Government consults on discretionary trust tax

The government is consulting on the minimum tax on discretionary trusts set to come into effect 1 July 2028.

Annoucned during the 2026 Federal Budget, Treasury is now seeking industry feedback on the incoming tax around the expanded rollover relief, how excess franking credits should be treated and the ways to collect the minimum tax.

The consultation period ends July 30.

The change will apply a 30% minimum tax on discretionary trusts to better align the tax rate on trust income with the tax rates paid by workers, Treasury said.

The announcement was made alongside other changes, including the reforms of capital gains tax discount and negative gearing strategies in the Budget earlier this year.

However, Treasury confirmed the minimum tax will not apply to other types of trusts, such as fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

While some types of income, such as primary production income, will also be excluded from the minimum tax.

"The minimum tax on discretionary trusts is not intended to modify the existing primary production concessions, including the current treatment of Farm Management Deposits and Australian Carbon Credit Unit related income. Some of the other exclusions require more detailed consideration," Treasury said.

"These exclusions relate to testamentary trusts, certain income relating to vulnerable minors, and amounts to which non-resident withholding tax applies."

Treasury will also use this opportunity to re-define discretionary trust, as the current tax framework defines discretionary trusts by exclusion, which provides "greater tax planning opportunities" than other types of trusts.

"Since the 2026-27 Budget announcement, some stakeholders have provided feedback that relying on the existing definition of fixed trusts may result in the scope of discretionary trusts for minimum tax purposes being broader than intended," the consultation paper stated.

"Feedback is sought on 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."

Notably, amounts already taxed in the hands of the trustees will generally not be affected by the tax, and if no beneficiary is made entitled to trust income, the highest marginal rate and the Medicare levy will also continue to generally apply to the income in the hands of the trustee.

Currently, less than 15% of small businesses operate through a discretionary trust structure, and more than 90% of all active small businesses in any given year will not be affected by these changes, Treasury said.

As a result of the consultation, the government may provide expanded rollover relief to assist when restructuring their discretionary trusts to other types of entities, where companies with an aggregated annual turnover that is less than $50 million and no more than 80% of their assessable income has passive sources can enjoy dividend imputation and a lower 25% corporate tax rate.