Minimum tax on discretionary trusts: the draft law lands, and the concerns remain

To be fair, the exposure draft picks up several points raised by the National Tax & Accountants’ Association (NTAA) in our submission on the consultation paper, most notably the election regime, distributions to charitable organisations and a long-overdue rewrite of the ‘fixed trust’ definition. But significant design problems remain and new ones have emerged. Here is what you need to know before the bills land.

The fundamentals have not changed

A trustee of a minimum tax trust will pay 30 per cent of the trust’s minimum tax income under proposed section 101AA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), and non-corporate beneficiaries receive a non-refundable minimum tax offset (MTO). The MTO can be used only to the extent of the beneficiary’s own tax liability, so their average rate matters, not their marginal rate. A beneficiary whose only income is a $45,000 distribution loses $9,748 of MTO, and would lose the same amount if their income was instead $135,000. Full use of the MTO requires a taxable income of more than $229,320. This means those on higher income are least affected while, oddly, those on lower income are most affected. The draft legislation does nothing to change that.

Franking credit refunds disappear

Consequential amendments to sections 207-45 and 207-50 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) require the trustee to apply franking credits against the minimum tax, so the credits no longer flow through to beneficiaries. A retiree or other low-income beneficiary who currently receives a refund of excess franking credits through an investment trust will lose that refund entirely and receive instead an offset they cannot use. Hold the same shares directly and the refund survives. That has nothing to do with income splitting.

Tip: identify now which clients receive franking credit refunds through a trust.

'Reverse streaming'

Certain classes of income will be excluded from the minimum tax, including primary production income, certain income relating to vulnerable minors, amounts subject to non-resident withholding tax, and income from deceased estate assets of testamentary trusts.

In a significant new compliance obligation, trustees will need to identify and separate those classes to apply the minimum tax correctly — a form of ‘reverse streaming’, with no precedent beyond the current streaming rules that apply to franked distributions and capital gains.

Vulnerable adults remain exposed

The exclusion in proposed subparagraph 101AE(1)(b)(ii) protects vulnerable minors, but it stops at age 18. An adult child with a disability supported through an ordinary discretionary trust, or a family member on income support, bears what is effectively a final tax of 30 per cent on the support they receive. NTAA recommended these beneficiaries be excluded. The exposure draft ignores that recommendation.

Corporate beneficiaries: the rationale does not stack up

Proposed paragraph 101AF(1)(d) denies the MTO to corporate beneficiaries. Income distributed to a corporate beneficiary bears 30 per cent at the trustee level and another 30 per cent in the company, with no credit for the tax already paid. By the time a top-rate shareholder receives a franked dividend, the total tax on $100 of trust income is $69.71. This sounds the death knell for the use of corporate beneficiaries, which will become commercially unviable from 1 July 2028.

The consultation paper justified the denial on the basis that a company could otherwise convert the MTO into refundable franking credits. That simply does not work under the imputation rules. Section 205-15 of the ITAA 1997 lists the events that give rise to a franking credit, and a non-refundable tax offset is not among them. Section 205-20 doesn’t help either: an offset reduces the amount of the company’s liability; it is not a payment of tax.

In fact, denying the MTO produces the opposite of the stated concern. To compare allowing and denying the MTO to a corporate beneficiary, take $100,000 of minimum tax income distributed to a company taxed at 30 per cent, with no other income and a nil opening franking account balance:

This example assumes the corporate beneficiary is not a base rate entity.

The denial creates the very franking credits the Government says it is worried about, and doubles the tax along the way. If the MTO were available, the company would have no tax payable, resulting in the company making an unfranked distribution to its shareholders. Because the MTO is denied, the company pays $30,000 of company tax, allowing it to make a franked distribution. Denying the MTO therefore increases the franking credits available to be attached to dividends; allowing it would generate none.

If the concern is refunds to low-rate shareholders, the targeted fix is to allow the MTO to reduce the company’s tax, but without giving rise to a franking credit.

Tip: the denial of the MTO to corporate beneficiaries applies only to minimum tax income. Taxable primary production income is excluded income under proposed paragraph 101AE(1)(a), so no minimum tax is paid on it and no MTO is denied.

Losses are still out in the cold

Two loss problems survive intact. First, where a profit trust distributes to a loss trust in the same family group (where the relevant family trust elections (FTEs) or interposed entity elections have been made), the income injection test in Division 270 of Schedule 2F to the ITAA 1936 currently does not prevent the loss trust from using its losses. Under the minimum tax, the income bears 30 per cent before it arrives. The loss trust has no liability to absorb the MTO and it cannot pass the MTO on either. The losses are effectively worthless. That overturns 31 years of settled policy, and hits hardest the groups that made (generally irrevocable) FTEs precisely to access them.

Second, nothing in the draft legislation adjusts the minimum tax for a beneficiary’s current year or carried forward tax losses. NTAA has suggested a variation mechanism along the lines of the PAYG withholding variation framework.

Six decisions left to the minister

This should worry practitioners, because the Minister will decide who is in and who is out. The draft legislation leaves six substantive matters to ministerial determination by legislative instrument:

• Which trusts are not minimum tax trusts;
• The conditions, potentially including a cap, under which distributions to registered charities and deductible gift recipients are excluded income. If no determination is made, no exclusion is available at all;
• What counts as a ‘material discretionary element’ for the fixed trust test, roll-over transferees and ‘eligible company’ under the election; and
• The continuity requirements for a trust without an FTE to access the roll-over.

None has been released in draft. Legislative instruments take effect before Parliament has a meaningful opportunity to scrutinise them and can be varied after enactment. We have seen where that leads with the challenges arising from the registration of the Tax Agent Services (Code of Professional Conduct) Determination 2024 without adequate prior consultation. Eligibility for the roll-over and the election belongs in primary legislation.

The new 'fixed trust' definition: welcome, with a sting

Proposed section 272-65 of Schedule 2F will replace the strict ‘vested and indefeasible’ test with a test of whether there are no material discretionary elements affecting beneficiaries’ entitlements or rights. This is a genuine improvement, but two things need watching.

First, it applies across the whole income tax law, including the trust loss and franking credit holding period rules, with unexamined consequences for trusts that will never be minimum tax trusts.

Second, the test turns on whether a power exists, not whether it has been exercised. Many SME unit trust deeds allow the trustee to issue or redeem units. Even if those powers are exercised only at market value, or never used, their mere existence may be fatal.

Tip: start reviewing unit trust deeds now. Unless the test is changed, some of your clients’ ‘fixed’ trusts, including unit trusts, may turn out to be minimum tax trusts.

The roll-over: welcome, but all or nothing

The roll-over will run from 1 July 2027 to 30 June 2030 and switches off the CGT and family trust distribution tax consequences of qualifying transfers. The conditions are full of traps:

• All assets, one transferee: Relief is available only if all the trust’s assets (subject to limited exclusions) go to a single transferee by 30 June 2030. Miss that and relief already claimed on earlier transfers is reversed. You cannot send the business to a company and the investment property to a fixed trust.
• Third-party consents: An asset that cannot be transferred is excluded, but no equivalent relief is available where a landlord or regulator does not consent in time. One recalcitrant lessor could sink the roll-over for every asset.
• Stranded losses: Carried forward tax and capital losses stay behind in a trust stripped of its income-producing assets, with no consolidation-style transfer of losses available.
• Non-family trusts depend on the Minister: A trust without an FTE can access the roll-over only if a ministerial instrument setting its continuity requirements is in force. This may lead to some clients choosing to make an FTE, with its lasting consequences, just to get through the door.
• Watch the transferee for up to five years: Relief is lost if material discretionary elements affect members’ rights in the transferee during the period ending four income years after the year of the last transfer. A constitution that allows directors to issue new classes of shares, or that can be amended by special resolution, may fail from day one.
• Duration of the roll-over period: With only three years to act, every group containing a discretionary trust will need to review its position, and many will incur substantial professional fees whether or not they ultimately restructure. The demand on accountants, tax agents and lawyers to review the arrangements of every trust client will fall on a profession already under pressure from other policy and regulatory changes.

Then there are the costs the Commonwealth cannot switch off. State and Territory duty remains the single biggest barrier to restructuring. GST is live too: the going concern exemption may not be available where assets move in stages. And neither the draft bill nor the explanatory materials confirm that restructure advice is deductible under section 25-5 of the ITAA 1997. If the five-year write-off under section 40-880 is the answer, investment trusts that do not carry on a business are left with genuine blackhole expenditure.

The election: an opt-out with strings attached

The electable regime responds directly to the alternative NTAA put forward, and we broadly support the concept. A trustee can elect for the trust to be an excluded election trust (EET) and nominate a percentage of income and capital for each beneficiary. No minimum tax, no restructure, no duty. What’s not to like?

Quite a lot, as currently drafted. A trustee who elects to avoid the minimum tax may encounter problems far greater than the tax saved. The nomination can be varied only on a beneficiary’s death or a relationship breakdown. Any distribution inconsistent with it, however small or inadvertent, permanently revokes the election. And revocation is severe: the trustee is assessed under section 99A at 47 per cent on all the trust’s net income for that year, including amounts already validly paid to other beneficiaries. Thereafter, it becomes a minimum tax trust.

In practice, a trustee is locked into distributing to a nominated beneficiary who develops a gambling dependency, becomes estranged, moves overseas or, in the worst case, is abusing the very parent who is the trustee. A child or grandchild born after the election cannot be added. A nominated charity must take the same share of capital as income every year.

Other pitfalls to watch for:

• A trustee choosing to elect must lodge a once-off election with the ATO broadly by the due date of lodgment of the 2028–29 trust tax return;
• A trustee cannot make an EET election if it has chosen the roll-over;
• Accumulating income revokes the election, even though accumulated income is taxed at 47 per cent anyway. That includes the common practice of retaining a small amount so the trustee is assessed and the period of review starts to run;
• Default beneficiary clauses and vesting provisions can force the trustee to breach either its obligations under the deed or the nomination;
• The trustee can vary a nomination on a relationship breakdown to cease distributing to the former spouse or partner of a beneficiary; however, starting to distribute to the new spouse or partner will revoke the election; and
• The explanatory materials are silent on how a nomination interacts with streaming, the pattern of distributions test and the small business CGT concessions. A beneficiary nominated for less than 20 per cent cannot be a significant individual.

Then there is trust law. The draft legislation describes the nomination in the language of ‘fixed entitlements’, inviting arguments that it erodes asset protection, triggers State or Territory duty or alters family group membership. And a trustee who simply distributes in line with the nomination, without giving real and genuine consideration to beneficiaries’ changing circumstances, risks acting in breach of trust in light of Owies v JJE Nominees Pty Ltd [2022] VSCA 142.

Tip: these are trust law questions, outside the remit of most accountants and generally outside their professional indemnity insurance cover. Any client considering an election should obtain legal advice, and should treat the election as a bridge for the current generation rather than a permanent state for the life of the trust.

Still to come

Treat these bills as tranche one. Residency, CGT and international interactions, collection, beneficiary notification, director liability, the Division 7A interaction following Commissioner of Taxation v Bendel [2026] HCA 18 and further integrity rules are all deferred to a later tranche. So is the interaction with the 30 per cent minimum tax on capital gains in Division 119 of the ITAA 1997, and whether minimum tax assessments will have a limited period of review. If collection is by periodic instalments, trusts with lumpy income may face real cash flow pressure.

What to do now

NTAA’s position is unchanged: the measures should not proceed in their current form. With the bills expected imminently, the focus now shifts to Parliament.

In the meantime, practitioners should:

• Map every client group with a discretionary trust, including beneficiaries’ likely income levels, franking credit refunds, corporate beneficiaries and carried forward losses;
• Review unit trust deeds and company constitutions against the ‘material discretionary elements’ tests;
• Identify trusts without an FTE that would depend on a ministerial instrument to access the roll-over, and resist making an FTE purely to qualify;
• Scope state and territory duty and GST exposure for any group likely to restructure;
• For clients attracted to the election, test whether a nomination can realistically survive the next 10 or 20 years of family life, and line up legal advice; and
• Compare the bills as introduced, and each instrument as released, against the exposure draft.

Above all, don’t restructure yet. The roll-over does not open until 1 July 2027, key eligibility rules have not yet been written, and the bills as introduced may differ from the exposure draft. But do start the conversation with affected clients now. The window between final law and the roll-over opening will be short, and demand on advisers intense.

NTAA’s submission on the exposure draft legislation can be found here. 

About the author

Robyn Jacobson is the senior advocate at the National Tax & Accountants' Association Ltd (NTAA). She is a fellow of NTAA, CA ANZ and CPA Australia, and is a chartered tax adviser of The Tax Institute.

About NTAA

NTAA is a prominent not-for-profit association, established in 1992 to support tax agents, accountants and tax advisers. For more than 30 years, NTAA has advocated on behalf of its members and supported them through its highly regarded tax seminars, products and hotline service. NTAA is a major representative voice for the tax community, representing more than 45,000 practitioners.

Read more at ntaa.com.au