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Minimum tax of 30% on discretionary trust taxable income from 1 July 2028 (May Federal Budget 2026)

From 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee. The minimum tax will not apply to other types of trusts, such as:

  • fixed and widely held trusts (including fixed testamentary trusts);
  • complying superannuation funds;
  • special disability trusts;
  • deceased estates; and
  • charitable trusts.

Exclusions for some types of income are also proposed, including:

  • primary production income;
  • certain income relating to “vulnerable minors”;
  • amounts to which non-resident withholding tax applies; and
  • income from assets of discretionary testamentary trusts existing at announcement.

Non-refundable credits for beneficiaries

Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee. If implemented as described, this would mean the withholding would operate more like the MIT final withholding tax for non-residents – a minimum floor tax – rather than like the existing credit mechanism where the beneficiary can get a refund if the trustee overpaid.

The marginal rate of 30% applies to taxable income in the range of $45,000 to $135,000. This means that beneficiaries who have taxable income of less than $45,000 would end up paying tax at a higher rate on the trust distribution (ie 30%) than they would on the rest of their taxable income (ie currently 0% or 16%).

The proposal would likely bring forward the collection of the new tax from a timing perspective, as the trustee would presumably have to withhold the tax from distributions and pay that tax to the ATO in a more timely manner than having the tax assessed and collected after the beneficiary lodges their tax return.

Restructure roll-over relief proposed

The Government notes that the number of discretionary trusts has more than doubled over the past 20 years. The Budget states that the minimum tax measures will include expanded rollover relief for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust.