Minimum 30% Trust Tax Minefield

On Thursday 3 September, Treasury released the Exposure Drafts on the proposed minimum 30% tax on discretionary trust distributions.

The draft legislation pack covers three topics:

• the mechanisms for imposing the 30% minimum tax;
• the new proposed CGT rollover; and
• an “electable regime” whereby a discretionary trust can opt out of the minimum tax by effectively electing to confine all future distributions to specific individuals.

A summary of the proposed changes is set out below.

30% Minimum Tax

From 1 July 2028, discretionary trusts will be subject to a minimum 30% tax on trust distributions.

The trustee of the discretionary trust will be liable to pay the 30% tax – individual beneficiaries will then receive a non-refundable tax offset for the tax paid by the trustee in respect of their distribution.

The result is:

• no advantage will be obtained by distributing to beneficiaries on effective tax rates below 30%; and
• beneficiaries on effective tax rates exceeding 30% will be required to pay “top up tax” on their trust distributions.

Application of Franking Credits

The draft legislation finally confirms the treatment of franking credits where part of the trust income includes franked dividends.

Specifically, the trustee of the discretionary trust will be able to utilise franking credits to reduce the trustee’s liability for the minimum tax. This results in:

• where the trust receives a fully franked dividend at a 30% imputation rate, no additional tax liability will arise for the trust; or
• where the trust receives a fully franked dividend at a 25% imputation rate, the trustee will be liable for 5% “top up tax”.

Once applied by the trustee, the franking credits are cancelled out. This means that they will not be passed on to the beneficiaries who receive the distribution – resulting in no ability for beneficiaries to receive franking credit refunds. The beneficiaries will only be entitled to the non-refundable offsets attaching to the minimum 30% tax.

Significantly, if the trustee has excess franking credits left over, the trustee will be entitled to a refund of the excess franking credits.

The Death of the Bucket Company

A company in receipt of a trust distribution will not be entitled to:

• franking credit offsets; or
• offsets for the minimum tax paid by the trust.

This will effectively result in “double taxation”, as:

• the trust will pay the minimum 30% tax on the trust income; then
• the company will pay tax at its own rate (25% or 30%) on the trust income distributed to it.

While the company will be liable for additional tax on the trust distribution, it will receive an entry into its franking account for the amount of tax paid by the company.

The result for a trust operating a business is the following:

A trading discretionary trust with income of $100,000 distributes all income to a company.

The trust pays the minimum tax of $30,000.

The company receives a distribution of $100,000, and is liable to tax on that $100,000 of $25,000.

The company receives:

• $70,000 cash from the trust (being the $100,000 less the tax paid by the trust);
• an unpaid present entitlement of $30,000 from the trust – since the tax offset is not passed on to the company, the trust must source the funds from elsewhere to discharge this UPE.

After the company discharges its own tax liability, it has $45,000 cash plus a UPE of $30,000.

The effective tax paid on the trust income is 55%.

Where the trust income instead comprises dividends received from a trading entity, the result is the following:

A trading company makes a profit of $120,000 and pays tax of $30,000 (at a 25% tax rate).

The company pays a fully franked dividend to a shareholder trust of $90,000 (plus $30,000 franking credits).

The trust’s minimum tax liability is $36,000 but it receives a franking offset of $30,000, resulting in additional tax payable of $6,000 by the trustee.

If the trust distributes the $90,000 dividend to a corporate beneficiary, the corporate beneficiary will be subject to 30% tax on that dividend (including on the franking credits given the streaming rules), resulting in a tax liability of $36,000.

The corporate beneficiary receives:

• $84,000 cash from the company; and
• an unpaid present entitlement of $6,000 from the trust – since the tax offset is not passed on, the trust must source the funds to discharge this UPE from other sources.

After the company discharges its own tax liability, it has $48,000 cash and a UPE of $6,000. The only entry into its franking account is for the company’s own tax liability of $36,000.

The effective tax paid on the profits of $120,000 is 60%.

Who’s not subject to the tax?

The following kinds of trusts will not be subject to the minimum tax:

• fixed trusts;
• special disability trusts;
• deceased estates; and
• complying superannuation funds (note: this means that a non-complying fund will be subject to the minimum tax).

The draft proposes to amend the definition of a “fixed trust” to be a trust where:

• the trust’s beneficiaries have fixed entitlements to all of the income and capital of the trust; or
• there are no material discretionary elements affecting the entitlements or rights of the trust’s beneficiaries.

Testamentary Trusts

Testamentary trusts will also be excluded from the regime but only under specific circumstances.

Consistent with section 102AG (excepted trust income) treatment, testamentary trust income in any year will not be subject to the minimum tax provided that the source of the income is:

• from the deceased estate;
• from natural accretions to the testamentary trust; or
• from the disposal and reinvestment of assets of the testamentary trust.

If the trust is “established on or after 1 July 2028” (which presumably is determined by the date of death, not the date of the will), then the beneficiary receiving the trust income must be an individual or tax exempt entity.

Further, these rules are subject to integrity measures that require the trust to be a “genuine testamentary trust”. A trust will fail this genuine testamentary trust requirement if the Commissioner is satisfied that the testamentary trust’s income was derived directly or indirectly from a scheme entered into or carried out for the purpose of, or for purposes including the purpose of, gaining access to the testamentary trust exemption.

New Rollover

The draft legislation also includes the proposed new CGT rollover.

The new Subdivision 126-C rollover will be available to any trust subject to the minimum tax where:

• all of the assets of the trust are transferred out of the trust;
• the transferee is:
  • individuals; or
  • a company or fixed trust, provided that the entity does not have material discretionary elements – including no rights to issue shares or units of different classes unless those powers can’t be exercised to vary existing rights or interests or significantly affect the value of existing rights or units;
• the restructure occurs between 1 July 2027 and 30 June 2030;
• the transferor and transferee choose to apply the rollover;
• continuity of ownership requirements are satisfied; and
• the transferor and transferee meet certain residency requirements.

No turnover requirements apply to the rollover, making it available to all discretionary trusts.

Any taxpayer (and the underlying owners) that uses the new rollover will be subject to a 4-year amendment window.

The continuity of ownership requirements provide that all persons who have a direct or indirect interest in the transferee just after the restructure must have been:

• beneficiaries of the trust; and
• a member of the “family group” for family trust election purposes.

Where the rollover is available, it will apply to switch off all direct income tax consequences, including CGT, balancing adjustment events and trading stock events. Family trust distributions tax is also specifically disregarded.

The impact of the rollover is that:

• the transferee entity inherits the existing CGT cost base of CGT assets (though the interplay between this and the deferred gain rules recently introduced are unclear);
• trading stock is acquired at cost price; and
• depreciating assets are acquired at their existing written down value.

Finally, the new rollover preserves the acquisition dates for the purposes of determining eligibility for the 15-year exemption.

Opt-Out Regime

The draft legislation also contains a surprising mechanism that allows a trust to opt out of the minimum 30% tax by making an “excluded election trust election” or EET election.

The making of an EET election requires the trustee to nominate:

• the names of the beneficiaries who will receive all future income and capital distributions from the trusts; and
• the share of trust income and capital that those beneficiaries will receive.

If distributions are made in any year other than to the nominated beneficiaries, penalty tax will be charged at a flat rate of 47% in that year. The election will then be deemed to be permanently revoked.

Once made, the election can never be varied – changes in who benefits from trust distributions will only be allowed in the case of death or marriage breakdown. However, to be varied on a marriage breakdown, both of the beneficiaries must have been specified in the nomination.

A trust can choose to revoke the EET election, however if it does:

• penalty tax will be charged at a flat rate of 47% in the year it is revoked;
• the trustee can never make a new EET election; and
• in all future years, the trust will be subject to the minimum 30% tax.

The election can be made partially in favour of a company, provided that the company was incorporated on or before 1 July 2028 and does not have any “material discretionary elements”. This would effectively require the shares on issue to be ordinary shares only, held by individuals.

The intended effect of the EET election option is to allow trusts the ability to fall outside the minimum trust tax regime, but in a way that doesn’t give rise to state-based duty implications. However, significant concerns have already been raised about this proposed regime since:

• making such an election could be construed as a fetter on a trustee’s discretion, giving rise to potential trust law breaches and future claims by beneficiaries who have not been properly considered; and
• many state revenue offices have already indicated that making such elections may in fact still give rise to duty implications.

Next Steps

The Exposure Drafts are open for consultation until 18 September 2026.

Concerned advisers and taxpayers are encouraged to lodge their submissions directly to Treasury.

The Federal Government has indicated that it intends to pass the new legislation prior to Christmas this year.

Natalie Cameron
Legal Practice Director