirements, residency, capital gains tax (CGT) and international tax interactions and additional integrity measures. The July consultation paper also raised collection mechanisms and unpaid present entitlements to corporate beneficiaries. The Government has indicated that the previously announced Division 7A measure for unpaid present entitlements will progress separately.
The draft legislation would significantly expand the definition of a fixed trust.
Under proposed subsection 272-65(1), a trust may qualify as a fixed trust under either of two tests. The first broadly preserves the existing requirement for fixed entitlements to all of the trust’s income and capital. The second adopts a broader approach based on whether there are any material discretionary elements affecting beneficiaries’ entitlements or rights.
Proposed subsection 272-65(2) then applies only to the second test. It sets out matters relevant to determining whether there are material discretionary elements, including whether beneficiaries have clearly defined, specific and enforceable rights to all of the income and capital of the trust or rights “in relation to the governance of the trust”. The subsection also considers whether powers under the trust can materially alter beneficiaries’ existing rights or interests, or significantly affect their value.
The broader test represents a significant departure from the existing concept of a fixed trust, which is principally concerned with whether beneficiaries have fixed entitlements to income and capital. A fixed entitlement generally requires a vested and indefeasible interest, which has been a difficult requirement to meet in practice, particularly in light of the Commissioner’s guidance. The proposed amendments retain that concept, but introduce a broader and more principles-based alternative.
The meaning of the governance reference is uncertain. The exposure draft does not define ‘governance’, and the explanatory materials do not explain in detail what it is intended to cover. The explanatory materials do, however, refer to employee share schemes as an example of an arrangement that may qualify where beneficiaries have clearly defined rights and entitlements under non-discretionary rules. Governance rights may include rights concerning the appointment or removal of a trustee, approval of particular decisions or other aspects of the trust’s administration. They may also include rights concerning the operation of the trust that are not themselves entitlements to income or capital.
The new test may provide greater flexibility than the existing fixed entitlement test, but it may also make fixed trust status harder to determine. For example, the draft does not define ‘material’ or ‘significantly’, the listed factors are non-exhaustive, and further matters may be prescribed by legislative instrument. This may be particularly relevant to unit trusts and other investment structures with powers to issue or redeem interests, vary classes of interests, amend the trust deed or otherwise affect beneficiaries’ rights or the value of their interests.
For trustees and advisers, the practical consequences are significant. Fixed trust status will determine whether many trusts are outside the proposed minimum tax regime, but the definition also applies more broadly across the income tax law. Trust deeds should therefore be reviewed before 1 July 2028, considering both the traditional fixed entitlement test and the broader test where relevant.
Where uncertainty remains, trustees may consider seeking a private ruling from the Australian Taxation Office.
The July consultation paper proposed three years of transitional rollover relief for trusts that chose to restructure. The exposure draft now provides the detailed framework, applying to qualifying transfers between 1 July 2027 and 30 June 2030.
Broadly, the rollover is intended to facilitate a transition from discretionary ownership to a qualifying structure, such as a company or fixed trust, without immediate income tax or CGT consequences. In general, all assets of the trust must be transferred to the new structure, subject to limited exceptions, and the transferee must not retain material discretionary elements.
The rollover is useful, but it does not provide relief from State or Territory transfer duty. Duty may be the largest practical impediment to many restructures involving land or other dutiable property. Transfers may also be commercially difficult where licences, contracts, financing arrangements or other rights cannot readily be transferred.
These limitations mean that restructuring may not be a practical solution for every affected trust. The exposure draft therefore also introduces the EET as a potential alternative.
An existing discretionary trust may instead elect to become an EET. The trust must exist on 1 July 2028, and the election is available only for the first income year of the new regime.
The trustee must nominate the beneficiaries to whom it may confer present entitlements to income and capital and specify each beneficiary’s percentage. The income and capital percentages must be the same, and the nominated percentages must add up to 100%. The beneficiaries generally must have been capable of benefiting under the trust on 1 July 2028.
The nomination is intended to be durable rather than an annual reshuffle. Variations are generally limited to specified events, such as death or relationship breakdown. An EET therefore preserves the existing trust structure but substantially gives up the annual distribution flexibility that is a defining feature of a discretionary trust.
A company may also be nominated, but only if it is an ‘eligible company’. Broadly, there must be no material discretionary elements affecting the rights or interests of its members. The explanatory materials refer to members having clearly defined and enforceable rights to income and capital and to the absence of powers that can significantly vary members’ rights or interests or the value of those rights or interests. These requirements may make it difficult for companies with multiple share classes or other dividend-flexibility arrangements to qualify as eligible companies. This could be significant for groups that currently rely on corporate beneficiaries as part of their distribution strategy. Where changes to a company’s share structure or constitution are being considered to address this issue, any resulting landholder duty implications should also be carefully assessed.
The policy rationale for the EET is apparent – it was introduced in response to consultation feedback about the costs of restructuring, including State and Territory duty. Unlike a restructure involving the transfer of trust assets, an EET election does not itself require the trust to be replaced or its assets transferred. The Government has indicated that it does not expect the election to result in State or Territory stamp duty.
However, the application of State and Territory duty legislation to an EET election remains a separate question. The approach taken in several jurisdictions provides some useful context.
In New South Wales, Revenue NSW’s ruling DUT 017 v2 distinguishes between variations that do not result in a change in beneficial ownership of dutiable property and transactions that do. In Victoria, the State Revenue Office’s guidance on variations to discretionary trusts focuses on the substance and legal effect of the variation, including whether it results in a change in beneficial ownership of dutiable property or changes equitable interests in that property. In Queensland, Revenue Office guidance distinguishes administrative variations of a trust from variations that change a beneficiary’s beneficial interest. The guidance identifies changes to governing rules and trustee powers as examples of administrative variations, while changes to beneficiaries or their rights or interests may give rise to duty.
Against that background, the duty analysis should distinguish between an EET election made within the existing trust structure and an amendment that changes beneficiaries’ beneficial interests. If the trust deed is not amended and the election does not otherwise alter beneficial ownership of, or create new proprietary interests in, trust assets, there appears to be a reasonable argument that the election should not itself give rise to adverse duty consequences. The position will ultimately depend on the relevant State or Territory legislation and any future administrative guidance.
The exposure draft does not expressly require the trust deed to be amended. The question for trustees is whether the existing deed can operate consistently with the EET requirements, or whether an amendment would be desirable. If the deed is retained, the EET rules require the trustee to exercise its discretion in accordance with the nominated percentages if the election is to remain effective.
The EET and the transitional rollover are alternatives. A trust that uses the transitional rollover cannot also use the EET pathway.
The ability to elect into the EET regime while retaining the trust’s discretionary trust deed creates an unusual tension between trust law and tax law. Although the trustee’s discretion remains legally intact, the tax outcome depends on the trustee exercising that discretion consistently with predetermined proportions.
For example, suppose a deed gives the trustee a discretion among four family beneficiaries, A, B, C and D. The trustee makes an EET nomination under which A and B are to receive income and capital entitlements in a 60:40 ratio. Several years later, C’s circumstances change materially.
The EET rules create a strong tax incentive to continue distributing 60:40 to A and B. However, the trustee’s underlying duties do not disappear. The trustee must continue to exercise its powers in good faith, for proper purposes and after genuine consideration of relevant matters. The existence of an EET nomination does not necessarily eliminate the need for the trustee to consider whether the interests and circumstances of beneficiaries who remain within the class of potential beneficiaries under the trust deed are relevant to the exercise of its discretion.
Put differently, the EET election constrains the exercise of the trustee’s discretion for tax purposes, but it does not change the trustee’s underlying obligations under trust law. Whether continued compliance with the EET nomination is consistent with those obligations will depend on the circumstances. The tax consequences of departing from the nomination may themselves be a relevant consideration.
If the trustee chooses to depart from the nomination, the tax consequences are significant. If the departure causes the election to be automatically revoked, the tax treatment of present entitlements for the relevant year can be affected, potentially exposing the trustee to tax at the top marginal rate plus Medicare levy, and the trust will enter the minimum tax regime for future years. Once revoked, an EET election cannot be made again.
For trustees retaining an unchanged discretionary trust deed, annual governance will therefore be critical. Trustee records should document not merely that the EET percentages were followed, but why continuing the election remained an appropriate exercise of the trustee’s powers in the circumstances.
Trustees considering an EET will need to consider whether amendments to the trust deed are desirable in light of the proposed nomination. Amendments that align the legal rights under the trust more closely with the EET nomination may reduce the tension between an ongoing discretionary power and the requirement to distribute in accordance with the nominated percentages, but they create their own issues.
The amendment must first be authorised by the deed and validly exercised. Depending on the amendment power and the changes proposed, questions may arise as to whether the amendment impermissibly changes beneficiary rights or exceeds the scope of the amendment power.
A significant amendment may also raise CGT resettlement issues. A valid amendment made under an existing power does not necessarily create a new trust for CGT purposes, but the potential CGT consequences would need to be considered carefully where the amendment materially alters beneficiaries’ rights or interests.
An amendment may also have duty consequences. The position will vary between jurisdictions and depend on the property held and the nature and legal effect of the amendment. In a number of jurisdictions, including New South Wales, Victoria and Queensland, amendments that alter beneficiaries’ beneficial rights or interests may have adverse duty consequences.
A deed amendment should therefore not be treated as a routine step in making an EET election. Whether amendments are appropriate will depend on the terms of the trust deed and the circumstances of the trust.
The exposure draft package answers a number of questions left open in the July consultation paper and adds an important alternative to restructuring. However, further draft legislation is expected and important questions remain.
Trustees considering an EET should review their trust deeds, focusing on whether the existing distribution powers can support the proposed nomination and whether continuing to operate the trust as an EET would be consistent with the trustee’s duties. If an amendment to the deed is needed, trustees should assess the potential CGT, duty and trust law consequences before making any changes.
Although the regime is not yet finalised, trustees do not need to wait until 2028 to begin planning. Trust deeds, beneficiary structures and distribution practices should be reviewed now so that affected trusts can assess the implications of the proposed regime and identify any issues requiring further advice.
New trust structures should also be considered carefully in light of the proposed fixed trust and EET rules. For existing trusts, trustees considering an EET election should evaluate whether the trust deed needs to be amended, taking into account the tax, trust law and State or Territory duty consequences.
If you have any questions about how the proposed legislation may affect your trust structure or eligibility for the EET, please get in touch with us.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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