The Federal Government yesterday released exposure draft legislation for the proposed 30% minimum tax on discretionary trusts, providing more guidance in respect of the likely form of the new regime from 1 July 2028.

The Government’s message remains clear – the discretionary elements of trusts are under attack. Retaining these discretions will attract adverse income tax implications from 1 July 2028 onwards if these changes are enacted.

The unexpected change, which is getting the headlines, is the ability to ‘lock in’ future distributions for existing discretionary trusts, even to ‘bucket companies’. This will act as an effective opt out of the 30% minimum tax rules. The devil is in the detail here though, so caution is required.

There’s more to play out here, so we recommend remaining alert, not alarmed. We provide a summary below of the key takeaways from the exposure draft for private groups.

How will the minimum tax work?

Broadly, trustees of most discretionary trusts would be required to pay tax at a minimum rate of 30% on trust income after 1 July 2028.  This change sets a floor for the tax paid by a private group and represents a significant change from the existing law. Effective tax rates can escalate quickly for groups if they are not careful.

Where an individual beneficiary is made presently entitled to that trust income, the beneficiary may receive a non-refundable tax offset for the tax paid by the trustee. In practical terms, this means that distributions of less than $227,000 to individuals with no other income will result in inefficient tax outcomes.

Double taxation nightmares for group structures

The more concerning outcome is for groups with corporate beneficiaries or chains of trusts. The exposure draft indicates that the minimum 30% tax is imposed at the trustee level, but care will be needed where the trust income is distributed to (or through) companies or other trusts.

Double taxation will arise in these instances where effective tax rates for groups can quickly climb above 60%, and in some cases tax rates surpass 70%!

A reprieve for charities

In good news for the charitable sector, the government has relented from previous announcements and declared that distributions to charities and deductible gift recipients will not be subject to the 30% minimum tax.

Restructuring possibilities

The exposure draft includes a proposed three-year Capital Gains Tax (CGT) roll-over period from 1 July 2027 for taxpayers who wish to restructure out of a discretionary trust into another vehicle, such as a company or fixed trust.  Importantly, the transfer of assets must meet a number of requirements, including that the transferee can have no “material” discretionary elements. This means that restructure relief is likely to only apply to asset transfers from discretionary trusts to vanilla structures with fixed entitlements.

Whilst CGT relief may be available in certain circumstances, it does not necessarily solve transfer duty, privacy or asset protection issues involved with moving from discretionary trusts to corporates or fixed trusts.

An election to fix entitlements – a way out?

An unexpected inclusion in the exposure draft is an ability for trustees of discretionary trusts in existence on 1 July 2028 to elect to distribute in a set way to pre-nominated beneficiaries in the future. This election will lock the trustee into making fixed distributions of income and capital to the nominated beneficiaries going forward. It is possible for companies to be included as predetermined beneficiaries, but only if their shareholdings reflect fixed entitlements too.

Where the election is made and the trustee distributes the income of the trust according to the election, the minimum 30% tax will not apply to that trust, and the group will avoid the abovementioned headaches.

However, if distributions are made outside the election, the election is revoked, the trustee is assessed on the top marginal tax rate in that year, and the trust enters the minimum 30% tax regime from then on.

Whilst this may allow some groups to preserve the existing trust without transferring assets, and incurring the tax headaches of the new regime, they will kiss goodbye to the flexibility they are used to.

Which trusts and income are proposed to be excluded?

The proposed minimum tax is not intended to apply to all trusts. The exposure draft indicates that fixed trusts, widely held trusts, managed investment trusts, bare trusts, employee share trusts, complying superannuation entities, special disability trusts, charitable trusts, deceased estates and genuine discretionary testamentary trusts are proposed to remain outside these rules.

Further, primary production income and certain income relating to vulnerable minors is also proposed to be excluded.

What should you do now?

Don’t panic. The announcements are not yet law. Pilot Partners continues to closely monitor the progress of the tax changes arising from the 2026 Federal Budget.

Contact Pilot

To discuss these changes further, and to understand what the changes mean for your group, and the alternatives available to you, contact Tom Howard, Murray Howlett, or your Pilot advisor on (07) 3023 1300.