28 July 2026
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The first tranche of legislation implementing the tax measures announced in the 2026-27 Budget, the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act), received Royal Assent on 26 June 2026.
The main changes made by the Act are:
The Act was introduced into Parliament on 28 May 2026 as the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 (Bill) and it immediately attracted significant criticism. The Bill’s more controversial features included:
In response to the criticism of the Bill and the Budget tax measures more generally, the government announced several amendments to the Bill. These include:
The other controversial aspects of the Bill remain unchanged.
In addition, the government:
The government also agreed to support a Greens amendment to the Bill prohibiting SMSFs from using LRBAs to acquire residential property.
The Budget announced a new 30% minimum tax on discretionary trusts from 1 July 2028 but provided limited detail on the design of the proposed tax.
On 8 July 2026, Treasury released a consultation paper (consultation paper) outlining the key design features of the minimum tax and seeking feedback on a number of aspects of its operation. We discuss the consultation paper below.
Trusts subject to the minimum tax
The consultation paper does not propose a definition of ‘discretionary trust’ for the purposes of the minimum tax. Instead, it proposes using the current definition in the trust loss rules in the Income Tax Assessment Act 1936 (ITAA 1936) as the starting point. That definition focuses on whether beneficiaries have ‘vested and indefeasible interests’ in the income and capital of the trust.
However, the consultation paper acknowledges concerns that relying on this definition “may result in the scope of discretionary trusts for minimum tax purposes being broader than intended.” It seeks feedback on the “appropriate treatment of cases such as modern commercial trusts, where trustees typically retain powers to change entitlements, add beneficiaries, or amend trust deeds, whether or not those powers are exercised.”
Trusts excluded from the minimum tax
Consistent with the Budget announcement, the consultation paper indicates that the minimum tax will not apply to fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and tax-exempt charitable trusts. Primary production income will also be excluded from the minimum tax.
The consultation paper states that certain other exclusions require further consideration, as outlined below.
Testamentary trusts
As noted above, the government has relaxed the application of the minimum tax to testamentary trusts. Testamentary trusts established before 1 July 2028 will be excluded from the minimum tax, provided they are established for genuine testamentary purposes and the income is derived from assets of the deceased estate or other assets injected into the trust before the Budget announcement on 12 May 2026. Testamentary trusts established on or after 1 July 2028 will need to satisfy the additional requirement that they can benefit only individuals and tax-exempt entities.
Vulnerable minors
The minimum tax will not apply to certain income relating to vulnerable minors. The exclusion will largely be based on the categories of income that are taxed at adult rates (rather than the top marginal rate) under Division 6AA of Part III of the ITAA 1936. These categories include investment income arising from loss of parental support, personal injury and workers compensation.
Dividends, interest and royalties
Certain categories of trust income, namely dividends, interest and royalties, distributed to foreign residents are subject to foreign resident withholding tax and are not subject to Division 6 of Part III of the ITAA 1936 (Division 6). The consultation paper indicates that this treatment will continue, with these categories of income excluded from the minimum tax.
Tax-exempt entities
The minimum tax is not intended to adversely affect tax-exempt beneficiaries of discretionary trusts, such as charities, which would not benefit from the minimum tax offset as they do not pay tax. The consultation paper seeks feedback on the appropriate treatment of discretionary trust distributions to tax-exempt entities.
The 30% minimum tax will be payable by the trustee and calculated by reference to the net (taxable) income of the trust as defined in section 95(1) of the ITAA 1936.
Beneficiaries of discretionary trusts will continue to be assessed on their respective shares of the net income of the trust under Division 6. Their entitlement to the minimum tax offset will depend on whether they are individuals, companies or trusts and, in the case of trusts, whether they are discretionary or non-discretionary trusts. This is discussed further below.
Individual beneficiaries
Individual beneficiaries will continue to be assessed on their share of the trust’s net income but will be entitled to a tax offset equal to the same proportion of the minimum tax paid by the trustee. For example, if the trustee of a discretionary trust distributes 60% of its trust law income to Beneficiary A and 40% to Beneficiary B, Beneficiary A will be assessed on 60% of the trust’s net income and entitled to a tax offset equal to 60% of the minimum tax paid by the trustee, while Beneficiary B will be assessed on the remaining 40% of the trust’s net income and entitled to a tax offset equal to 40% of the minimum tax paid by the trustee.
The minimum tax offset will not be refundable, cannot be carried forward to a later income year and cannot be used to offset the Medicare levy. The consultation paper states that this means the offset cannot be used “to the extent it exceeds the taxable income of the individual”. The reference to “taxable income”, rather than discretionary trust distribution, suggests that the offset may be available to reduce the tax payable on the individual’s other income. If so, this would create an exception to the policy of ensuring that taxing discretionary trust distributions are taxed at a rate of no less than 30%.
Corporate beneficiaries
The Budget created significant uncertainty regarding the treatment of corporate beneficiaries under the minimum tax.
The consultation paper confirms that corporate beneficiaries will continue to be assessed on their share of the net income of a discretionary trust but will not be entitled to the proposed minimum tax offset. As a result, trust income distributed to a corporate beneficiary will be taxed twice. First through the 30% minimum tax imposed at the trustee level, and again at the corporate tax rate, resulting in an effective tax rate of 60%.
Tax paid at the company level will generate franking credits. If the company distributes the income received from the trust to its shareholders as a franked dividend, the combined effective tax rate on the underlying trust income will be approximately 70%, assuming the shareholders are taxed at the top marginal rate of 47%.
The consultation paper explains this approach on the basis that allowing corporate beneficiaries to access the minimum tax offset would enable companies to convert the benefit of the offset into refundable franking credits, which could then be distributed, and potentially refunded to, non-corporate shareholders who are also trust beneficiaries. It further states that denying companies access to the minimum tax offset is the simplest mechanism for preventing the minimum tax from being undermined through the interposition of a company between the trust and the ultimate beneficiary, without requiring changes to the imputation system.
This approach comes at the cost of imposing effective tax rates of up to 70% on distributions to corporate beneficiaries. It represents a significant departure from the long-standing taxation of a common commercial structure and is likely to have substantial implications for existing trust arrangements.
Trustee beneficiaries
Trustee beneficiaries will continue to include their share of the net income of a discretionary trust in their own net income and will be entitled to the minimum tax offset in the same way as individual beneficiaries. However, where a trustee beneficiary is itself a discretionary trust, the minimum tax offset must be applied against its own income tax liabilities (including the minimum tax, but excluding the Medicare levy) and cannot be passed on to its beneficiaries.
Consequently, income flowing through a chain of discretionary trusts will be subject to the minimum tax at each level, with a tax offset available only to the first trustee beneficiary in the chain. A beneficiary’s share of a trust’s net income is not reduced by the minimum tax paid by the trustee, so the total minimum tax payable through a chain of discretionary trusts could potentially exceed the amount of the underlying income. The consultation paper acknowledges that this treatment “discourages complex tax planning involving chains of discretionary trusts.”
Where a trustee beneficiary is not itself a discretionary trust, the minimum tax offset may be passed on to its own beneficiaries and used by its non-corporate beneficiaries.
Rollover relief
The Budget announced that rollover relief would be available for a three-year period to allow taxpayers to restructure out of discretionary trusts into alternative structures, including companies and fixed trusts. However, the Budget announcement provided limited detail regarding the scope and operation of the proposed relief.
The consultation paper indicates that the proposed relief will be based on the existing rollover provisions in Subdivision 328-G of the Income Tax Assessment Act 1997. Unlike the existing Subdivision 328-G rollover, however, the proposed relief will not be limited to small business entities or active assets. Instead, it will also apply to passive assets and discretionary trusts that do not carry on a business. Nor will it include a ‘genuine restructure’ requirement.
The proposed rollover will be available where the transferee is an individual or an entity in which the relevant economic entitlements are “sufficiently predetermined and stable, rather than capable of being redirected year-to-year”. However, the relief will not apply where assets are transferred to a company with multiple classes of shares that allow dividends or capital returns to be allocated between shareholders on a discretionary basis.
Notably, the consultation paper does not address the implications of state and territory transfer duty, which may remain a significant barrier to restructuring discretionary trusts that hold dutiable assets, including land and, in some jurisdictions, business assets.
Treatment of franking credits
The consultation paper proposes that franking credits attached to franked distributions will no longer flow through discretionary trusts to beneficiaries. Instead, franking credits received by discretionary trusts in respect of dividends will be applied against the trustee’s tax liabilities. The government is seeking feedback on whether excess franking credits should be refunded to the trustee or carried forward to reduce the trustee’s future tax liabilities.
Preventing franking credits from flowing through discretionary trusts is intended to “ensure the use of franking credits does not undermine the minimum tax”. The government’s concern appears to be that allowing franking credits to flow through to beneficiaries could enable those credits to be used to offset other income or be refunded, thereby reducing or eliminating the minimum tax imposed at the trustee level.
However, if excess franking credits are refundable or can be carried forward and applied against the trustee’s future minimum tax liabilities, it is not clear why they would not still reduce the effective tax payable on future trust distributions below the proposed 30% minimum tax rate.
Collection mechanisms
As noted above, the minimum tax will be payable by the trustee. The consultation paper proposes that directors of corporate trustees be made jointly and severally liable for payment of the minimum tax, consistent with the existing treatment of family trust distribution tax (FTDT). FTDT applies where a trust that has made a family trust election distributes income or capital to a person outside the family group.
Accordingly, directors of corporate trustees of discretionary trusts will need to consider whether to obtain indemnities or other protections from the trust or their fellow directors in relation to this additional exposure.
The consultation paper also proposes giving the Commissioner of Taxation a right of reimbursement from trust assets and including the minimum tax within the PAYG instalment regime.
In June 2026, the High Court handed down its decision in the Bendel case, finding that a corporate beneficiary’s unpaid present entitlement to trust income is not a deemed dividend for the purposes of Division 7A, contrary to the ATO’s administrative practice since 2009.
The consultation paper confirms the government’s commitment to legislating the ATO’s practice, as announced in the 2018-19 Budget, and seeks feedback on the implementation of the measure and its interaction with the design of the minimum tax.
If you have any questions on these changes, please contact us here.
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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