On 3 September 2026, Treasury released exposure draft legislation for the proposed 30% minimum tax on discretionary trusts, announced in the 2026-27 Federal Budget. This is not yet law. Submissions on the draft closed on 18 September 2026, and the legislation has not yet been introduced to Parliament.

The exposure draft is significant for two reasons. First, it settles much of the architecture of the reform and provides the clearest picture yet of how the minimum tax will actually operate. Second, it introduces a new mechanism, the Excluded Election Trust election, that may allow some existing trusts to avoid the minimum tax without having to restructure. That option was not part of the original Budget announcement and represents a meaningful development for many clients.

The measure at a glance: What is proposed

From 1 July 2028, trustees of discretionary trusts would be required to pay a minimum tax of 30% on the trust's taxable income. The tax is paid at the trustee level, before distributions are made. The mechanism works as follows:

• For individual beneficiaries: The trustee pays 30% tax. The beneficiary receives a non-refundable credit for the tax paid on their share of the income. If the beneficiary's marginal rate is above 30%, they pay additional top-up tax. If their rate is below 30%, the excess credit is lost - meaning more tax is paid overall than would have been the case without the minimum tax.
• For corporate beneficiaries: No credit is available. This means the trust income is taxed at 30% at the trustee level and then again at the company's tax rate when the company distributes the funds. The effective tax rate on income flowing through a corporate beneficiary to an individual can reach as high as 62.9%. This effectively ends the 'bucket company' strategy.

The Government has stated that it expects more than 90% of small businesses operating through discretionary trusts to be unaffected, because most of those businesses distribute income to beneficiaries who are already on marginal rates of 30% or above.

Which trusts are captured (and which are not)

The exposure draft introduces a new and expanded definition of a fixed trust. Trusts that meet the fixed trust definition are excluded from the minimum tax entirely. The new definition is broader than the existing definition used in the trust loss rules, and is intended to ensure that widely held commercial trusts, managed investment trusts, unit trusts with genuinely fixed entitlements, and similar structures are not captured.

The following trust types and income categories are explicitly excluded from the minimum tax under the exposure draft:

• Fixed trusts and unit trusts where there are no material discretionary elements affecting beneficiaries' entitlements
• Widely held trusts, managed investment trusts, and similar commercial structures
• Deceased estates and discretionary testamentary trusts established for genuine testamentary purposes
• Special disability trusts and charitable trusts
• Primary production income
• Distributions to registered charities, deductible gift recipients, and other income tax exempt entities (up to a cap to be finalised)
• Income relating to vulnerable minors under existing concessions.
  
  

The new 'excluded election trust' mechanism – a significant development

One of the most important features of the exposure draft is the Excluded Election Trust election. This is a new mechanism not included in the Budget announcement or the subsequent consultation paper.

Under the election, a discretionary trust that existed on 1 July 2028 may elect to nominate specific beneficiaries with fixed percentage entitlements to both the income and capital of the trust. If a valid election is made, the trust is treated as a fixed trust and is excluded from the minimum tax regime - without needing to restructure into a company or a formal unit trust.

Key features of the election as currently drafted include:

• There is no limit on the number of beneficiaries that can be nominated.
• Nominated beneficiaries can include individuals, trusts and certain companies.
• Each nominated beneficiary's percentage entitlement to income and capital must be the same - the income and capital percentages must correspond.
• The election does not require a formal restructure and is not expected to trigger state and territory stamp duties.

Whether the Excluded Election Trust mechanism is suitable for a particular trust depends heavily on the trust's current structure, the beneficiaries involved, and what flexibility the trustee currently needs. The election effectively fixes distributions in advance, which sacrifices the year-to-year income splitting flexibility that makes discretionary trusts attractive in the first place. For some trusts, this trade-off will be acceptable. For others, the loss of flexibility will outweigh the benefit of avoiding the minimum tax.

The rollover relief for restructuring

For trusts that choose to restructure rather than make the Excluded Election Trust election, three years of rollover relief will be available from 1 July 2027 to 30 June 2030. This allows eligible transfers of assets from a discretionary trust into a company or fixed trust structure without triggering immediate capital gains tax or other tax consequences.

Importantly, the exposure draft introduces a four-year clawback period for rollover relief. If any discretionary element is introduced into the ownership structure of the newly created entity within four years of the restructure, the rollover ceases to have effect and capital gains tax applies to the original disposal. This is intended to prevent trusts from restructuring to access the relief and then reverting to a discretionary arrangement.

What should trust clients do now

The exposure draft is a consultation document. The law is not yet finalised, and the design details, including the exact mechanics of the Excluded Election Trust election, the cap on exempt distributions to tax-exempt entities, and the interaction with the Division 7A rules - remain subject to further consultation and may change before the legislation is introduced to Parliament.

The professional bodies and advisers who have reviewed the draft have noted significant remaining complexity, particularly around the interaction with existing trust structures and the integrity provisions. Making major structural decisions now, before the law is settled, carries real risk.

A note on timing

The draft legislation confirms the direction of the reform and introduces the Excluded Election Trust mechanism as a potential option, but the details are not yet final. It is worth understanding how the proposed rules would affect your specific trust before making any structural decisions. If you would like to talk through how this may affect your situation, we are happy to assist.

Please contact us if you have any questions - email us or phone our team on 02 9899 3044.