Minimum tax on discretionary trusts: the drafts arrive, the questions remain

‍On 3 September 2026, Treasury released exposure draft legislation to implement the proposed 30 per cent minimum tax on discretionary trusts announced in the 2026–27 Budget. The draft package includes four instruments and three sets of explanatory materials, with submissions closing on 18 September 2026. The drafts settle much of the architecture of the reform, although several practical questions remain unresolved.

‍Summary of the changes

From 1 July 2028, a 30 per cent minimum tax applies to discretionary trusts in scope. It is a trustee-level tax on minimum tax income. Section 101AA of the Income Tax Assessment Act 1936 (ITAA 1936) assesses the trustee where the trust has net income, is a minimum tax trust at the end of the income year, and the trustee is not already assessed under subsection 99A(4) or (4B).

The Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 (Bill) inserts section 12AB into the Income Tax Rates Act 1986. The rate equals the shortfall to 30 per cent. Where tax already equals or exceeds 30 per cent, the rate is nil. Where no other tax is payable, the rate is 30 per cent. The tax therefore operates as a top-up on income taxed at less than 30 per cent, rather than as a separate flat impost.

Section 101AF gives non-corporate beneficiaries a non-refundable 30 per cent offset for amounts reasonably attributable to minimum tax income. Corporate beneficiaries are excluded. Section 101AG reduces existing Division 6 rebates to prevent double benefit.

Trustees have two paths out of the minimum tax:

1. An excluded election trust (EET) election under new Division 6F (sections 102UYA to 102UYH of the ITAA 1936).

2. Transitional roll-over relief under new Subdivision 126-C of the Income Tax (Transitional Provisions) Act 1997.

The two are mutually exclusive: a trustee that makes a roll-over choice cannot make an EET election, and vice versa.

The EET election is available to trusts in existence at 1 July 2028. The trustee must nominate beneficiaries and allocate 100 per cent of income and capital, with each beneficiary's income and capital shares matching. The trustee must distribute in accordance with the nomination each year. Nominated beneficiaries must have been capable of benefiting under the trust on 1 July 2028.

Section 102UYE confines variation to death or relationship breakdown. The trustee may revoke the election voluntarily but cannot reverse that revocation. An inconsistent distribution triggers automatic revocation, and the trustee is then assessed on the entire net income at the top marginal rate plus Medicare levy for that year.

The roll-over applies to transfers from 1 July 2027 to 30 June 2030 and requires all relevant trust assets to be transferred out of the discretionary structure to a single transferee. Conditions include continuity of beneficial ownership, residency, and the absence of material discretionary elements in the transferee. The transferor must not have made an EET election. The roll-over defers the tax outcome rather than conferring a permanent exemption. If the trustee does not transfer all assets by 30 June 2030, the relief fails for every asset.

Item 13 of the minimum tax Bill repeals and replaces section 272-65 of Schedule 2F to the ITAA 1936. A trust is fixed if beneficiaries have fixed entitlements to all income and capital, or there are no material discretionary elements affecting beneficiaries' entitlements or rights. Item 19 updates subsection 995-1(1) of the Income Tax Assessment Act 1997, so the new definition applies across the income tax law.

Fixed trusts, special disability trusts, deceased estates, and complying superannuation entities are excluded from the minimum tax trust definition. Excluded income includes:

• primary production income

• certain income of vulnerable minors

• certain testamentary trust income

• income to registered charities and deductible gift recipients (subject to conditions)

• other exempt entity income (subject to conditions and a cap to be finalised)

• non-resident withholding payments

• income already assessed at the top rate

The explanatory materials say that widely held trusts, managed investment trusts, bare trusts, and employee share trusts should fall outside the regime under the new fixed trust definition.

Comparison with Sladen Legal submission

Sladen Legal made a submission on 31 July 2026 on the Treasury Consultation Paper that was a precursor to the draft legislation. The next section of this article compares the draft legislation with the Sladen submission.

The Annexure sets out how the exposure drafts respond to each point in the Sladen Legal submission.

Targeting

The Sladen Legal submission said the regime should target a material discretionary capacity to redirect economic returns, not any trust that fails a strict, fixed trust analysis. The drafts partly address this through the material discretionary elements limb in the new section 272-65, but the minimum tax trust definition in section 101AB still turns on exclusion from fixed trust status. Trusts with minor administrative discretions may fall within the regime unless those discretions come within the non-exhaustive indicators (including some that the explanatory materials say should fall outside).

Undefined concepts

Material discretionary elements appears in the fixed trust definition (subsection 272-65(2)), the eligible company test (subsection 102UYC(2)) and the roll-over transferee condition (subsection 126-430(6)). The concept is not defined. The drafts provide non-exhaustive indicators and ministerial determination powers, but material uncertainty remains. Trustees and advisers must form a view on an undefined standard, and an incorrect view carries substantial tax consequences.

EET complexity and revocation severity

The EET election requires a 100 per cent annual allocation, matched income and capital shares, a fixed beneficiary pool and limited variation grounds. A single inconsistent distribution triggers automatic revocation, and the trustee is then assessed at the top marginal rate plus Medicare levy on the entire net income for that year. The drafts confer no Commissioner discretion, set no de minimis threshold and provide no correction mechanism. An operational error, such as a minor misallocation in a complex group, therefore attracts the same consequence as deliberate non-compliance. The Sladen Legal submission identified the need for trust law safeguards to address that risk.‍ ‍

Roll-over complexity

The roll-over requires the trustee to transfer all relevant trust assets, with limited exceptions. It imposes conditions on continuity, residency and notifications, and a four-year material discretionary elements clawback. The Sladen Legal submission sought wider exceptions for assets that cannot be transferred. The drafts include some exceptions, being assets incapable of transfer, primary production CGT assets, liability assets, winding-up costs, and assets costing $1,000 or less, but those exceptions do not extend to the full range sought. The requirement to transfer every relevant asset, together with the 30 June 2030 deadline, creates execution risk for trusts with complex or illiquid asset bases.

Delegated legislation

The exempt entity conditions and cap, the ministerial determinations for fixed trusts and material discretionary elements, and the non-family trust continuity requirements are yet to be made. Until those instruments exist, advisers cannot fully evaluate the regime. Treasury therefore asks stakeholders to comment on a framework whose detail remains incomplete.

Corporate beneficiaries

The Sladen Legal submission proposed an irrevocable corporate beneficiary election to prevent double taxation. The drafts do not adopt that proposal, and corporate beneficiaries remain excluded from the section 101AF offset. Where a trustee distributes income to a corporate beneficiary and the minimum tax also applies, the effective tax rate on that income can approach 60 per cent, which is a material structural gap in the design.

Franking credits

The Sladen Legal submission sought refundability for excess franking credits. The drafts provide refunds for franking credits relating to minimum tax income, which substantially addresses that concern and avoids carry-forward compliance burdens.

Bendel and Division 7A

The Sladen Legal submission urged integrated design of the minimum tax and Division 7A reforms following Commissioner of Taxation v Bendel [2026] HCA 18. The draft legislation does not do that but the Treasurer announced on 3 September 2026 that “Legislation to address implementation of the 2018 Budget measure on unpaid present entitlements that was announced but not enacted by the previous Government will be progressed separately.” The interaction between the two regimes remains unresolved.

Deferred matters

The drafts defer administration, collection, beneficiary notification, PAYG instalments, residency, CGT interactions, and further integrity rules to later legislation. Those matters are central to compliance. Trustees will need to understand their reporting and payment obligations well before the 1 July 2028 start date. ‍

Further guidance

We will publish specific articles on aspects of the draft legislation over the consultation period.

Sladen Legal’s tax team regularly advises accountants, private business owners, family groups and trustees on trust taxation, Division 7A, FTEs, restructuring, and ATO engagement. If you or your clients would like to understand how the draft legislation may affect existing structures, please contact a member of our tax team.

Annexure: our July submission against the draft legislation

The table below compares each point in the Sladen Legal submission to Treasury dated 31 July 2026 with the corresponding treatment in the exposure draft legislation.

Submission point	Draft legislation response	Outcome
Target the regime to trusts with a material discretionary capacity to redirect economic returns, not any trust failing a strict, fixed trust test.	New section 272-65 includes a no material discretionary elements limb, but section 101AB still defines in-scope trusts by exclusion from fixed trust status.	In part
Use a stand-alone statutory definition rather than defining the regime only by exclusion from fixed trust status.	Draft continues to use minimum tax trust definition by exclusion in section 101AB. New section 272-65 modifies the fixed trust boundary.	In part
Expressly exclude employee share trusts, managed funds, MITs, widely held commercial trusts, bare trusts, protective trusts, and similar arrangements in the primary law.	Some fall outside through the new fixed trust definition or existing law. Section 101AB excludes certain categories. Many listed exclusions appear in explanatory material rather than as express primary-law exclusions.	In part
Protect distributions to income tax-exempt entities, not only DGRs.	Section 101AE excludes registered charities and DGRs subject to conditions, and other exempt entities subject to conditions and a cap to be determined.	In part
Preserve CGT discount and Division 152 outcomes.	Draft excludes primary production income and provides roll-over relief. Further CGT interaction rules are deferred. No general preservation rule is included.	In part
Ensure testamentary trust exclusions cover genuine testamentary purposes, substituted property and ordinary estate administration.	Section 101AD includes a testamentary trust exclusion with scheme rules but imposes a 12 May 2026 property cut-off and a post-1 July 2028 individual or exempt entity beneficiary limit.	In part
Permit corporate beneficiaries to elect into a non-refundable credit regime to avoid compounding tax.	Corporate beneficiaries remain excluded from section 101AF. No corporate beneficiary election is adopted.	Not at all
Provide workable roll-over relief and review whether three years is sufficient for complex restructures.	Subdivision 126-C provides roll-over relief for 1 July 2027 to 30 June 2030. No extension is included.	In part
Preserve existing Subdivision 328-G genuine restructure outcomes.	Draft contrasts the new roll-over with Subdivision 328-G but does not expressly preserve prior or later Subdivision 328-G positions.	Not at all
Draft integrity rules for alternative structures by reference to retained discretionary allocation, not ordinary commercial vehicles.	Sections 126-430(5) to (8), 102UYC and 272-65 use material discretionary elements tests, but the concept is not exhaustively defined.	In part
Prevent family trust distribution tax on qualifying roll-over transfers.	Section 126-451 provides that a qualifying transfer does not result in family trust distribution tax under sections 271-15 to 271-30 of Schedule 2F to the ITAA 1936.	In full
Align the family unit concept with the existing Schedule 2F family group concept or provide a coherent rule.	Section 126-440 uses the existing Schedule 2F family group concept for family trusts. Non-family trust continuity is left to ministerial determination.	In part
Provide wider exceptions to the all-assets requirement for third-party consents, refinancing, regulatory approvals, and contractual restrictions.	Subsection 126-430(4) excludes assets not capable of transfer, primary production CGT assets, liability assets, winding-up cost assets, and assets costing $1,000 or less. Those exceptions do not extend to the full range suggested.	In part
Address consolidated group consequences.	No specific consolidated group rule appears in the exposure draft package.	Not at all
Develop an election alternative to upfront restructuring.	Division 6F introduces the EET election, but with narrow variation rules and severe revocation consequences.	In part
Include trust law safeguards for an election, including defined variation events and authority for trustees.	Section 102UYE permits variations only on death or relationship breakdown. No broader trust law authorisation rule is included.	In part
Refund excess franking credits to trustees.	Draft provides refunds for franking credits remaining after offsetting trustee income tax liabilities for credits relating to minimum tax income.	In full
Avoid carry-forward credit compliance burdens.	The refund approach avoids a general carry-forward model for excess credits.	In full
Specify franking credit interactions with trust income, distributable income, beneficiary entitlements, and Division 6E.	Items 10 to 18 amend Division 6E, section 67-25 and Division 207. Some timing and practical issues remain.	In part
Include proportionate director and corporate trustee collection safeguards.	Administration and collection are deferred to later legislation.	Not at all
Standardise beneficiary notification through annual distribution information.	Beneficiary notifications are foreshadowed but not legislated.	Not at all
Provide PAYG instalment safe harbours and align payment with the trust return cycle.	Administration and payment rules are deferred to later legislation.	Not at all
Design the minimum tax and Division 7A unpaid present entitlement reforms together after Bendel.	Treasury states the 2018 Budget UPE measure will be progressed separately.	Not at all
Consult on exposure draft legislation for operative definitions, roll-over conditions, crediting rules, and collection mechanisms.	Exposure draft legislation released for core minimum tax, election, roll-over, and crediting rules. Collection mechanisms remain for later legislation.	In part

Of the 24 submission points, 3 were adopted in full, 14 in part and 7 not at all. The points adopted in full relate to family trust distribution tax relief for roll-over transfers, refundability of excess franking credits and the avoidance of carry-forward compliance burdens. The points not adopted at all include the corporate beneficiary election, Subdivision 328-G preservation, consolidated group consequences, director and corporate trustee collection safeguards, beneficiary notification, PAYG instalment safe harbours and the integrated design of the minimum tax and Division 7A reforms.

For more information please contact:

Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
Enbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
Edsmedley@sladen.com.au‍ ‍

Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
Eklowdon@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