Discretionary Trust Tax Changes 2026: Draft Rules Released

Recently, draft rules concerning the revised taxation of discretionary trusts were released for public comment, due by 18 September 2026. While these draft rules provide a good indication of the likely direction of final legislation, there is still time to run, and there will be changes and updates to take account of unforeseen consequences and lobbying by various business and industry groups.

So, what to do now with this new information? Below we set out how the changes look and may apply but until there is final legislation in place, it isn’t our recommendation to make any changes just yet, but to start the process of thinking about what may need to be done.

Minimum Tax on Discretionary Trusts: What Was Announced

The first real mention of a minimum tax for discretionary trusts was in the budget released in May 2026. Since then, there has been much speculation on how the minimum tax would apply and how existing discretionary trusts may restructure in order to seek relief. Some income in discretionary trusts is exempt (e.g. primary production) and some trusts that may be considered discretionary may be exempt (e.g. testamentary trusts). On Thursday (3 September), exposure drafts and explanatory materials, together with a fact sheet, were released for public comment. These documents set out the mechanism for the minimum taxation of discretionary trusts, and detailed:

• The 30% Discretionary Trust Tax Rate and Who Pays It

  The application of a minimum 30% tax for discretionary trusts, payable by the trustee with the tax thus paid passed on to beneficiaries as a non-refundable credit (except for corporate beneficiaries, which do not get a credit at all).

• Trust Restructuring, Rollover Relief and Stamp Duty

  Details on how a trust may restructure to avoid the minimum tax and obtain rollover relief for doing so. It has been well covered in the media that this rollover relief would only cover capital gains tax (CGT) but not stamp duty, which is likely to apply in many trust restructures, in particular those with real property.

• The Fixed Distribution Election (Excluded Election Trust)

  An alternative to rollover relief for a restructure was a proposed fixed distribution election, creating what the draft calls an excluded election trust (EET), to treat the trust as though it were a fixed trust by nominating all beneficiaries and their ongoing entitlement to a proportion of trust income. These beneficiaries and their proportionate entitlements cannot be changed unless there are specific circumstances (e.g. death or marriage breakdown), if they are changed then the trust is subject to a penalty rate of tax on all income and the trust will from that time onwards revert to being a discretionary trust subject to the minimum rate.

What Does That Mean for Your Trust?

While we do wait for final legislation, each client group is going to need to start considering how they best respond to the trust minimum tax rules. If a restructure is decided upon this may have less impact (subject to whether duty applies) than making an election concerning fixed beneficiaries. But the election pathway does not impact the entity in place and may be less disruptive – and will necessarily tie in with the family succession / estate planning. In most cases, clients ought to consider both alternatives in some detail before deciding on the preferred pathway, with the election able to be made for the 2028-29 income year and any rollover completed by 30 June 2030.

What Could Go Wrong?

Some might say a lot has already. But taking this seriously, there are a number of areas where further detail is needed or that will likely be subject to some scrutiny in the consultation process, these being just a few:

• Defining a Material Discretionary Element

  The definition of a material discretionary element does not appear to be finalised. This is important as it determines what a discretionary trust is. It is important to note that this also applies to companies in a group, a company beneficiary that has multiple classes of shares is likely to fail the material discretionary element, so cannot be one of the ‘fixed’ beneficiaries.

• Distributions to a Loss Trust

  The taxation of discretionary distributions from an income producing trust to a loss trust. It appears as though the tax credits would be lost in this situation. For group planning it is difficult, if not impossible to foresee future loss-making entities and thus making an election considering the right trust beneficiaries is going to be problematic.

• New Children, Grandchildren and Minors Turning 18

  New children or grandchildren in a family don’t appear to be able to be brought into a fixed beneficiary group, nor children when they turn 18 (and are no longer treated as minors).

Franked Distributions From Trusts and Franking Credits

Franked dividends (or distributions) to a discretionary trust effectively have the imputation credits converted from refundable credits to non-refundable. This is because it is the trustee that will apply franking credits toward the 30% minimum tax and pass that out to beneficiaries as a non-refundable credit. If there are excess franking credits at the trust level, the trustee will get a refund, not the beneficiaries. 

Next Steps

We are watching this space, along with the raft of other changes announced, including the CGT changes, Division 296 changes for super and the changes to negative gearing. Once there is greater clarity around the final legislative position, we will contact our clients to discuss specific strategies to be best positioned and prepared. If you do have any questions in the meantime, please don’t hesitate to contact us.