Tax on trusts: what is a “minimum tax trust”? The definition that decides everything
Treasury’s exposure draft legislation for the 30 per cent minimum tax on discretionary trusts turns on a single classification. If a trust estate is a minimum tax trust at the end of an income year, the trustee must pay tax on the trust’s minimum tax income, subject to the charging conditions.
New section 12AB of the Income Tax Rates Act 1986, to be inserted by the Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 (the Imposition Bill), then tops up any tax otherwise payable by the trustee on that income to at least 30 per cent. If the trust is not a minimum tax trust, that minimum tax does not apply.
The amendments will apply to assessments for income years starting on or after 1 July 2028. Although that leaves time to prepare, the more pressing task is to determine what the definition means.
Proposed section 101AA of the Income Tax Assessment Act 1936 (ITAA 1936) is the charging provision. It assesses the trustee only where the trust estate has net income for the year of income, the trust estate is a minimum tax trust at the end of that year, and the trustee is not assessed and is not liable under subsection 99A(4) or (4B) to pay tax on the net income. The definition in proposed section 101AB therefore determines the scope of the regime.
This article deals with that definition and the exclusions that affect its operation. It examines how the definition operates, what falls inside and outside it, and where the draft legislation and the explanatory materials do not say the same thing.
References to the exposure draft are to the Treasury Laws Amendment Bill 2026: Minimum tax on discretionary trusts (the Main Bill). Unless stated otherwise, references to paragraph numbers are to the exposure draft explanatory materials for the Main Bill (the EM). Other legislative references are to the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) unless stated otherwise.
This article is part of a series on the minimum tax on discretionary trusts:
1. Minimum tax on discretionary trusts: the drafts arrive, the questions remain
2. Tax on trusts: the EET election: relief from the minimum tax, but at what cost?
3. Tax on trusts: roll-over relief for discretionary trusts: a three-year window with sharp edges
Sladen Legal has also made submissions to Treasury on 31 July 2026 and 18 September 2026 on the minimum tax.
Summary: exclusions, near-exclusions, and drafting tensions
What is a minimum tax trust?
The draft defines a minimum tax trust by listing what it is not. Every trust falls within the definition unless it fits one of five exclusions, subject to the separate excluded election trust rule discussed below (proposed subsection 101AB(1)).
There is no separate requirement that the trustee have discretion, that the trust involve a family, or that it allows income splitting.
The Main Bill adds the term to both income tax Acts, so the classification will apply across the income tax law.
The five exclusions are:
a fixed trust, under the definition discussed below;
a special disability trust recognised under social security or veterans’ legislation;
the trust estate of a deceased person;
a complying superannuation entity, as defined in the ITAA 1997; and
a type of trust that the Minister excludes by a separate determination.
The EM confirms that these five categories are the complete list. Treasury intends the list to confine the minimum tax to the discretionary trusts the Government wants to cover, because other trusts have their own tax and regulatory arrangements (EM paragraphs 1.12 to 1.17).
The proposed election regime provides a further means of falling outside the definition. A minimum tax trust becomes an “excluded election trust” (EET) when an EET election is in force. If an EET nomination also accompanies that election, the law treats the trust as no longer being a minimum tax trust while the election is in force (proposed section 102UYA and paragraph 102UYD(1)(a)).
This is a separate rule that changes how the law treats the trust. It does not add a sixth category to the five exclusions, and it does not itself make the trust a fixed trust. The explanatory material for the election regime describes this result at paragraphs 1.36 to 1.40.
Advisers need to ask two separate questions:
Is the trust a minimum tax trust?
Does it have any minimum tax income?
For a trust that is a minimum tax trust at year end, minimum tax income is the part of its net income left after the specific income exclusions apply (proposed section 101AC). A trust can remain within the regime but have no minimum tax to pay because all its income is excluded.
Testamentary trusts, commonly established under a will, illustrate the distinction. A testamentary trust may be a minimum tax trust if it is not fixed and no other exclusion or EET rule applies. Even so, some or all of its income may qualify for a separate exclusion (proposed section 101AD).
As we discuss in our article on testamentary trusts, Treasury’s fact sheet describes discretionary testamentary trusts established for “genuine testamentary purposes” as excluded. That description does not distinguish between excluding the trust itself and excluding qualifying income.
The ministerial determination power
Paragraph 101AB(1)(e) and subsection 101AB(2) give the Minister power to determine, by legislative instrument, that trust estates of a specified kind are not minimum tax trusts. The Minister must be satisfied that the trusts meet at least one of three descriptions:
they are similar to trusts covered by one of the first four exclusions or by an earlier ministerial determination;
they do not have a sufficient economic connection to Australia; or
they, or their trustees, perform functions that an Australian law gives them, as that term is defined for income tax purposes.
The EM gives the example of a foreign resident trust with no ultimate Australian resident beneficiaries and no Australian sourced income or assets (EM paragraphs 1.23 to 1.25).
This power can only remove trusts from the regime; it cannot bring them in. That is an appropriate limit, although it leaves a practical planning difficulty.
Several types of trust that Treasury describes as outside the regime must first satisfy the new fixed trust definition. Others may depend on a ministerial determination. No such determinations accompany the draft materials, so a trustee assessing its position in 2026 cannot know which rules will apply in 2028.
Parliament can disallow these instruments, and they are subject to rules under which they expire unless renewed. Those safeguards provide parliamentary scrutiny, but they do not give trustees planning certainty (Legislation Act 2003).
A trust does not need a ministerial determination if it already qualifies under an existing exclusion or another applicable rule. Equally, an expectation in the EM that a type of trust will be outside the regime is not a sufficient basis for that conclusion. Advisers need to identify the legal rule that produces that outcome.
If a trustee expects to rely on a future determination, it should check the final terms and obtain advice before lodging a return on the basis that the trust is outside the regime.
The fixed trust exclusion
The fixed trust exclusion is the most significant of the five. The Main Bill replaces the current definition with two alternative ways to qualify (proposed section 272-65 of Schedule 2F).
The first requires beneficiaries to have fixed entitlements to all the trust’s income and capital. The second requires there to be no “material discretionary elements” affecting their entitlements or rights. In broad terms, the second test asks whether any discretion affecting those rights is material.
The first test keeps the existing concept. As Sladen Legal’s submission to Treasury of 31 July 2026 explains, fixed entitlements require “vested and indefeasible” interests. Broadly, this means an established legal interest that cannot be taken away (section 272-5 of Schedule 2F).
That is a demanding test, and a trust can fail it for reasons unrelated to splitting income among beneficiaries.
The second test is new, and Treasury intends it to cover more trusts. The draft lists features that point towards an absence of material discretion (proposed subsection 272-65(2)):
Beneficiaries have clearly defined, specific and enforceable rights to all the trust’s income and capital, or in relation to its governance. Rules can apply to those rights, provided the rules do not involve discretion.
Powers to change rights, issue new rights or interests, classify receipts as income or capital, or handle administrative matters cannot be used to significantly change existing rights or significantly affect the value of existing beneficiaries’ interests.
The trust deed can be amended only through a process requiring all beneficiaries’ consent, or in a way that cannot adversely affect their entitlements or rights.
The trust has another feature that the Minister identifies as pointing towards an absence of material discretion.
Features that run against these indicators point towards the trust not being fixed, although the indicators do not settle the question.
For the new test, the Minister can also specify matters that conclusively establish material discretion, regardless of the other indicators. The draft gives the Minister two separate powers: one to add favourable indicators and another to specify matters that prevent a trust from satisfying this test (proposed subsections 272-65(3) and (4)).
The EM explains the new definition at paragraphs 1.71 to 1.80. Two points are relevant:
Some remaining trustee discretion will not prevent a trust from being fixed if it does not materially affect beneficiaries’ entitlements or rights. The EM says this approach draws on existing ATO guidance and administrative safe harbours, which allow trustees meeting specified conditions to adopt a position without seeking an individual decision (EM paragraph 1.74).
A managed investment trust may admit new members or issue new units. The EM says that Treasury does not intend minor or consequential effects on existing beneficiaries to count as “significantly” changing their rights or affecting their interests’ value (EM paragraph 1.77).
The Main Bill also makes the ITAA 1997 definition of fixed trust refer to this new definition. It includes a note confirming that an existing rule treats attribution managed investment trusts (AMITs), which use a special regime to allocate tax amounts to members, as fixed trusts (section 276-55 of the ITAA 1997).
The change would therefore apply across the income tax law, beyond the minimum tax regime. The EM presents it as addressing longstanding concerns with the current definition (EM paragraphs 1.5 and 1.71 to 1.72).
Advisers should consider those wider effects, although the draft does not change every separate test of fixed interests. The franking credit issue raised in Sladen Legal’s 18 September 2026 submission, discussed below, remains distinct.
PCG 2016/16 and the Commissioner’s discretion
Sladen Legal’s 31 July 2026 submission explains the current ATO safe harbour in Practical Compliance Guideline PCG 2016/16. Under that approach, a trustee that meets the conditions can self-assess the trust as fixed. One essential condition is that all beneficial interests carry the same rights to receive income and capital.
If the safe harbour is unavailable, the trustee may need to ask the Commissioner to use a statutory discretion to treat the interests as fixed entitlements (subsection 272-5(3) of Schedule 2F).
Treasury intends the new test to let trusts qualify as fixed despite some remaining discretion, without depending on that existing approach. Although the EM says it draws on current guidance and safe harbours, three groups still need to examine the statutory test:
Trusts with separate income and capital classes cannot use the safe harbour. That fact alone does not determine whether they qualify under either of the two statutory tests.
Employee share trusts need to examine whether rules about employees becoming entitled to benefits, losing rights or meeting performance conditions involve discretion. The EM says non-discretionary scheme rules with clearly defined rights point towards fixed trust status (EM paragraph 1.76). Its statement that employee share trusts would generally qualify is an expectation, not a conclusion for every scheme (EM paragraph 1.22).
For managed funds, the classification would determine the trust’s minimum tax exposure, as well as whether an administrative safe harbour is available.
The interaction with the existing fixed entitlement rules also needs attention. The Main Bill leaves those rules unchanged and keeps fixed entitlements as the first way to qualify as a fixed trust.
If a continuing exercise of the Commissioner’s discretion treats beneficiaries as having fixed entitlements to all income and capital, advisers should not assume that the new definition displaces it.
Relying on the PCG safe harbour is different from having a favourable decision under the Commissioner’s statutory discretion.
The new test may also allow a trust to qualify even if its beneficiaries’ interests do not meet the strict “vested and indefeasible” requirement. The explanatory material does not say how the ATO will update its existing guidance.
Sladen Legal’s submission of 18 September 2026 identifies a further problem. The expressions “significantly vary,” “significantly affect” and “material discretionary elements” provide no measurable boundary. The listed indicators neither guarantee fixed trust status nor cover every relevant consideration, leaving uncertainty about both inclusion and exclusion.
The submission recommends making the listed matters a safe harbour that gives a definite outcome. It also recommends limiting the Minister’s rule-making power, applying new instruments only to future income years, and preventing a later instrument from applying to a trust that arranged its affairs under the law as enacted.
The submission also points out that the draft leaves a separate fixed interest test for passing franking credits through a trust unchanged (former section 160APHL). Questions about whether beneficiaries’ interests can be taken away would therefore continue under that test, with its own Commissioner’s discretion.
Other excluded categories
The draft expressly excludes special disability trusts. They must qualify under the Social Security Act 1991 or the Veterans’ Entitlements Act 1986, and their own regulatory rules apply to them. Once a trust qualifies, this exclusion imposes no additional condition (proposed paragraph 101AB(1)(b); EM paragraph 1.19).
The draft also expressly excludes a deceased person’s estate. The EM explains that the income tax law treats an estate as a trust and describes the exclusion as covering estate assets held during administration.
The EM distinguishes the estate itself from a testamentary trust. The latter has a separate exclusion for qualifying income, rather than an exclusion for the trust as a whole (proposed paragraph 101AB(1)(c) and section 101AD; EM paragraph 1.20).
The superannuation exclusion covers complying superannuation funds, including self-managed funds, complying approved deposit funds and pooled superannuation trusts. It uses the ITAA 1997 definition and reflects those entities’ separate tax and regulatory treatment (proposed paragraph 101AB(1)(d); EM paragraph 1.21).
Inconsistencies and differences between the legislation and the explanatory materials
A central risk is that Treasury’s explanations do not always match the terms of the draft legislation.
Categories described as excluded that are not separately listed
The EM says the minimum tax will not apply to fixed trusts, widely held trusts, AMITs, complying superannuation entities or charitable trusts (EM paragraph 1.9). Treasury’s fact sheet similarly says fixed and widely held trusts will be excluded, along with charitable trusts, special disability trusts, and complying superannuation entities.
Yet the statutory list does not separately name widely held trusts, AMITs or charitable trusts.
The EM says there is no need to name these trusts because other legal rules already keep them outside the tax. It makes the same point about corporate collective investment vehicles (CCIVs) and their sub-funds, bare trusts, employee share trusts, and worker entitlement funds (EM paragraph 1.22).
CCIVs are a corporate form of collective investment vehicle. A bare trust generally holds property for a beneficiary without an active trustee discretion over who benefits. Treasury’s reasoning differs across the categories:
An existing statutory rule treats AMITs as fixed trusts, and the Main Bill expressly acknowledges that rule.
For CCIVs and their sub-funds, the EM says AMIT treatment depends on meeting the relevant eligibility criteria.
For charitable trusts, the EM relies on their exemption from income tax. That is different from being expressly excluded from the definition of minimum tax trust. A particular charitable trust may also qualify under a listed exclusion.
The EM expects widely held trusts, bare trusts, and employee share trusts generally to satisfy the new fixed trust definition. Advisers still need to test that expectation against each trust’s actual rights and powers.
Sladen Legal’s 18 September 2026 submission recommends express exclusions for trusts covered by the managed investment scheme provisions of the Corporations Act 2001, trusts qualifying as managed investment trusts for the AMIT regime, and widely held trusts offered commercially to investors.
It also recommends an express exclusion for employee share trusts that satisfy the existing sole purpose test, instead of relying on the EM’s expectation (Division 83A of the ITAA 1997).
Charitable trusts and exempt entities receive dual treatment
Charities require separate consideration because two different rules apply. First, the EM treats tax-exempt entities, including charitable trusts, as outside the tax because they do not pay income tax (EM paragraph 1.22).
Second, a trust within the minimum tax regime may have a charity or another tax-exempt entity as a beneficiary. The draft excludes the share of the trust’s net income that corresponds to the income entitlement of a registered charity, a deductible gift recipient (DGR, an entity entitled to receive tax-deductible gifts), or another exempt beneficiary (proposed paragraphs 101AE(1)(d) and (e)).
The beneficiary must have the required status on the last day of the income year, and any conditions set under the Minister’s determination power must be met. For other exempt entities, the Minister can also set a cap or a method for calculating one (proposed subsection 101AE(2)).
An exempt charitable trust’s own tax position is therefore different from the treatment of a distribution to a charity from another trust. The final legislation should make that distinction explicit.
Differences in scope and language
The draft does not expressly limit the deceased estate exclusion to the period of administration, although the EM describes it that way (proposed paragraph 101AB(1)(c); EM paragraph 1.20).
That omission alone does not establish an inconsistency or mean that a separate testamentary trust qualifies once administration ends. The question is what falls within “the trust estate of a deceased person.” The materials should clarify where that category ends and the separate testamentary trust income rules begin.
The proposed start date contains a direct discrepancy. The Main Bill applies to income years starting on or after 1 July 2028, while the EM refers to the income year that includes that date and later years (item 21 of the Main Bill; EM paragraph 1.83).
That difference matters for a taxpayer using a substituted accounting period, meaning an approved income year that differs from the usual 1 July to 30 June year. Such a year could begin before 1 July 2028 but include that date.
There is also a smaller difference in when the legislation would commence. The Main Bill says its Schedule 1 starts at the same time as the Imposition Act. The EM says it starts immediately after that Act (EM paragraph 1.82).
The package also uses different timing tests:
The minimum tax charge and income calculation depend on the trust’s status at year end (proposed sections 101AA and 101AC). The franking rules instead ask whether it is a minimum tax trust at any time during the year (amended subsection 207-50(3) and new subsection 207-50(3A) of the ITAA 1997). These tests need to work together if a trust changes status during the year. The new franking rule also asks whether part of a franked distribution, a distribution carrying franking credits, forms part of minimum tax income.
The EET rules need to be read together. The rule removing an EET from minimum tax trust status operates alongside provisions specifying when an election is in force by reference to the start or end of an income year (proposed paragraph 102UYD(1)(a) and section 102UYH). The provision defining an EET does not, by itself, create a third inconsistent timing test (proposed section 102UYA).
Descriptive language and operative tests
Treasury and its fact sheet describe the testamentary trust exclusion by referring to “genuine testamentary purposes.” The EM repeats the phrase, but the draft uses it only in a note explaining the rules designed to prevent misuse (EM paragraph 1.36; note to proposed subsection 101AD(1)). It is not a separate condition in the legislation.
The requirements are:
The trust must arise from a will, a codicil (an amendment to a will), an order or intestacy (where a person dies without a valid will), in the circumstances covered by the existing tax rules (paragraph 102AG(2)(a)).
The assessable income, meaning income counted in calculating tax, must be earned for a beneficiary’s benefit. It must either be of the kind covered by the existing testamentary trust income rules (subsection 102AG(2AA)) or come from other property transferred to the trustee before 7.30 pm, Australian Capital Territory time, on 12 May 2026.
For a trust established on or after 1 July 2028, the beneficiary for whose benefit the relevant income is earned must be an individual or a tax-exempt entity.
The draft also contains rules directed at schemes that misuse the exclusion. It disregards a merely incidental purpose and uses the ITAA 1997 definition of “scheme” (proposed subsections 101AD(2) to (5)).
Sladen Legal’s 18 September 2026 submission argues that “genuine testamentary purposes” should not become an additional factual requirement. It recommends a two-part statutory test based on where the property came from and the trustee’s function.
The EM also says that a testamentary trust with companies or other trusts as beneficiaries will have its net income subject to the minimum tax (EM paragraph 1.38). That statement is broader than the draft.
The draft looks at the beneficiary for whose benefit the particular income is earned (proposed paragraph 101AD(1)(c)). On its face, it does not exclude all the trust’s income from relief merely because the deed names a non-exempt company or trust that receives no benefit. The rules against misuse still need separate consideration.
“Material discretionary elements” creates a different difficulty. It is central to the new fixed trust test but has no separate definition. Related, though not identical, versions of the expression also appear in the eligible company test for the EET regime and in a rule protecting the proposed roll-over from misuse (proposed subsection 102UYC(1) and subsection 126-430(5) of the Income Tax (Transitional Provisions) Act 1997).
The fixed trust provisions supply indicators, rather than a definition. A useful example appears in the explanatory material for the roll-over, not in the legislation. It concerns a company with different classes of “alphabet shares,” where directors can choose which classes receive dividends and how much each receives (roll-over explanatory material, paragraph 1.87).
There are also errors in references intended to help readers find the relevant provisions. One refers to the “ITAA 936” instead of the ITAA 1936 (the citation after EM paragraph 1.23). Another identifies the changes to the fixed trust definitions as “items 1 and 193” of the Main Bill, although they are items 13 and 19 (EM paragraph 1.72).
The EM also directs readers from the tax offset index to the testamentary trust income exclusion, although the draft directs them to the tax offset provision (section 13-1; EM paragraph 1.55 refers to section 101AD, whereas item 14 of the Main Bill refers to section 101AF). These are drafting slips, rather than substantive problems, but they make the EM less reliable as a guide to the legislation.
Other drafting gaps
Sladen Legal’s central concern is the structure of the definition. Subject to the other exclusions and the EET rule, it applies to trusts simply because they are not fixed trusts.
That can capture trusts with commercial or protective purposes unrelated to allocating family income. Examples include employee incentive trusts holding shares or rights that depend on service or performance conditions; pooled investment and custody arrangements that allocate benefits by unit holdings or specified events; and protective or succession trusts where future events determine who becomes entitled or when.
The submission recommends a definition designed specifically for discretionary trusts. It would focus on whether the trustee can shift economic returns among beneficiaries within a family group, instead of relying on a fixed or non-fixed distinction.
What should trustees and advisers do now?
Start by classifying each trust in the client group before considering a restructure. Identify whether a listed exclusion or the EET rule applies. If the trust relies on fixed trust status, establish which of the two tests it satisfies.
That requires a review of the deed. Identify every power to change entitlements, issue interests, or new units, reclassify interests, classify receipts as income or capital, or amend the deed. Assess whether each power could significantly change existing entitlements or significantly affect the value of existing interests.
Pay particular attention to class rights and powers to classify income and capital. Keep the evidence supporting the conclusion and consider approaching the ATO once the legislation is settled.
Trusts that have relied on the PCG 2016/16 safe harbour should reassess their position under the new definition. Where the Commissioner has exercised the statutory discretion and that decision continues to apply, examine its terms under the retained fixed entitlement test. Do not assume the new definition has displaced it.
A trust that has not previously examined its fixed trust status may qualify under the new test. Managed funds, employee share trusts, and bare trusts should consider whether they can support that conclusion or should seek an express exclusion as the legislation is finalised.
Review estate planning separately. The deceased estate exclusion and the testamentary trust income exclusion serve different purposes and have different conditions.
For the beneficiary restriction applying from 1 July 2028, the relevant date is when the testamentary trust is established, not when the will is signed. The restriction concerns the beneficiary for whose benefit the particular income is earned.
Review the beneficiary classes and intended benefits in draft wills while the position remains unsettled. Naming a company or trust as a beneficiary does not, by itself, defeat the exclusion for all income.
Base advice on the legislation, while recognising the limits of Treasury’s explanations. Several types of trust described as excluded are not named in the draft. Some assurances depend on how a test requiring judgement applies to the particular trust.
Where a client’s position relies on an assurance in the EM, record the analysis and monitor the next stage of legislation, the deferred administration, notification and collection rules, and any ministerial instruments. Revisit the conclusion before the first income year affected by the changes.
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