In the May 2026 Federal Budget, the Government announced a minimum tax of 30 per cent on discretionary trusts. Treasury released its consultation paper on 8 July 2026, and submissions closed at the end of that month.

Luke Henry and Eric Zheng prepared a submission, on behalf of the privately owned business and investment groups we advise.

We believe that discretionary trusts, often paired with a private company established years ago to receive distributions, are a familiar feature of Australian family enterprise. These are ordinary structures, set up under settled law and on professional advice. The practical detail of how this measure is implemented will matter a great deal to the families who own them.

This article explains what has been proposed, what we found when we modelled it, and the points we put to Treasury. None of it is law yet.

What the Government has proposed

Broadly, a discretionary trust’s taxable income would be taxed at a floor rate of 30 per cent, with the tax paid by the trustee. Beneficiaries then receive a credit for that tax when they lodge their own return.

Three dates matter:

• The minimum tax is proposed to start on 1 July 2028, applying from the 2028-29 financial year.
• A rollover is proposed, allowing families to move assets out of a discretionary trust without an immediate income tax bill. That window opens on 1 July 2027 and closes on 30 June 2030.
• Exposure draft legislation has not yet been released.

Why the design matters more than the rate

The 30 per cent figure has attracted most of the attention. The more significant feature is that the credit given to beneficiaries cannot be refunded. If a beneficiary’s own tax liability is smaller than the credit they receive, the balance is not refunded and cannot be carried forward to a later year. It is simply lost.

That single design choice determines who actually pays the tax.

Because the credit is non-refundable, the measure can only collect additional tax where an individual beneficiary’s average rate of tax is already below 30 per cent.

On the rates applying from 2027-28, that crossover sits at approximately $202,000 of income per beneficiary. In practice, the measure operates as a flat charge of roughly 32 per cent on trust income allocated to anyone below that figure and has no effect where the beneficiary’s income is above it.

The proportionate impact also falls as income rises. On our modelling, a retired couple drawing $80,000 from a family investment trust face a tax increase of around $19,000 per year. A trust distributing $500,000 equally between two adults is unaffected. The structure is taxed differently even when the underlying income and the split are identical to what would arise in a partnership or company paying franked dividends.

We have asked for the tax base to be confined, so that the measure reaches the arrangements the Government identified in the Budget.

What the numbers look like

The table below is calculated on the same basis as Treasury’s own worked example.

2027–28 rates, including Medicare levy and the low income tax offset. Beneficiaries are assumed to have no income other than their share of the trust.

Two observations follow from these figures.

The first is that the proportionate increase falls as income rises. A retired couple drawing $80,000 from a family investment trust face the largest percentage increase in the table. A trust distributing $500,000 between two adults is unaffected.

The second is that the measure applies to the structure rather than to the outcome. The couple in the second row, on the same income and with the same equal split, would pay $18,704 in a partnership, and $18,704 through a company paying franked dividends. In a trust they pay $38,400.

How the measure affects common structures

Discretionary trusts are used in a number of well-established ways within privately owned family and business groups. The measure would affect each of them slightly differently.

The three-year window is shorter than it looks

This point is easy to miss, and it is worth setting out carefully.

The rollover window runs for three years, from 1 July 2027 to 30 June 2030. The minimum tax begins on 1 July 2028. Those two dates serve different purposes.

The three year window covers restructuring without an immediate income tax bill on the transfer itself. Only the first year of that window also protects against the minimum tax.

A trust that completes its restructure by 30 June 2028 does not pay the minimum tax at all. A trust that restructures during the 2028-29 year still receives the rollover relief, but the trust’s income up to the date of the transfer falls within the new regime and is taxed at the 30 per cent floor. A trust that waits until 2029-30 has close to two years of trust income exposed.

Put another way: if the objective is to avoid the tax altogether, rather than simply to move assets without a capital gains tax bill, the practical window is twelve months rather than three years.

Two qualifications are worth making.

1. The first is that the legislation has not been drafted, so it is not yet clear how the minimum tax will apply to a trust that restructures partway through a financial year. Whether the calculation is apportioned, and on what basis, is one of the matters we have asked to see resolved in the exposure draft.
2. The second is that a shorter effective window does not mean that moving early is automatically the right answer. For some groups, particularly those holding land, the sensible course may be to accept a year of minimum tax while waiting to see whether the states agree to matching duty relief, or whether the fixed trust election we have recommended is legislated. A restructure into a company is difficult to unwind. Deciding well matters more than deciding quickly.

What the timing does mean is that the preparatory work should begin well before the window opens. Deed reviews, share class rationalisation, valuations, bank and landlord consents and state duty rulings all take time, and they take longer when many families are seeking the same advice at once.

It also explains why we asked the Government to release the exposure draft legislation as a single package, with enough time before 1 July 2027 for families to obtain advice and plan properly. A twelve-month clean window is workable. A twelve-month window that opens before the law is settled is considerably less so.

What the transition needs, in order to work

The Government has described the rollover as a fair transition for families who established their structures under settled law. We support that intention.

Our submission set out the areas where, as currently described, the rollover would work well for a family starting from a blank page and less well for the structures that actually exist.

In summary, we asked that:

1. Families be able to use the corporate beneficiary they already own, rather than being required to incorporate and fund a second company alongside it;
2. Assets transferred under the rollover be able to be applied against an existing unpaid present entitlement or complying Division 7A loan rather than requiring unnecessary cash circulation;
3. A trust holding a grandfathered property is not forced to choose between that concession and the rollover;
4. The Commonwealth work with the states, through the Board of Treasurers, to secure matching transfer duty and landholder duty relief, since the proposed relief covers Commonwealth income tax only;
5. An irrevocable election to be taxed as a fixed trust be legislated for trusts that cannot practically move, whether because of duty, financing arrangements, licences or change of control provisions; and
6. Exclude distributions to endorsed charities from the base.
7. Introduce a threshold below which the minimum tax does not apply, set by reference to the top of the second marginal rate bracket, and modelled on the existing rules for distributions to minors;
8. An exclusion for income from a business in which the beneficiary is genuinely engaged, consistent with the exclusion already proposed for primary production;
9. Allowing the credit to be applied against the beneficiary’s Medicare levy, so that the effective floor is 30 per cent rather than approximately 32 per cent. On Treasury’s own worked example, the levy interaction produces $4,398 more tax than a wage earner on the same income pays, and it does so in an example where no income splitting occurs at all;
10. A purpose-built definition of a discretionary trust, so that ordinary unit trusts, property syndicates and joint ventures are not drawn into the regime because of the technical difficulty of satisfying the existing fixed trust test;
11. Clear sequencing between this measure and the Government’s response to the High Court’s decision in Bendel, including grandfathering for unpaid present entitlements that arose before commencement; and
12. Release the exposure draft legislation as a single package, with sufficient lead time before 1 July 2027 for families to obtain proper advice.

How we are helping clients respond

Although the proposed minimum tax is not yet law, there is enough detail to begin understanding which family and business groups may be affected and where the impact could be material.

For existing LDB clients, we are reviewing relevant structures across the groups we advise. Where the proposal may have a significant effect, we can then work through the realistic options, which may include:

• transferring assets or activities to an existing or new company
• holding certain assets directly
• using a fixed-trust election, if this option is ultimately legislated
• retaining the existing structure and accepting the resulting tax outcome.

Each option brings different tax, duty, financing, succession and commercial considerations. Existing Division 7A loans, unpaid present entitlements and the nature of assets held by the trust may also affect what is practical.

Importantly, a restructure is not automatically the right outcome. For some groups, retaining the existing structure may remain the most appropriate course once the costs, complexity and broader objectives are considered.

The value in reviewing the position early is not to make a decision before the law is settled. It is to understand the potential impact, identify any constraints and preserve the ability to make an informed decision once the final rules are known.

Trusts are used for reasons extending well beyond tax, including asset protection, succession planning and the orderly ownership of family and business assets. Any response to the proposed changes therefore needs to consider the wider structure, not the tax outcome in isolation.

If you are not an LDB client and would like to understand how the proposal may apply to your circumstances, our tax team can help you work through the issues and available options. Call us on (03) 9875 2900 or get in touch online.

A copy of our submission to Treasury is available on request.