This article continues our Tax on Trusts series. Earlier articles examined:
This article considers a different question: how much of the feedback on the exposure draft found its way into the legislation now before Parliament?
On 18 September 2026, Sladen Legal lodged a submission with Treasury on the exposure draft legislation for the minimum tax on discretionary trusts (Submission).
The Government introduced the Bills on 14 October 2026. They are the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 (Bill) and the Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 (Rates Bill), supported by a combined Explanatory Memorandum (EM).
On 15 October 2026, the Senate referred the Bills to the Senate Standing Committee on Economics, which is due to report on 13 November 2026. Submissions to the Committee close on 26 October 2026.
We made 43 recommendations in the Submission. Measured against the introduced Bills, 3 have been adopted in full, 15 in part and 25 not at all. Treasury has accepted a number of changes to the operative mechanics of the regime, but it has largely maintained its position on the scope and design of the regime.
Our next article will be on the reformulated minimum tax rules and testamentary trusts.
Unless otherwise stated, section references are to the Income Tax Assessment Act 1936 (ITAA 1936). References to the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 (ITTPA) are identified as such.
Background and numbering
The exposure draft described the main instrument as Tax Reform No. 4. The Bill as introduced is No. 3. The roll-over, which the Submission discussed as Subdivision 126-C, now appears as Subdivision 126-Z of the ITTPA. We use the introduced numbering throughout.
Adopted in full
Employee share trusts are now expressly excluded
At paragraphs 29 and 30 of the Submission, we argued that employee share trusts should not have to prove fixed trust status under an uncertain test. The exposure draft EM had offered only an assurance that such trusts "would generally meet the definition of fixed trust".
The Bill now adopts this recommendation. Paragraph 101AB(1)(f) excludes an employee share trust from being a minimum tax trust. Paragraph 1.25 of the EM confirms the exclusion operates through the existing definition in section 130-85 of the ITAA 1997. That definition requires the trust’s sole activities to relate to obtaining shares or rights for employees under an employee share scheme. Plan trustees can now answer the threshold question by reference to a familiar statutory test.
Excess franking credits are refundable
Paragraph 104 of the Submission supported the refund of franking credits that exceed the minimum tax payable. Item 12 of Schedule 1 to the Bill replaces subsection 67-25(1B) of the ITAA 1997 and inserts subsection 67-25(1BA). The refundable tax offset rules will apply to franking credits referable to minimum tax income. The proportions of franking credits that do not form part of that minimum tax income are not refundable.
Paragraph 1.79 of the EM states the result plainly: a trustee with excess franking credits after paying the minimum tax "is entitled to a refund". Because the refund arises in the year the excess arises, the carry-forward safeguards we proposed are unnecessary.
Division 6E is coordinated with the minimum tax
At paragraph 103 of the Submission, we asked Treasury to settle how the franking credit gross-up, the minimum tax and the beneficiary offset interact. The Bill adopts this technical recommendation in full, and it is the only one of its kind to be adopted in that way.
Section 101AF defines a beneficiary’s share of the adjusted net income by reference to the Division 6E net income in subsection 102UY(3), together with Subdivision 115-C capital gain amounts and section 207-35 franked distribution amounts (both in the ITAA 1997). Paragraph 1.52 of the EM explains that, without this term, net income would not align with the beneficiary’s share, and the offset would be miscalculated. New subsection 207-45(2) of the ITAA 1997 reduces a beneficiary’s franking offset where the trustee has used the credit, including through a chain of trusts. Section 101AH then prevents the offset duplicating rebates under paragraph 98A(2)(a) and subsections 98B(3), 99D(1) and 100(2). ). Example 1.6 in the EM works through the franking result.
Adopted in part
Most of the legislative changes fall within the partly adopted recommendations. In several cases the Bill supplies the mechanism we sought but leaves its content to delegated legislation or a later tranche.
The fixed trust test: a safe harbour in form only
Paragraph 21.1 of the Submission recommended that the listed matters in section 272-65 of Schedule 2F operate as a safe harbour. The introduced Bill contains a conclusive rule. Under paragraph 272-65(2)(a), a trust is taken to have no material discretionary elements if a matter determined by the Minister under paragraph 272-65(5)(a) applies to it.
The matters set out in the primary law, in subsection 272-65(3), remain matters that merely "suggest" the absence of material discretionary elements. Paragraph 1.85 of the EM confirms that their presence or absence "is not necessarily determinative". The safe harbour therefore exists, but it will operate only once the Minister makes the relevant instrument.
On the instrument-making power itself (at paragraph 21.2 of the Submission), the result is mixed. Subsection 272-65(5) now confers four determination powers, covering matters that "mean" and matters that "suggest" either outcome. That is broader than the exposure draft. The EM relies on disallowance and sunsetting under the Legislation Act 2003 (paragraph 1.93) and states that the power "is intended to be exercised sparingly" (paragraph 1.91). The Bill itself, however, imposes no statutory limit on the exercise of the power, and nothing confines a determination to future income years.
Managed funds and widely held trusts
At paragraph 37 of the Submission, we sought an express exclusion for managed investment schemes, managed investment trusts, and widely held trusts. Subsection 101AB(1) does not include any such exclusion. Paragraph 1.26 of the EM states that such trusts are "already excluded by operation of law" because they would be expected to meet the fixed trust definition.
Treasury has made some changes on this point. The note to the new definition of fixed trust in subsection 995-1(1) of the ITAA 1997, inserted by item 19 of Schedule 1, records that AMITs are treated as fixed trusts under section 276-55 of the ITAA 1997. Paragraph 101AB(2)(d) also allows the Minister to exclude trusts with widely held membership or used for collective investment. Paragraph 1.32 of the EM describes that power as a reserve mechanism, and Example 1.7 works through a MIT that satisfies the new definition. Each fund must still test itself against section 272-65, which is the outcome we asked Treasury to avoid.
Testamentary trusts
The testamentary trust provisions in section 101AD have changed in ways that partly reflect paragraphs 39, 47, 48 and 55 of the Submission.
On the diversity of will trusts, paragraph 101AD(1)(a) frames the exclusion by reference to a trust established as a result of a will, codicil, order or intestacy as described in paragraph 102AG(2)(a). That is broad enough to cover life interest, protective, blended family, and succession trusts without naming them. Paragraph 101AB(1)(c) separately excludes a deceased estate, and paragraph 1.22 of the EM confirms this covers assets held during administration.
More significantly, the phrase "genuine testamentary purpose", which we criticised at paragraphs 47 and 48 of the Submission, no longer operates as a requirement in section 101AD. It survives only in Note 2 to subsection 101AD(1). Paragraphs 101AD(1)(a) and (b) substantially reflect the first limb of our proposed two-part test, a source-based tracing of property to the estate. The Bill does not enact the second limb, a trustee-function test. Instead, the Bill relies on the beneficiary restriction in paragraph 101AD(1)(c) and the integrity rules. The EM also continues to use the phrase as shorthand at paragraphs 1.12 and 1.36.
On unused gift-overs, the Bill makes the least change. Paragraph 101AD(1)(c) tests what the trust instrument permits, and the trustee’s actual distributions are irrelevant to that test. Paragraph 1.38 of the EM confirms a corporate object defeats the exclusion for post-1 July 2028 trusts whether or not the trustee makes any distribution to it.
Post-death trusts: relief for minors only
At paragraphs 52 to 54 and 55.9 of the Submission, we sought equivalent treatment for trusts funded by superannuation death benefits, life insurance proceeds, and employment death benefits. Paragraph 101AE(1)(c) now excludes a minor beneficiary’s share of adjusted net income derived as described in paragraph 102AG(2)(c). Paragraph 1.42 of the EM confirms this captures life insurance and superannuation death benefit proceeds. The relief depends on the beneficiary being under 18 at the end of the income year. Trusts for adult dependants receive no equivalent protection.
The Commissioner’s discretion on revocation
Paragraph 75 of the Submission sought a correction window for inadvertent breaches of an excluded election trust (EET) election. Section 102UYH gives the Commissioner a discretion to treat an automatic revocation under paragraph 102UYG(2)(b), (c) or (d) as never having occurred. Subsection 102UYH(2) lists relevant matters, including whether the inconsistency was an inadvertent error, its quantum, and any mitigating action. Paragraph 3.91 of the EM states the discretion "is intended to deal with inadvertent errors or genuinely exceptional circumstances". A refusal is reviewable under Part IVC of the Taxation Administration Act 1953.
This is a significant improvement. The relief nonetheless depends on the Commissioner exercising a discretion, and trustees have no entitlement to it. There is no 60-day window. The trustee must make the application by the date it must notify the revocation event. If the Commissioner refuses the discretion, section 102UYI still taxes all the trust’s net income for the year at the top marginal rate plus the Medicare levy.
Trust-to-trust distributions to an EET
At paragraph 85 of the Submission, we asked whether minimum tax paid by one trust is recognised when it distributes to an EET. Section 101AG allows a non-corporate trustee beneficiary to claim the offset. Paragraph 1.67 of the EM explains that a beneficiary trust that is not a minimum tax trust may apply the offset, but its own beneficiaries receive no further offset. Because an EET is not a minimum tax trust under paragraph 102UYE(1)(a), the EET applies the offset and does not pass any benefit to its beneficiaries. Paragraph 3.103 of the EM defers broader interaction rules to a future tranche.
Roll-over relief
On assets that cannot yet be transferred, subsection 126-905(4) of the ITTPA excludes six categories from the all-assets requirement. These include assets not capable of being transferred, primary production assets, assets reasonably required to discharge liabilities and winding-up costs, assets costing $1,000 or less and membership interests in the transferee. Paragraph 2.6 of the EM records that the primary production exclusion responds to consultation. Paragraph 2.33 ties the first category to legal incapacity of transfer, however, rather than to a withheld lender consent or a lease restriction. Example 2.1 confirms that retaining a substantial property outside the categories denies relief for the whole restructure.
On the small business restructure roll-over, section 126-960 of the ITTPA deems paragraph 328-243(1A)(c) of the ITAA 1997 satisfied for small business depreciating assets, and sections 126-975 and 126-980 address the small business CGT concessions. Paragraph 2.12 of the EM notes there is no genuine restructure test. No provision says whether Subdivision 126-Z and Subdivision 328-G can be used together.
Capital gains minimum tax and interaction rules
At paragraph 101 of the Submission, we asked that the two minimum tax packages treat testamentary trusts consistently. Schedule 4 inserts section 119-20 of the ITAA 1997, which exempts gains of testamentary trusts, deceased estates, special disability trusts, and certain minors. Paragraph 4.138 of the EM describes these as "comparable exemptions". Subsection 119-20(2) uses paragraph 102AG(2)(a), and the integrity rules in section 119-25 mirror subsections 101AD(2) and (3). Alignment is incomplete: the post-1 July 2028 beneficiary restriction has no counterpart, and paragraph 4.179 defers further CGT issues.
On ordering and anti-duplication rules generally, section 101AH, subsection 207-45(2) of the ITAA 1997 and new section 12AB of the Income Tax Rates Act 1986 each contribute. Section 12AB imposes only the shortfall to 30 per cent where other provisions already tax the trustee. Paragraphs 1.17, 1.100, 3.103 and 4.179 of the EM nonetheless defer interaction and administration rules to later legislation.
Design and commencement
Paragraphs 110 to 114 of the Submission asked that substantive liability rules sit in primary legislation. The core rules do, and the EM includes Examples 1.1 to 1.7. However, determination powers remain in subsections 101AB(2), 101AE(2) and (3), 272-65(5) and 102UYD(4), among others, and some go directly to liability. On commencement (paragraph 120), item 21 of Schedule 1 applies the tax to income years starting on or after 1 July 2028, and paragraph 2.17 of the EM explains that the roll-over opens a year earlier. The matters still deferred reduce that lead time.
Not adopted
The 25 recommendations not adopted concentrate on the regime’s central design. We summarise them briefly.
Scope
Subsection 101AB(1) still defines a minimum tax trust by exclusion, rather than through the purpose-built definition we proposed at paragraphs 11 and 12. The Bill does not amend former section 160APHL. Nothing prevents a later determination from drawing in a trust that has arranged its affairs under the enacted law.
Testamentary trusts
No text addresses substituted property; the result appears only in paragraph 1.36 of the EM. Corporate beneficiaries remain disqualifying for post-1 July 2028 trusts under paragraph 101AD(1)(c). Subparagraph 101AD(1)(b)(ii) grandfathers property transferred before 7.30 pm on 12 May 2026, and it does not extend that protection to wills made before that time. The integrity rules retain a purpose test without a dominant purpose threshold, and paragraph 4.154 of the EM confirms the same approach for the CGT measure. The Bill provides no protection for a variation narrowing the beneficiary class.
Corporate beneficiaries
Subparagraph 101AG(1)(d)(i) denies the offset to a body corporate, and paragraph 1.69 of the EM explains why. The Impact Analysis considered a non-refundable credit model as Option 3 and preferred Option 2. The Bill adopts neither our credit proposal nor the irrevocable corporate election.
Electable regime
The Bill does not address the trustee’s power to elect or State and Territory duty. The 100 per cent nomination in paragraph 102UYC(2)(c) remains. Section 102UYF limits variations to death and relationship breakdown. There is no fiduciary or court-order carve-out. Indeed, paragraph 3.94 of the EM states the Commissioner’s discretion is not intended to extend to a trustee who departs from the nomination in the proper exercise of fiduciary duty. The eligible company test in section 102UYD is unchanged. A change of trustee holding shares in a nominated company is not an allowable reason under subsection 102UYG(3). Paragraph 102UYC(7)(a) prevents a replacement election and subsection 126-910(3) of the ITTPA and paragraph 102UYC(7)(b) preserve mutual exclusivity with the roll-over.
Roll-over
Paragraph 2.24 of the EM confirms there can be only one transferee. The period in paragraph 126-905(1)(b) of the ITTPA ends on 30 June 2030 with no power to extend. Paragraph 2.70 of the EM confirms State and Territory duties continue to apply.
Other matters
The Bill does not amend Division 7A, and the EM does not mention Commissioner of Taxation v Bendel [2026] HCA 18. Section 101AC does not relate minimum tax income to trust law income or section 97. The Government introduced both Bills without a further exposure round.
What this means for trustees
The Bills are more workable than the exposure draft in several respects. Trustees of employee share trusts now have certainty about their status, and the Bill secures refunds of excess franking credits. The testamentary trust exclusion no longer depends on an undefined purpose test, and the Commissioner may now disregard an inadvertent EET breach.
The central features we challenged remain. The fixed trust gateway continues to determine the scope of the regime, and corporate beneficiaries continue to bear compounding tax. The EET regime still requires a rigid permanent commitment in the 2028-29 income year. Much of the practical detail depends on determinations, guidance and later tranches that do not yet exist.
Trustees should not wait for that detail before acting. The roll-over window opens on 1 July 2027, and the election window is confined to a single year under paragraph 102UYC(5)(c). Please review trust deeds, corporate beneficiary arrangements, and estate plans now, so that the choice between restructuring, electing, and paying the tax is an informed one.
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