The Australian Government’s proposal to introduce a 30% minimum tax on discretionary trusts has the potential to represent one of the most significant changes to the taxation of private groups and family businesses in decades. However, at the time of writing, the proposal remains just that: a proposal.
Need to know:
- A proposed 30% minimum tax on discretionary trusts was outlined in a Consultation Paper released 8 July 2026, but no draft legislation exists yet – so the key details remain unresolved.
- The definition of “discretionary trust” is a central issue – the Consultation Paper’s “fixed economic outcomes” and “transparent outcomes” concepts resemble existing tax law tests such as the vested and indefeasible interest concept under Schedule 2F of the ITAA (1936), but are not identical, and their interpretation will impact who is caught by the new rules.
- The reform could push some groups toward companies or fixed trusts, but advisers and trustees should avoid irreversible decisions until draft legislation is released, as it may include concessions, exclusions or transitional relief.
On 8 July 2026, the government released a Consultation Paper, but no draft legislation has been introduced at this stage. Until such draft legislation is available for review, many of the critical design features remain uncertain. Among the questions that appear to remain open are:
- What precisely constitutes a “discretionary trust”?
- How will corporate beneficiaries be treated?
- How will franking credits interact with the minimum tax regime?
- How will trustee-level taxation be administered?
- What restructuring pathways will be available for affected groups?
- How will the proposal interact with recent trust taxation developments, including the High Court’s decision in Bendel?
The definition issue may ultimately become one of the most important aspects of the reform. What appears straightforward at first glance becomes significantly more complex when viewed through the lenses of trust law, tax law and state revenue legislation.
This article is therefore not a statement of what the law will be, but rather a thought piece exploring some of the questions advisers, business owners and trustees may wish to consider if the reforms proceed in a form broadly consistent with the Consultation Paper.
The use of discretionary trusts in Australia
Discretionary trusts are deeply embedded in the Australian business landscape. They are commonly used by family groups, primary production businesses, professional practices and privately owned enterprises to facilitate succession planning, asset protection, family wealth management and flexibility in income distributions.
For many years, trust distribution strategies and planning have been built around the principle that trust income can be distributed to beneficiaries who are taxed at their own marginal tax rates. The proposed minimum tax fundamentally challenges that paradigm by introducing a trustee-level tax mechanism designed to ensure a minimum 30% rate of tax is borne on trust income.
The Consultation Paper indicates that this minimum 30% tax will only apply to discretionary trusts, and not to other types of trusts such as fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts. It is also relevant to note that some types of income such as primary production income may be excluded from this minimum tax regime.
It is proposed that testamentary discretionary trusts will also be exempt from the minimum tax rate provided they are established for a genuine testamentary purpose and the trust can only benefit individuals and income tax-exempt entities (i.e. not corporate beneficiaries).
The important question then becomes – what is a discretionary trust?
What is a discretionary trust?
At general law, the decision of the High Court in Chief Commissioner of Stamp Duties v Buckle (1998) 37 ATR 393 remains relevant, where the Court stated that the term “discretionary trust” has no fixed meaning and is used to describe features of certain express trusts.
The meaning of the term “discretionary trust” is determined by a consideration of usage rather than doctrine, and the usage is descriptive rather than normative (a normative statement is one that establishes a norm, standard, duty, requirement or consequence).
The label “discretionary trust” tells us something about the structure of the trust, but the label itself does not determine the legal outcome. For example, even if a trust is described as a “discretionary trust”, one must still examine:
- the actual terms of the deed
- whether there are takers in default
- whether interests have vested
- the nature of discretions
- whether there has been a change in beneficial ownership.
For income tax purposes, the starting point is that the tax legislation does not define a “discretionary trust” in the same way that the Duties Act 1997 (NSW) does. Instead, Schedule 2F to the Income Tax Assessment Act 1936 (Cth) is principally concerned with distinguishing between fixed trusts and non-fixed trusts for trust loss, franking credit and other taxation purposes.
Key terms under the Consultation Paper
The Consultation Paper does not provide a definition of discretionary trust. However, it is possible to infer from the broader discussion what attributes will be relevant. In the context of future rollover relief that is intended to be available to assist taxpayers that wish to restructure from a discretionary trust into other structures such as a company or a fixed trust there are several comments that assist.
The Consultation Paper states that the proposed rollovers will not be available to facilitate the continuation of substantially equivalent discretionary distribution outcomes through alternative legal structures. In this context, two key terms are introduced:
- Fixed economic outcomes – economic entitlements are sufficiently predetermined and stable, rather than capable of being redirected year to year.
- Transparent outcomes – having transparent outcomes suggest that the allocation mechanics are set based on the legal rights attaching to the interests, rather than dependent on a broad discretion.
These new concepts closely resemble what Schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) has been attempting to identify for decades.
Under Schedule 2F, a fixed trust exists where beneficiaries hold vested and indefeasible interests in all income and capital of the trust.
There is an argument that the Consultation Paper is implicitly moving toward a Schedule 2F-style conception of ownership. Schedule 2F asks: Does the beneficiary have a vested and indefeasible entitlement?
Based on the Consultation Paper, Treasury appears to be asking: Is the participant’s economic outcome fixed, stable and determined by legal rights rather than discretion?
Those are not identical tests, but they are directed at essentially the same policy objective: Reducing the ability to separate economic enjoyment from fixed ownership and to redirect economic benefits among related parties through discretionary decision-making.
Accordingly, “vested and indefeasible interests” provide a useful framework for understanding the Consultation Paper. The language of “fixed economic outcomes” and “transparent outcomes” is, in many respects, the policy equivalent of the Schedule 2F distinction between fixed entitlements and discretionary entitlements.
While it may appear that the policy objectives of the Consultation Paper mirror the existing law to an extent – there are still a number of significant outstanding questions and issues which are unresolved and are likely to impact the interpretation of these new concepts.
Could we see a structural shift away from discretionary trusts?
If the final legislation broadly follows that policy direction outlined in the Consultation Paper, we may see:
- increased use of companies
- greater reliance on fixed trusts and unit trusts
- reconsideration of long-standing family structures
- succession plans being accelerated while rollover relief is available
- significant activity in the private client (including agribusiness) and SME advisory market.
However, taxpayers should be cautious about making decisions before the legislative details are known. History demonstrates that the practical operation of tax reforms often differs materially from their initial policy announcement.
What should trustees and advisers do now?
Instead, trustees and advisers may wish to:
- review existing trust structures
- consider why the structure exists and whether those objectives remain valid
- identify assets that could present challenges if future restructuring is required
- monitor consultation outcomes and draft legislation
- evaluate the potential implications of trustee-level taxation on family group cash flows.
Most importantly, trustees and advisers should avoid making irreversible decisions based solely on the Consultation Paper materials.
The draft legislation, when released, may contain significant concessions, exclusions, transitional provisions or restructuring measures that materially change the practical outcome for taxpayers.
The proposed 30% minimum tax on discretionary trusts is potentially one of the most consequential trust tax reforms in recent memory. Yet, despite the volume of commentary already emerging, we remain at a relatively early stage in the policy development process
For now, what we have is a Consultation Paper and a broad policy framework. We do not yet have any legislation.
The most productive discussion may not be whether the reform is good or bad, but whether Australia’s existing concepts of trust taxation are fit for purpose in a modern economy.
As always, the details will matter.
If trustees or advisers have any queries or wish to undertake a review of their current structures, please contact our Hamilton Locke Private or Tax team.
