Australia has introduced legislation to impose a 30% minimum tax on discretionary trusts from 1 July 2028, alongside beneficiary tax offsets, targeted exemptions and transitional relief options. The reforms aim to curb tax minimisation through income splitting and other trust distribution arrangements.

RF Report

The Australian Government introduced the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 and the Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 to the House of Representatives on 14 October 2026. The proposed legislation imposes a 30% minimum tax on the net income of discretionary trusts, scheduled to apply to income years commencing on or after 1 July 2028.

According to the Explanatory Memorandum, the discretionary trust package (Schedules 1–3) is projected to increase the underlying cash balance by AUD 4.3 billion over the forward estimates (realised in 2029–30), with average regulatory compliance costs rising by AUD 141.5 million annually over ten years.

The primary policy objective is to align trust income taxation with individual wage earners paying marginal tax rates. The reform targets tax minimisation strategies exploiting trust flexibility, such as income splitting across low-rate beneficiaries, income streaming (capital gains and franked distributions), funding personal expenses via distributions, and tax deferral through corporate beneficiaries.

Core mechanics & beneficiary offsets

Schedule 1 of the Bill and the Imposition Bill establish a trustee-level top-up tax under section 101AA of the ITAA 1936 and section 12AB of the Income Tax Rates Act 1986:

  • Trustee top-up tax: Applies to net “minimum tax income” of a minimum tax trust. Where existing trustee tax liability falls short of 30%, section 12AB imposes a top-up rate to bridge the shortfall to 30%.
  • Non-corporate beneficiaries: Entitled to a 30% non-refundable tax offset under section 101AG against individual tax liabilities, matching their share of minimum tax income.
  • Corporate beneficiaries: Section 101AG explicitly denies the tax offset to corporate beneficiaries, preventing the circumvention of minimum tax rules through corporate entity structures.

Carve-outs & statutory exclusions

The legislation exempts certain primary production income, distributions to vulnerable minors, qualifying testamentary trusts, charities and deductible gift recipients (DGRs). It also caps income for certain non-charitable tax-exempt entities. A new principles-based definition of fixed trusts replaces the existing statutory test to protect commercial trusts, managed investment trusts (MITs) and attribution managed investment trusts (AMITs). Testamentary trusts established from 1 July 2028 will face stricter beneficiary eligibility requirements.

Transitional relief pathways

In-scope discretionary trusts existing on 1 July 2028 have two primary compliance options:

Parameter Pathway A: 3-Year Income Tax Rollover Relief Pathway B: Electable Regime / Excluded Election Trust (EET)
Statutory Authority Subdivision 126-Z, Income Tax (Transitional Provisions) Act 1997 Division 6F, Income Tax Assessment Act 1936
Eligible Window 1 July 2027 – 30 June 2030 2028–29 income year (irrevocable nomination)
Entity Restructuring Required; transfer all non-excluded assets to a single transferee entity Not required; retains trust structure and discretionary powers
Duty & Tax Impact Defers CGT/income tax via historic tax base carryover; state duties may apply Avoids state transfer duties and immediate CGT triggers
Key Condition Continuous underlying individual ownership; no material discretionary elements 100% of income and earnings allocated in fixed proportions to set beneficiaries
Non-Compliance Risk 4-Year Post-Transfer Clawback: Discretionary elements introduced within four years trigger tax reassessment Automatic revocation subjects trustee to s. 99A tax at top marginal rate plus Medicare levy
Relief Mechanism N/A s. 102UYH: Commissioner discretion to disregard automatic revocation for inadvertent errors

Broader context & related reform measures

Related reforms replace the 50% CGT discount with cost base indexation and introduce a 30% minimum tax on capital gains from 1 July 2027. They preserve existing tax concessions for investments in new residential and affordable housing. Certain employer superannuation contributions received in 2026–27 are also excluded from concessional cap calculations to prevent breaches.