The Government has now introduced a Bill into the Parliament to legislate the minimum 30% tax on discretionary trusts, as well as plugging some gaps in the Capital Gains Tax and Negative Gearing changes introduced earlier this year.
The pace of change, and backflips, here is rapid – and most would be forgiven for seeing stars. The Greens have already stated that they have major issues with some of the backflips, so we expect that further changes will be made before the legislation is enacted…
We have taken this opportunity to summarise where the government’s reforms are up to.
Discretionary trusts: the 30% minimum tax
The Bill contains the Government’s proposed 30% minimum tax on the net income of discretionary trusts from 1 July 2028. If legislated, this will fundamentally change the extent to which discretionary trusts are used in Australia. The Government doesn’t like them, and is taking a sledgehammer to the pinata.
How will the minimum tax work?
Broadly, if the legislation is passed in its current form, the trustee of a discretionary trust will be taxed so that at least 30% tax is paid on relevant trust income. A non-corporate beneficiary may claim a non-refundable tax offset for the tax paid by the trustee in respect of the beneficiary’s share of trust income. The offset mechanism is intended to recognise tax already paid at the trust level, but it is clear that distributions to beneficiaries on lower marginal tax rates will produce a higher effective tax burden than under the current rules.
The treatment of distributions to companies and other trusts remains a critical issue for private groups. Distributions from minimum tax trusts to corporate beneficiaries and certain other trusts will attract effective tax rates north of 60%.
What are the exclusions?
The Bill includes exclusions for specified entities and income, including primary production income, deceased estates, special disability trusts and income from testamentary trusts that are established for “genuine testamentary purposes”.
Distributions to registered charities and deductible gift recipients are also protected. Fixed trusts are also excluded – and have a new definition such that those trusts cannot have any material discretionary elements affecting the income or capital rights of the trust’s beneficiaries.
There are conditions attached to a number of these exclusions. In relation to a discretionary testamentary trust, its income will only be excluded from the minimum tax regime if the beneficiaries of the trust are individuals, exempt entities or a special disability trust. Under these changes, if a testamentary trust has company or trust beneficiaries, then the net income of the trust will be subject to the minimum tax.
Transitional rollover relief
Transitional rollover relief will be available for three years, from 1 July 2027 to 30 June 2030, for eligible restructures from discretionary trusts into vanilla ownership arrangements with no material discretionary elements, such as fixed trusts, companies with ordinary shares, or direct individual ownership.
The relief is limited to income tax consequences. It will not remove State or Territory transfer duty (although the NSW government has made an election commitment not to levy duty on these if re-elected), nor will it necessarily resolve commercial issues such as asset protection or privacy. Any restructure will therefore require a whole-of-group review.
EET, phone home
A discretionary trust in existence on 1 July 2028 may instead elect to become an “Excluded Election Trust” (EET). If made, the trust will not be subject to the minimum 30% tax. The election will only be available in the 2028–29 income year and, once made, will continue for future years unless it is voluntarily or automatically revoked.
Once made, provided the trustee continues to distribute the income and capital of the trust to pre-nominated beneficiaries in accordance with the election, then the minimum 30% regime will not apply to that trust. Permitted nominees can include deductible gift recipients or registered charities, companies without material discretionary elements and other trusts, subject to the detailed conditions.
If distributions are made that are not in accordance with the EET, the trust will be subject to penalty tax in that year, and then be subject to the minimum 30% tax regime.
Negative gearing
The first tranche of the Government’s reforms has already limited negative gearing for future residential property investments. From 1 July 2027, losses from investments in residential dwellings will generally be quarantined unless an existing grandfathering rule or a specific exemption applies.
This Bill now sets out the meaning of a “new residential dwelling” for which negative gearing, as it has been known, can still be applied. Losses from an eligible new residential dwelling will remain deductible against other income rather than being quarantined.
When will a dwelling be “new”?
The Bill identifies four main cases:
- Construction on vacant land – an entity acquires land without a residential dwelling and constructs or installs a dwelling on it.
- Additional dwellings – an entity acquires land with one or more dwellings and later increases the number of dwellings on that land, including by constructing additional dwellings or creating separate dwellings from an existing building.
- Conversion to residential use – an entity converts a building, such as an office or warehouse, into one or more residential dwellings.
- Recent acquisition after completion – an entity acquires an existing dwelling no more than 24 months after the first certificate of occupancy was issued to a previous owner.
Additional exemptions
The existing grandfathering rules remain relevant for residential properties acquired, or contracted to be acquired, before 7.30 pm AEST on 12 May 2026. Earlier amendments also preserve grandfathering in specified transfers arising from death or relationship breakdown.
Capital Gains Tax
The core CGT reforms enacted in the first tranche apply from 1 July 2027. The 50% CGT discount will be replaced for most future gains by cost-base indexation and a 30% minimum tax on real capital gains. Gains accruing before 1 July 2027 remain subject to the existing regime, even if the asset is sold later.
This Bill addresses technical and structural issues left by the first tranche, particularly for trusts and taxpayers whose circumstances do not fit neatly within the basic transition rules.
Deceased estates and testamentary trusts
Capital gains arising for genuine testamentary trusts, deceased estates and special disability trusts, and gains forming part of the income of minor beneficiaries, will be exempt from the 30% minimum tax on capital gains provided they meet integrity measures. The integrity measures broadly target contrived tax-driven arrangements, but do not apply to genuine estate or succession planning, where any tax considerations are merely incidental to achieving legitimate commercial or family succession objectives.
Foreign and temporary residents
Where a foreign resident or temporary resident makes a capital gain directly, access to the CGT discount and indexation will be pro-rated by reference to the number of days the taxpayer was an Australian resident during the relevant ownership period. This was not accounted for in the prior legislation.
AMITs and other trusts
The Bill extends the pre- and post-1 July 2027 split to attribution managed investment trusts (AMITs). Relevant trust assets will be treated as sold immediately before 1 July 2027 and reacquired on that date so that gains and losses accruing on either side of the changeover can be dealt with under the appropriate regime.
Trustees will also be able to choose not to apply cost-base indexation where no beneficiary or member can benefit from it. The amendments preserve access by trusts and AMITs to the CGT discount available for new residential dwellings and affordable housing.
Contact Pilot
If you would like to discuss the impact of the Budget for you and your group, please contact Tom Howard, Murray Howlett or your Pilot advisor on (07) 3023 1300.