Discretionary Trust Tax Changes 2026

The Albanese Government’s discretionary trust tax proposal would impose a 30% minimum tax at trustee level. Bills are before Parliament. Review your client’s exposure and the election or rollover choices before recommending changes to distributions or assets.

What the Trust Tax Reform Proposes

The proposed minimum tax targets income earned through discretionary trusts, with exclusions for specified trusts and income. The trustee would pay the minimum tax. Non-corporate beneficiaries would receive a non-refundable offset for the trustee’s tax attributable to their share.

The measure has progressed through a Budget announcement, Treasury consultation and exposure draft legislation to introduced bills. Those stages have different legal effects. An announcement sets policy, consultation seeks feedback and an exposure draft proposes wording. Introduced legislation still requires parliamentary passage and Royal Assent.

The Government’s introduction announcement identifies the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 and its accompanying income tax rates bill. The proposed application is from the 2028-29 income year, subject to the legislation’s application rules. The new minimum tax has not commenced.

Use Treasury’s legislative materials alongside the parliamentary bill record when preparing advice. A proposed tax outcome belongs in a scenario calculation. Your client’s current return continues to use the law applying to that income year.

Which Trusts and Income Are Affected

Ordinary discretionary trading and investment trusts are the main client groups to review. A family business trust and a trust holding rental properties can both be affected. Calling an arrangement a family trust does not establish an exclusion.

The Government identifies the following exclusions from the proposed minimum tax:

• Fixed trusts, subject to the proposed definition and their actual distribution powers.
• Charitable trusts and complying superannuation entities.
• Special disability trusts and deceased estates.
• Discretionary testamentary arrangements established for genuine testamentary purposes, subject to their integrity conditions.

Read the powers in the trust deed. A unit label alone does not prove that rights to income and capital lack material discretionary elements.

Income exclusions require a separate review. Taxable primary production income would be excluded, but an investment held alongside a farming business needs its own classification. The vulnerable-minor exclusion depends on qualifying circumstances (including disability) or specified income sources (including compensation-derived property). Being under 18 alone does not qualify a beneficiary.

Distributions to registered charities and deductible gift recipients would be excluded subject to the applicable conditions. Other income tax-exempt recipients, such as sporting clubs, have a proposed capped exclusion. Do not model an unlimited exclusion for every exempt recipient.

Testamentary treatment depends on the origin of the property and the trust’s beneficiaries. Trace estate property and replacement assets separately from later unrelated contributions. The proposed rules also restrict beneficiary types for trusts established after the relevant commencement boundary. Use the official conditions for that boundary instead of assuming every trust created under a will receives the same treatment.

Consider a hypothetical discretionary trust holding a farming business and a residential investment. Its primary production income requires separate treatment from its rental income. A possible vulnerable-minor beneficiary needs evidence of the qualifying circumstance and entitlement. The review can identify the rental income as potentially exposed while leaving the minor’s exclusion conditional on those records.

How the Minimum Tax Changes Distributions

The proposed trustee assessment changes who funds the first layer of tax, even where beneficiaries remain taxable on their entitlements. It also changes the value of distributions to beneficiaries whose tax liability is below the minimum.

Under ordinary discretionary trust rules, present entitlement generally determines a beneficiary’s share of taxable net income. Trustee assessments and special rules can apply. The proposal adds a trustee-level floor on the income within its scope.

Hypothetical Individual Beneficiary Comparison

Assume a trust has $100,000 of ordinary taxable income, all within the proposed regime. One resident adult beneficiary is presently entitled to all of it. Assume no franking credits, capital gains or other offsets. Ignore Medicare levy and other levies. The beneficiary tax amounts below are assumed incremental liabilities, not personal tax-rate calculations.

Scenario	Trustee minimum tax	Beneficiary tax before minimum-tax offset	Additional beneficiary tax	Combined tax
Current rules, assumed lower beneficiary liability	$0	$20,000	$20,000	$20,000
Reform scenario, same lower liability	$30,000	$20,000	$0	$30,000
Current rules, assumed higher beneficiary liability	$0	$40,000	$40,000	$40,000
Reform scenario, same higher liability	$30,000	$40,000	$10,000	$40,000

In the lower-liability reform scenario, $10,000 of the $30,000 offset produces no refund. In the higher-liability scenario, the offset leaves $10,000 for the beneficiary to pay. These calculations illustrate the proposed mechanism for an individual. They do not establish a client’s final liability.

Corporate beneficiaries require separate modelling because they would not receive the same minimum-tax offset. Include the company’s assessment and any later dividend consequences. Applying the individual example to a company would understate the possible tax cost.

Franking credits also require a separate calculation. Treasury’s explanatory materials place relevant credits at trustee level against the minimum tax and provide for excess-credit refunds. A beneficiary must not claim the same credit again. Distinguish that franking treatment from the individual’s non-refundable minimum-tax offset.

Record cash as well as entitlements. A distribution left unpaid does not remove the proposed trustee assessment. Show how the trust will fund tax while meeting liabilities to beneficiaries and keeping enough cash for its operations.

The Fixed-Distribution Election

The proposed excluded election trust regime would let an eligible trust remain outside the minimum tax while following nominated distribution proportions. It exchanges annual tax flexibility for a continuing commitment to specified beneficiaries.

Treasury’s election materials set eligibility and notification conditions. The proposal covers trusts existing at the specified commencement boundary, with an election in the designated first income year. Substituted accounting periods require their own timing check.

The nomination must allocate all income and capital among eligible beneficiaries. Each beneficiary’s income and capital proportions must match. Confirm that each beneficiary can benefit under the deed within the eligibility rules. A nominated company must also meet the eligible-company conditions. A discretionary class listed in a deed is not a completed nomination.

For example, a hypothetical nomination might allocate 60% to one eligible individual and 40% to another. Continuing relief depends on the trustee making entitlements consistently with those proportions. A later wish to allocate everything to the lower-income beneficiary creates a conflict with that nomination.

Variations are limited, including rules for death and qualifying relationship breakdown. Inconsistent distributions can trigger automatic revocation and an adverse trustee assessment. Voluntary revocation also has ongoing consequences. The Tax Institute’s submission identifies an added Commissioner discretion for unreasonable automatic-revocation outcomes in the introduced bill. Treat that discretion as a specific relief provision, not permission to change proportions each year.

The election operates for tax purposes. It does not itself rewrite the deed or remove the trustee’s legal powers. The trustee must exercise those powers consistently with the nomination to retain the intended treatment.

A family trust election is a separate election with its own family-group restrictions. Holding one does not exempt the trust from the proposed minimum tax. Review how both elections would interact before recommending the new option.

Restructuring and Rollover Relief

The proposed transitional rollover would defer immediate income-tax consequences of eligible transfers out of a minimum tax trust. It preserves relevant tax costs and history instead of forgiving future gains.

Treasury’s rollover conditions cover a three-year transitional period. Eligible recipients can include a company, individual, partnership or qualifying trust. The proposal generally requires one eligible transferee and transfer of all required assets, with specified exceptions.

The transferor and transferee must choose relief and satisfy residency and continuity requirements. For a trust with a family trust election, trace the underlying individuals to the required beneficiary and family-group conditions. Other trusts depend on their applicable continuity rules. Transfers across income years also have notification requirements.

The rollover and excluded election trust pathways are alternatives under the proposal. Starting one can prevent use of the other. Obtain advice on that interaction before making an election or transferring an asset.

Income-tax relief does not settle state or territory duty. Review land transfers, financing consents and contract assignments, as well as legal and administration costs. The Government expects the tax election itself to avoid restructuring duty costs, but that does not establish a blanket duty exemption for related transactions.

Compare the Client’s Choices

Hypothetical client circumstance	Option to assess	Trade-off to model
Beneficiaries need different proportions each year	Remain within the minimum-tax regime	Retained flexibility against trustee tax, beneficiary offsets and cash requirements
Eligible beneficiaries expect stable proportions over time	Excluded election trust	Continued legal discretion against restrictive tax conditions and revocation consequences
Owners want fixed economic interests and can transfer required assets	Transitional rollover	Deferred income tax against duty, financing and ongoing entity costs

A landholding client can have a different answer from a service business with few transferable assets. Compare total tax and implementation costs before recommending an option.

Prepare the Client Review

Prepare a written assessment that separates current duties from the proposed reform. The file needs enough evidence to explain exposure and compare the choices.

1. Obtain the deed and all variations. Identify distribution powers, beneficiary classes and any restrictions on transfers or amendments.
2. Reconcile recent trust returns, financial statements and distributions. Classify income, including primary production income, dividends and estate-derived amounts.
3. Record family trust elections, corporate beneficiaries and unpaid entitlements. Trace who benefits, who holds the cash and any payments or loans to related parties.
4. List assets, tax costs, acquisition records and liabilities. Add property location, financing terms and any consents a transfer requires.
5. Calculate the current-law outcome and each relevant reform scenario. State assumptions about beneficiary income, exclusions and eligibility.
6. Document the preferred next step, outstanding conditions and who must resolve them. Set a review point for legislative changes before implementation.

Section 100A and Division 7A remain separate current-law questions. Section 100A can affect entitlements linked to reimbursement agreements. Division 7A requires its own review of company payments, loans and relevant trust transactions. An unpaid entitlement alone does not establish the answer for every arrangement.

Continue preparing the annual trust distribution resolution under the deed and current law. Your reform assessment is ready for the client when it identifies the exposed income, compares applicable choices and assigns every unresolved condition to a specific advice or documentation step.