Tax on trusts: roll-over relief for discretionary trusts: a three-year window with sharp edges
The 2026-27 Budget announced a 30 per cent minimum tax on certain discretionary trusts from 1 July 2028. Exposure drafts released on 3 September 2026 provide two alternatives to that tax: the excluded election trust (EET) election, which we discussed in our article of 11 September 2026, and roll-over relief under new Subdivision 126-C of the Income Tax (Transitional Provisions) Act 1997 (ITTP Act).
The roll-over provides trustees with a three-year window to restructure without triggering immediate income tax consequences. The conditions attaching to that window may, however, prove difficult to satisfy in practice. This article summarises the roll-over provisions and identifies the matters trustees and advisers should consider before choosing this course.
Our next article will examine the application of the regime to testamentary trusts and testamentary income while the final article will focus on what is a minimum tax trust.
The roll-over: requirements and risks
The object of the Subdivision and its context
The exposure draft inserts new Subdivision 126-C at the end of Division 126 of the ITTP Act. Section 126-425 states the object: to provide transitional relief for three years so that trustees may restructure while disregarding tax gains and losses.
The Subdivision operates alongside the EET election under proposed Division 6F of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Unlike Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997), no genuine restructure test applies (EM (Roll-over), paragraph 1.12).
Completing a restructure in 2027-28 avoids minimum tax liability from 1 July 2028 (EM (Roll-over), paragraph 1.5).
Eligibility conditions
Subsection 126-430(1) sets six cumulative conditions. The transferor must transfer all non-excluded assets to a single transferee between 1 July 2027 and 30 June 2030. Both parties must choose under section 126-431; the transferor must give the progress notification under section 126-432, where applicable. The continuity requirements in section 126-440 and the residency requirements in section 126-445 must also be satisfied (EM (Roll-over), paragraphs 1.10 and 1.20). If the transferor does not transfer the required assets by 30 June 2030, relief is unavailable for any assets already transferred (subsection 126-430(3)).
Sladen Legal’s submission on the July Treasury Consultation Paper contended that the denial of relief for all transferred assets is disproportionate where a third-party refuses consent, refinancing is unavailable or contractual restrictions apply. The excluded asset category for assets “not capable of being transferred” may extend to rights incapable of assignment; its application depends on the nature of the asset and legal restrictions on its transfer (paragraph 126-430(4)(a); EM (Roll-over), paragraph 1.32).
The single-transferee rule increases the difficulty of whole-of-group restructures and is difficult to reconcile with the trustee’s obligation to consider the interests of all beneficiaries.
Excluded transferees
Subsection 126-430(2) prohibits certain transferees. The transferee cannot be an exempt entity, a complying superannuation entity, or a trustee of a minimum tax trust. Eligible transferees include a company, an individual, a partnership, or the trustee of another trust that is not a minimum tax trust (EM (Roll-over), paragraph 1.24).
Excluded assets
Subsection 126-430(4) lists five categories of excluded assets: assets not capable of transfer; CGT assets used to generate assessable income from carrying on a primary production business; assets reasonably required to meet trust liabilities, including tax and the trustee indemnity; assets reasonably required for winding-up costs if the trust is intended to be wound up as a result of the restructure; and assets that cost $1,000 or less when acquired. Paragraph 1.6 of the EM (Roll-over) notes that consultation identified the effect on primary production concessions, so a limited partial restructure will be available for trusts with primary production income.
The material discretionary elements clawback
Subsection 126-430(5) denies the roll-over if material discretionary elements affect transferee members' rights or interests during the period beginning on the day of the last required transfer and ending at the end of the fourth income year after the income year in which that transfer occurs. Subsection 126-430(6) lists indicators suggesting no material discretionary elements: clearly defined enforceable rights, powers that cannot significantly vary those rights, and constituent document variation only with all-member consent or in a way that cannot adversely affect members' rights or interests.
The Minister may determine further matters by legislative instrument (subsection 126-430(8)). The clawback period broadly aligns with the ordinary amendment period (EM (Roll-over), paragraph 1.82), and the Commissioner holds an extended amendment period under subsection 126-430(9) of four years after the day notice of the assessment is given, confined to amendments connected to roll-over availability (EM (Roll-over), paragraphs 1.93 to 1.95). The Sladen Legal submission raised concerns about the uncertainty of this concept.
Continuity and residency
Subsection 126-440(1) addresses family trusts. If the transferee is not an individual, every individual with a direct or indirect interest in the transferee just after the transaction takes effect must have been a beneficiary and a family group member of the transferor trust just before that time. If the transferee is an individual, that individual must satisfy those pre-transfer requirements. For non-family trusts, the Minister is to determine the continuity requirements by legislative instrument, and if no determination is in force that option is unavailable (subsections 126-440(2) to (4); EM (Roll-over), paragraph 1.44).
Unless a determination under subsection 126-440(3) is in force, a minimum tax trust without a family trust election in force cannot satisfy the continuity requirement. This may exclude multi-branch structures, trusts with unrelated business partners, and other trusts without a family trust election in force. Section 126-445 applies entity-specific residency tests: individuals and companies must be Australian residents; a trust must be a resident trust for CGT purposes; for a partnership other than a corporate limited partnership, each partner to whom an asset transfers must be an Australian resident; and a corporate limited partnership must be resident under section 94T of the ITAA 1936 (EM (Roll-over), paragraph 1.48).
Income tax consequences and family trust distribution tax
Subsection 126-450(1) provides that a transfer under the roll-over has no direct income tax consequences, except as provided by the Subdivision. Section 126-451 ensures the transfer does not result in family trust distribution tax under sections 271-15 to 271-30 of Schedule 2F to the ITAA 1936. The relief does not extend to GST, FBT or state and territory duties (EM (Roll-over), paragraph 1.64).
The practical restructuring window is also shorter than three years, because taxpayers will wait for the legislation to be enacted and advisers will not defer implementation to the final months. The Commissioner has no discretion to extend 30 June 2030.
Roll-over cost and depreciating assets
Section 126-455 provides that assets transfer at roll-over cost: cost base for CGT assets other than trading stock, revenue assets or depreciating assets; cost or opening value for trading stock; the amount producing neither a profit nor a loss for revenue assets; and adjustable value for depreciating assets. Section 126-456 treats specified conditions in the capital allowance roll-over rules, including the small business rules, as satisfied, although the other requirements of those rules must still be met. The transferee inherits the roll-over cost, so the relief defers the tax consequences to a later disposal (EM (Roll-over), paragraph 1.69).
Membership interests as consideration
Section 126-465 sets the first element of cost base and reduced cost base for membership interests issued as consideration: the sum of roll-over costs of non-depreciating assets plus adjustable values of depreciating assets, less liabilities the transferee undertakes to discharge in respect of the transferred assets, divided by the number of interests. Those amounts are reduced accordingly if the interests are only part of the consideration (subsection 126-465(2); EM (Roll-over), paragraph 1.75). Section 126-470 disregards a capital loss from a later CGT event relating to a direct or indirect membership interest in the transferor or transferee, or an interest issued under the transaction, except to the extent the entity demonstrates that the loss is attributable to a matter other than the transaction (EM (Roll-over), paragraph 1.76).
Small business concession interactions
Section 126-475 applies the CGT event J2, J5 and J6 consequences of an earlier Subdivision 152-E choice to the transferee (or each relevant partner where the transferee is a partnership), so the transferee may inherit a contingent capital gain arising from a replacement asset choice made by the transferor. Section 126-480 preserves the acquisition time for the 15-year exemption under Subdivision 152-B and the related significant individual rules (EM (Roll-over), paragraphs 1.96 and 1.97). Later legislation will address broader CGT interactions, including the 1 July 2027 cost base reset and the treatment of deferred discount gains transferred to companies.
Choices and notifications
Section 126-431 requires irrevocable choices by both transferor and transferee in approved form, with notice to the Commissioner due by the earlier of actual lodgment and the due date of the income tax return for the first-transfer income year, or within further time the Commissioner allows (paragraphs 126-431(1)(c) and (5)(c); EM (Roll-over), paragraph 1.51). The transferor may make only one choice for the minimum tax trust, and the transferor cannot revoke that choice. Where the transferee is a partnership, each partner to whom an asset transfers makes the choice. Section 126-432 requires a progress notification from the transferor for transfers in later income years. Section 126-433 requires both parties to notify the Commissioner if the restructure is not completed or a condition is not met. These notifications enable the Commissioner to monitor the restructure and assist amendment (EM (Roll-over), paragraph 1.60).
Mutual exclusivity with the EET election
Subsection 126-431(3) prevents a roll-over choice if an EET election has been made. Paragraph 102UYB(6)(b) of the ITAA 1936 prevents an EET election if the roll-over applies, even if the roll-over has not been completed (EM (Electable Regime), paragraph 1.16).
A trustee who chooses the roll-over in 2027-28 and cannot complete the restructure by 30 June 2030 therefore loses relief for every asset transferred and cannot then make an EET election. The timing may increase that risk, because a trustee may make a roll-over choice before the EET election window opens on 1 July 2028. Greater certainty on this in the final legislation would be welcomed.
Summary of the roll-over
Core eligibility conditions
Transferor is trustee of a minimum tax trust
All relevant assets transferred to a single transferee entity
Transfer occurs between 1 July 2027 and 30 June 2030
Both parties make irrevocable choices under section 126-431
Transferor's progress notifications given, where applicable, under section 126-432
Continuity requirements satisfied under section 126-440
Residency requirements met under section 126-445
No EET election already made by the transferor in relation to the trust (subsection 126-431(3))
Excluded assets
Assets not capable of transfer
CGT assets used to generate assessable income from carrying on a primary production business
Assets reasonably required for trust liabilities, including tax and trustee indemnity
Assets reasonably required for winding-up costs if the trust is intended to be wound up as a result of the restructure
Assets costing $1,000 or less when acquired
Clawback and denial triggers
Material discretionary elements in transferee during the period from the last required transfer to the end of the fourth income year after the income year of that transfer (subsection 126-430(5))
Incomplete transfer of all non-excluded assets by 30 June 2030 (subsection 126-430(3))
Transferee is an exempt entity, complying superannuation entity or a trustee of a minimum tax trust (subsection 126-430(2))
Extended four-year amendment period, running from notice of assessment, for amendments connected to the roll-over (subsection 126-430(9))
For non-family trusts: no ministerial continuity determination in force (subsection 126-440(4))
Comparison with existing roll-overs
The following table compares the new roll-over in Subdivision 126-C of the ITTP Act with some existing roll-overs in the context of the 30 per cent minimum tax.
Roll-over |
Legislative reference |
Broad description |
Advantages in the context of the 30 per cent minimum tax |
Disadvantages in the context of the 30 per cent minimum tax
|
Transitional discretionary trust roll-over |
Subdivision 126-C of the ITTP Act |
Transfer of all relevant trust assets by the trustee of a minimum tax trust to a single non-discretionary transferee between 1 July 2027 and 30 June 2030, subject to choice, notification, continuity, residency and material discretionary elements conditions. |
Designed for the minimum tax measures. No genuine restructure test applies, and the roll-over is available regardless of the size of the trust or whether it carries on a business. The transferee may be a company, an individual, a partnership or a trust that is not a minimum tax trust. The Subdivision defers income tax consequences, and section 126-451 provides relief from family trust distribution tax. |
Primary production assets, assets incapable of transfer, liability and winding-up assets, and assets costing $1,000 or less fall outside the all-assets requirement. A failure to transfer all remaining assets by 30 June 2030 denies relief for every asset already transferred. The provisions permit only one transferee, so the roll-over does not accommodate whole-of-group or multi-entity restructures. The four-year material discretionary elements clawback, the irrevocable choice that precludes an excluded election trust election, and the inability of non-family trusts to satisfy continuity until the Minister makes a determination each operate as significant constraints. The roll-over provides no relief from State or Territory duty, GST or fringe benefits tax. |
Small business restructure roll-over |
Subdivision 328-G of the ITAA 1997 |
Transfer of active assets between eligible entities connected with a small business entity where the transfer forms part of a genuine restructure and ultimate economic ownership is maintained. |
Subdivision 328-G is already enacted and well understood, and it permits multiple transferees. An alternative ultimate economic ownership test accommodates transfers within a family group where a family trust election is in force. |
Subdivision 328-G is confined to small business entities with aggregated turnover under $10 million, which excludes larger groups and purely passive investment trusts. It is limited to active assets and requires a genuine restructure of an ongoing business, which a restructure undertaken only to avoid the minimum tax may not satisfy. Transfers from a discretionary trust generally fail the ultimate economic ownership test, and the exposure draft does not expressly preserve earlier or later Subdivision 328-G positions.
|
Small business replacement asset roll-over |
Subdivision 152-E of the ITAA 1997 |
Deferral of a capital gain on an active asset where a replacement asset is acquired within the replacement asset period. |
Subdivision 152-E continues to operate, and section 126-475 of the ITTP Act carries an earlier choice through to the transferee, so a Subdivision 126-C transfer does not cause the loss of the small business concessions. |
Deferral is tied to acquiring replacement assets rather than to changing entity type. The basic conditions in Division 152 must be met, and CGT events J2, J5 and J6 can crystallise the deferred gain in the transferee.
|
Roll-over for disposal of assets to a wholly owned company |
Subdivision 122-A of the ITAA 1997 |
A trustee may transfer a CGT asset, or all the assets of a business, to a company in which the trustee owns all the shares, taking shares as consideration. |
Subdivision 122-A is available to a trustee and is long established, and it suits a straightforward incorporation of trust assets. It is not limited to all the assets of a business. |
The company must be wholly owned by the transferor, so the company cannot issue shares directly to family members or beneficiaries. Consideration must be shares and, in a disposal case, the company assuming liabilities, which constrains commercial terms. The roll-over is confined to CGT consequences, so separate rules apply to depreciating assets (section 40-340), trading stock and revenue assets. Certain assets are excluded, and the roll-over does not resolve the discretionary trust’s status, because the trust continues to hold the shares.
|
Trust restructure roll-over |
Subdivision 124-N of the ITAA 1997 |
A trust may transfer its CGT assets to a company where unit holders or beneficiaries receive shares in substitution for their interests in the trust. |
Subdivision 124-N expressly contemplates a trust to company restructure and provides a replacement asset roll-over to the beneficiaries. |
Subdivision 124-N is designed for trusts with fixed or unitised interests. Objects of a discretionary trust hold no vested and indefeasible interest capable of being exchanged for shares. The Subdivision requires shares in the company as the substituted interest, is limited to CGT assets, and requires the trust to cease to exist within a short period after the transfer.
|
Roll-over for transfers between certain fixed trusts |
Subdivision 126-G of the ITAA 1997 |
Same-asset roll-over where the trustees of two fixed trusts with the same beneficiaries and interests choose to apply it. |
Subdivision 126-G allows assets to move between fixed trusts without a CGT event, which may assist where a trust already has fixed entitlements. |
Both the transferring and the receiving trust must be fixed trusts with no material discretionary elements, which a conventional discretionary trust cannot satisfy without amendments that carry resettlement and duty risk. The Subdivision does not permit a transfer to a company or an individual.
|
Suggested improvements
The Sladen Legal submission proposed:
an exception to the all-assets requirement where third-party consent is refused or delayed;
consequences proportionate to the assets that remain untransferred, in place of the denial of all relief;
Commissioner discretion to extend the 30 June 2030 deadline;
multi-transferee or whole-of-group relief;
publication of the ministerial continuity determination for non-family trusts before commencement;
a clearer primary-law definition of material discretionary elements with worked examples in the legislation;
a preserved fallback to the EET election where the trustee commenced the roll-over in good faith but cannot complete it; and
coordinated state and territory duty relief.
Item 8 lies outside the Federal Government’s control. The Federal Government could adopt the remaining items, and doing so would improve the practical utility of the roll-over.
What should trustees and advisers do now?
Trustees should begin with the asset register. Trustees need to identify and catalogue every asset the trust holds, including small holdings, unassignable rights and encumbered property, because the all-assets requirement applies to the entire pool, subject to the exclusions in subsection 126-430(4).
Where a transfer requires financier, landlord, regulator or counterparty consent, trustees should begin seeking that consent early. They should also confirm whether a family trust election is in force, because, in the absence of a ministerial determination under subsection 126-440(3), a trust without one cannot satisfy the continuity requirement. The parties should draft the transferee's constitution from the outset to avoid material discretionary elements for the full clawback period specified in subsection 126-430(5), which requires careful consideration of any alphabet share arrangements.
Trustees should model the roll-over against the EET election and against accepting the minimum tax, and should include state and territory duty, financing costs and professional fees in that comparison. Because the roll-over choice is irrevocable and permanently excludes the EET election, trustees should not commit to either course before the final legislation is settled.
Sladen Legal’s tax team regularly advises accountants, private business owners, family groups and trustees on trust taxation, Division 7A, family trust elections, restructuring and engagement with the ATO. If you or your clients would like to understand how the draft legislation or the roll-over may affect existing structures, please contact a member of our tax team.
For more information please contact:
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E dsmedley@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E klowdon@sladen.com.au
Edward Hennebry
Special Counsel
M +61 428 439 730 | T +61 3 9611 0113
E ehennebry@sladen.com.au
Kseniia Gasiuk
Associate
T +61 3 9611 0160
E kgasiuk@sladen.com.au
James Gao
Lawyer
T +61 3 9611 0166
E jgao@sladen.com.au
