30% MINIMUM INCOME TAX ON DISCRETIONARY TRUSTS

On Wednesday, 14 October 2026, Treasurer Jim Chalmers introduced the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 and the Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 into the House of Representatives. The introduction of the Bills follows months of consultation with the community and industry stakeholders and provides the first insight into the legislation the Government intends to pass.

What has not changed

 From 1 July 2028, discretionary trusts will be subject to a minimum tax rate of 30% on their taxable income. According to the Government, this rate aligns with the marginal tax rate applicable to individuals earning between $45,000 and $135,000 per year. Beneficiaries, other than companies, will be entitled to a non-refundable tax offset reflecting the tax paid by the trustee.

What the Bills clarify

 Now that the draft legislation has been released, there is greater clarity around how the proposed regime will operate in practice. Key aspects clarified by the Bills include:

• Fixed distribution election: Trustees can avoid the minimum 30% income tax rate by making a fixed distribution election, under which income and capital must be distributed to pre-nominated beneficiaries in fixed proportions. Provided those proportions are maintained, the trust may be exempt from the minimum 30% income tax and effectively operates as a fixed trust. The minimum tax regime will commence on 1 July 2028. The relevant election, including the nomination of beneficiaries and their respective fixed percentage interests, must be made by 30 June 2029. Once made, those fixed percentages must be applied to distributions for the year ending 30 June 2029 and for all subsequent years

• Exemptions: The regime does not apply to deceased estates, fixed trusts, charitable trusts, special disability trusts, or superannuation funds. It also excludes primary production income and certain income relating to vulnerable minors.

Importantly from an estate planning perspective, discretionary testamentary trusts (discretionary trusts created under a Will) are also excluded from the new tax regime, but only if they are created for a genuine testamentary purpose (the meaning of which is yet to be further defined) and certain conditions are met. The income must come from assets of the deceased's estate, so assets added to the trust from other sources after 12 May 2026 will be subject to the minimum 30% income tax. For testamentary trusts created on or after 1 July 2028, the Will must also limit beneficiaries to individuals and tax-exempt entities such as charities. Many existing Wills allow companies or other trusts to be beneficiaries, which would cause the testamentary trusts to lose the exclusion.

Where a testamentary trust qualifies for the exclusion, children who receive income from it will continue to be taxed at normal adult rates and therefore be entitled to have access to the tax-free threshold. If the trust does not qualify for the exclusion, the trustee will pay 30% tax on the income (irrespective of distributions to minors), and much of the income tax benefit will be lost.

Distributions to tax-exempt entities

Distributions to registered charities and deductible gift recipients will be fully exempt from the minimum tax regime. Distributions to other income tax-exempt entities, such as sporting clubs, will also be exempt, subject to a reasonable cap.

Restructure rollover relief

Discretionary Trusts that elect to restructure into a company, fixed trust, or another eligible entity will have access to rollover relief from income tax and capital gains tax. This relief will be available from 1 July 2027 to 30 June 2030. However, the federal rollover relief does not extend to state and territory stamp duty.

Making the fixed distribution election does not require trust assets to be transferred, so it is different from restructuring the trust into a company or other entity, which will usually attract stamp duty if the trust holds land. However, there is some uncertainty about whether the election itself could attract stamp duty. This is because fixing each beneficiary's share may be treated as changing who owns the trust's property, particularly if the trust deed needs to be amended.

The Federal Government has said it does not expect the election to attract stamp duty, but stamp duty is a state and territory tax and each state will decide. The NSW Government has promised that no stamp duty will apply to the election, but only if it is re-elected in March 2027. Victoria has not yet announced their position.

What happens next?

 On 15 October 2026, the Senate referred the Bills to the Senate Economics Legislation Committee. Public and industry submissions close on 26 October 2026, and the Committee is due to deliver the report by 13 November 2026. The Bills must then pass both houses of Parliament.

What this means for you

The Bills are not yet law but are expected to pass soon. Deciding whether to restructure, adopt fixed distributions or keep your existing trust structure is not purely a tax decision. It can also have significant implications for succession planning and asset protection.

The restructuring rollover relief opens on 1 July 2027, and the 30% minimum tax starts on 1 July 2028. The planning you do over the coming months, and the decisions you make once the Bills become law, will be important for you and your family.

Authored by Teresa Catalano & Georgia Shorland of iWills Legal

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Teresa has been in private practice for over 23 years and became a Wills and Estates Victorian Accredited Specialist in 2008.  She was previously a partner of a top-ten Australian legal firm and has developed and headed up Wills and Estates practices in small to mid-tier firms across Melbourne. 

Teresa has extensive expertise acting for high net worth of individuals in the areas of administration of estates and estate litigation including VCAT matters, Wills, Powers of Attorney, Estate Planning (including preparation/amendment of trusts, companies and superannuation funds), superannuation matters, applications to remove trustees and contested Wills.

Georgia brings hands-on legal experience and a down-to-earth, client-focused approach to the team, with a keen interest in Wills and Estates.

Originally from the Echuca/Moama region, she spent six dedicated years working in law within a regional firm, developing a strong foundation in client advocacy and practical problem-solving. She completed her Bachelor of Laws at Deakin and was admitted to practice in May 2025.