Treasury has released a consultation paper (Paper) on the proposed 30 per cent minimum tax for discretionary trusts. The Paper follows the 2026-27 Federal Budget announcements made on 12 May 2026 and provides further detail about the Government’s proposal for a trustee-level minimum tax from 1 July 2028.
The Paper follows shortly after Commissioner of Taxation v Bendel [2026] HCA 18 (Bendel), where the High Court, by majority, dismissed the Commissioner’s appeal and rejected the argument that the corporate beneficiary’s unpaid present entitlements (UPEs) in that case were loans for the purposes of section 109D of the Income Tax Assessment Act 1936 (ITAA 1936). We wrote about Bendel here.
The Paper addresses both by seeking feedback on:
the design and administration of the minimum tax; and
the implementation of an earlier announced measure to bring UPEs within Division 7A of the ITAA 1936.
Treasury has set a brief consultation period. Submissions close on 31 July 2026.
What has Treasury released?
The Paper outlines the proposed design of the minimum tax and asks for feedback on implementation. The Paper is not draft legislation. Treasury states that the principles in the Paper have not received Government approval and are not yet law.
The basic trust taxation rules will remain. Division 6 of the ITAA 1936 will continue to assess beneficiaries by reference to their present entitlement to trust income. Section 95 of the ITAA 1936 will remain central because the Paper uses “taxable income” to describe the “net income of the trust estate” as defined in that section. Section 97 of the ITAA 1936 will continue to be the main provision assessing a beneficiary who is presently entitled to a share of trust income on the corresponding share of net income.
The proposed change would require, from 1 July 2028, the trustee of a discretionary trust within scope to pay a 30 per cent minimum tax on the trust’s taxable income, unless a higher rate or an exclusion applies. Beneficiaries would still include their trust distributions in their own tax returns. The trustee-level tax would then be recognised through a new minimum tax offset for eligible beneficiaries.
Treasury’s policy concern is income splitting. Discretionary trusts allow trustees to allocate income among beneficiaries, often including family members or related entities, in a way that can produce a lower overall tax rate than would apply if one individual earned the income directly.
Treasury also states that trusts remain legitimate structures for asset protection and succession planning. The Paper proposes a minimum effective rate for discretionary trust income while leaving the use of trusts available.
The proposed taxing mechanism
The trustee would pay the minimum tax. Treasury’s rationale is practical: the trustee controls distributions, calculates the trust’s taxable income, and already manages the trust’s tax reporting.
Non-corporate beneficiaries would generally receive a non-refundable minimum tax offset for the minimum tax payable by the trustee. The offset would be calculated by reference to the beneficiary’s share of the trust’s taxable income, not merely the beneficiary’s share of accounting or trust income.
The Paper clarifies that beneficiaries are still assessed for tax on their share of the trust’s income and, for that purpose, the minimum tax payable by the trustee is not an expense reducing that income. An example in the Paper indicates that income of a trust distributed to a corporate beneficiary would be subject to both the minimum tax payable by the trustee and tax in the hands of the corporate beneficiary without the benefit of the minimum tax offset, resulting in approximately $60,000 in tax on that one amount of income. This is consistent with our explanation of how the model works in our article (The Minimum Tax on Discretionary Trusts: Bucket companies are worse than you think — Sladen Legal), which then considers the further tax payable when that distribution is ultimately paid to an individual shareholder which can result in a total effective tax rate of 69.72 per cent.
For non-corporate beneficiaries, the minimum tax offset could reduce income tax but could not reduce the Medicare levy. It could not be refunded, carried forward, or transferred.
Corporate beneficiaries would not receive the minimum tax offset. Treasury’s concern is that allowing a company to claim the offset could convert trustee-level minimum tax into franking credits that later flow to shareholders, including individuals who may also be trust beneficiaries. This would significantly affect groups that use corporate beneficiaries to retain trust income.
The Paper proposes specific rules for trustee beneficiaries. A trustee beneficiary would generally include its share of the first trust’s taxable income and may receive a minimum tax offset. If that trustee beneficiary is itself a discretionary trust subject to the minimum tax, any excess offset could not be refunded, carried forward, or passed to downstream beneficiaries.
This may prevent a trust with positive income from distributing to a trust with current year or prior year revenue losses and being able to offset that income against the loss. This may have been a key incentive for trusts to make family trust elections (FTEs) in order to avoid needing to consider the income injection test. Those groups will now be left with legacy FTEs but unable to offset the losses, as the minimum tax offset paid by the profitable trust will be wasted.
If the trustee beneficiary is not a discretionary trust within scope, the offset may be capable of being allocated to eligible non-corporate beneficiaries.
If no beneficiary is presently entitled to trust income, the existing trustee assessment rules would generally continue to apply. Accordingly, Treasury does not intend the new minimum tax to replace the existing trustee taxation rules where income accumulates without a present entitlement.
Which trusts are within scope, and how will income be treated?
Treasury proposes that the minimum tax apply only to discretionary trusts. This creates an immediate definitional issue. The Paper notes that the existing tax framework generally defines discretionary trusts by exclusion: a trust is treated as discretionary because it is not a fixed trust. Fixed trust status depends on beneficiaries having vested and indefeasible interests, a concept used in provisions such as section 272-5 of Schedule 2F to the ITAA 1936 and subsection 102UC(4) of the ITAA 1936.
Treasury recognises that adopting the existing fixed trust concept may capture more trusts than intended. Modern trusts often include amendment powers, powers to add beneficiaries, or powers to adjust entitlements. Those powers may exist but may never be exercised. Treasury is asking how the minimum tax should distinguish between discretionary family trust structures and trusts that have sufficiently fixed and transparent economic outcomes.
A related question is how Treasury will treat trusts where different beneficiaries have fixed entitlements as to income compared to capital. Practical Compliance Guideline PCG 2016/16 requires beneficiaries to have the same rights as to both income and capital for a trust to qualify as a fixed trust for the purposes of that guideline. It is unclear whether Treasury intends to adopt a similar approach for the minimum tax, or whether trusts with fixed but differing income and capital entitlements could be excluded from the discretionary trust definition.
Treasury proposes to exclude several trust categories. These include fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts. Treasury also proposes to exclude primary production income and says the reform would not change existing treatment of farm management deposits or Australian carbon credit unit related income.
The Paper proposes separate rules for testamentary trusts. Treasury proposes that income from discretionary testamentary trusts be exempt where they are established for genuine testamentary purposes and the income comes from assets of the deceased estate.
Income from unrelated assets injected into a testamentary trust after 7:30 pm AEST on 12 May 2026 would be subject to the minimum tax. For discretionary testamentary trusts established on or after 1 July 2028, the exclusion would be limited to trusts that can only benefit individuals and income tax-exempt entities.
Treasury also proposes exclusions for certain income relating to vulnerable minors, broadly consistent with the current policy of Division 6AA of the ITAA 1936. This would include certain income associated with disability, personal injury, workers compensation, criminal injury, loss of parental support, and orphan circumstances. Distributions to foreign resident beneficiaries would also be excluded to the extent they comprise dividends, interest, or royalties subject to withholding tax.
Treasury has not resolved how the rules should treat income tax-exempt beneficiaries, including charities. The trustee would pay the minimum tax, which would generate a non-refundable offset. A tax-exempt beneficiary may not be able to use that offset because it has no income tax liability. Treasury specifically asks how distributions to income tax-exempt entities should be treated.
Rollover relief for restructuring
The Government proposes expanded rollover relief for three years from 1 July 2027. The policy objective is to assist taxpayers who wish to move assets or activities out of discretionary trusts before the minimum tax commences on 1 July 2028.
The proposed rollover would use the small business restructure rollover in Subdivision 328-G of the Income Tax Assessment Act 1997 as its base, with broader operation:
it would apply beyond small business entities and would not require a genuine restructure of an ongoing business; and
it would apply to all trust assets capable of transfer, including passive investment assets, rather than only active business assets and other specified assets.
Treasury does not intend the relief to preserve the same discretionary economics in a replacement vehicle. Treasury intends restructured arrangements to produce more fixed and transparent economic outcomes.
For example, relief may be restricted where assets move into a company with multiple share classes that allow dividends or capital returns to be directed between participants on a discretionary basis. Relief may also be denied where a partnership or comparable arrangement allows discretionary allocation of income, gains, or capital.
The Paper also raises a practical issue for family groups. Existing small business restructure rollover rules can require a FTE to satisfy ultimate economic ownership requirements. Treasury recognises that this would be problematic in this context because FTEs are generally irrevocable and can have ongoing tax consequences, including family trust distributions tax (FTDT). Treasury therefore canvasses a new statutory family unit concept to determine whether economic ownership remains within the same family group.
Treasury proposes to design the rollover so that FTDT does not arise merely because a discretionary trust with an existing FTE or interposed entity election (IEE) transfers property to an entity that is outside the relevant family group as part of a qualifying restructure. This issue is likely to affect many long-standing family trust groups that have made elections for trust loss, franking credit, or other reasons.
Treasury also asks whether alternatives could reduce the need for pre-commencement restructuring. One example is allowing an existing discretionary trust to make an irrevocable election to be treated and taxed as a fixed trust for all income tax purposes. Some groups may consider that approach, but it raises questions about trust deed powers, beneficiary rights, trustee duties, and whether the tax election would align with the trust law position.
Should trustees receive refunds or carry forward excess franking credits?
The treatment of excess franking credits is a significant design issue. Under the proposed minimum tax, a trustee that receives franked dividends would use franking credits to offset its tax liabilities, including the minimum tax.
Excess franking credits may remain after the trustee applies the available offsets. Treasury is considering two approaches:
Treasury could refund excess franking credits to the trustee. This approach preserves the refundable character of franking credits, but Treasury notes that it may create complexity because excess minimum tax offsets are not refundable.
Alternatively, Treasury could require trustees to carry forward excess franking credits to reduce future trustee tax liabilities. This approach may better align with the integrity objective, but it would create record-keeping and tracing issues.
Treasury notes that integrity rules may be needed so that new beneficiaries do not obtain an indirect benefit from credits generated before they became involved with the trust.
How Treasury proposes to collect the minimum tax and notify beneficiaries
The Paper also addresses collection mechanisms. Trustees would need to calculate, report, and pay the minimum tax. Trustees would also need to notify beneficiaries of their entitlements and associated minimum tax offsets.
Treasury recognises that, in practice, the full tax consequences of a beneficiary’s entitlement may not be known until closer to the trust’s lodgement date. That timing can create difficulties for beneficiaries who need to lodge their own returns and for accountants managing trustee reporting, beneficiary statements, and trust tax return preparation.
Treasury canvasses stronger collection mechanisms. These include giving the Commissioner of Taxation a right of reimbursement from trust assets, making directors of corporate trustees jointly and severally liable for the minimum tax, empowering the Commissioner to issue notices where trustees fail to pay, and using earlier collection methods such as pay as you go (PAYG) instalments. The Paper refers to section 254 of the ITAA 1936 as an existing collection and recovery rule for trustees and agents.
These proposals have practical significance for corporate trustees. Many corporate trustees have limited assets in their own right. Directors and advisers should consider whether any director exposure is proportionate and how it would interact with existing trustee indemnity rights, trust deed limitations, and ATO debt collection practices.
How Bendel affects Division 7A reform
Treasury addresses Bendel directly and asks for feedback on the interaction between the minimum tax and the 2018-19 Budget measure to bring UPEs within Division 7A.
Division 7A of the ITAA 1936 treats certain payments, loans, and forgiven debts by private companies to shareholders or their associates as unfranked dividends. Section 109D of the ITAA 1936 deals with loans.
The Commissioner had long taken the view that certain UPE arrangements involving corporate beneficiaries could amount to financial accommodation for Division 7A purposes. That approach was reflected historically in Taxation Ruling TR 2010/3, which was withdrawn with effect from 1 July 2022 for trust entitlements created on or after that date, and later in Taxation Determination TD 2022/11 that applied from that date.
In Bendel, the High Court rejected the Commissioner’s argument on the facts before it. The majority held that the relevant UPEs were held on separate trusts for the corporate beneficiary, no debtor-creditor relationship arose between the trustee and that beneficiary, and the beneficiary’s failure to demand payment did not bring the arrangement within the expanded definition of loan in subsection 109D(3) of the ITAA 1936.
The Government may now pursue two related reforms.
The minimum tax would reduce the incentive to distribute discretionary trust income to low-rate beneficiaries or corporate beneficiaries where that produces an overall rate below 30 per cent.
Separately, the Division 7A reform would address UPEs owed to corporate beneficiaries more directly.
Advisers should consider the minimum tax and the Division 7A measure together. The minimum tax would reduce the benefit of distributing discretionary trust income where that produces tax below 30 per cent. The revised Division 7A measure would address UPEs owed to corporate beneficiaries in a more targeted manner. Accordingly, the Paper should be read as both a trust minimum tax consultation paper and a post-Bendel Division 7A consultation paper.
The 17 questions on which Treasury seeks feedback
The Paper asks for feedback on 17 specific questions. The table below summarises those questions.
Please see original artilce here
What should advisers do at this stage?
The Paper is at consultation stage, but the proposed commencement dates are sufficiently close that advisers should begin identifying affected groups now. Advisers should first identify discretionary trusts that distribute to low-rate individuals, corporate beneficiaries that retain trust income, tax-exempt entities, foreign residents, or other trusts. Advisers should then review trust deeds, unpaid entitlements, FTEs, IEEs, franking credit profiles, and the feasibility of restructuring.
The proposed rollover relief may assist some groups, but it will not suit every structure. This includes structures that own real property or businesses in certain jurisdictions.
Moving from a discretionary trust to a company may reduce some compliance complexity and allow income retention at the corporate rate. However, it may also result in loss of access to the capital gains tax discount until 1 July 2027 and indexation after that. It may also alter succession, asset protection, and governance outcomes. Moving to a fixed trust may be a more familiar alternative; however, drafting, stamp duty, land tax, financing, and beneficiary rights issues may be significant.
Sladen Legal’s tax team regularly advises accountants, private business owners, family groups and trustees on trust taxation, Division 7A, FTEs, restructuring, and ATO engagement. If you or your clients would like to understand how the proposed minimum tax and post-Bendel Division 7A reform may affect existing structures, please contact a member of our tax team.
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E dsmedley@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E klowdon@sladen.com.au
This article was originally published on the Sladen Legal website: From Bendel to Budget reform: Treasury targets trust tax planning
