The proposal to introduce a minimum 30% tax on income of discretionary trusts (DTs) means that each unit trust deed should be reviewed to determine whether it qualifies as a fixed trust.
Unless the trust qualifies as a fixed trust or satisfies another exception, the trust is likely to be subject to the new 30% tax from 1 July 2028 as a minimum tax trust (MTT).
Many think that unit trusts are fixed as distributions of income and capital are generally proportionate to each unitholder’s share of units in the trust (eg, proportionate to each unitholder’s number of units held as a proportion of the total number of units on issue).
However, under the proposed changes from 1 July 2028 the criteria to satisfy the revised definition of ‘fixed trust’ will include, among other things, a requirement that there are no ‘material discretionary elements’.
Background
From 1 July 2028, the trustee of a DT must generally pay a 30% tax on its minimum tax income unless a higher rate applies, eg, where income is accumulated by a trust, a 45% rate plus the 2% Medicare levy applies.
Individuals and other non-corporate beneficiaries will receive non-refundable tax offsets for the 30% tax paid by the trustee; which will reduce the beneficiaries’ income tax payable on such income distributions. This is designed to ensure that tax paid on DT income is not less than 30%.
Certain kinds of trusts, in particular ‘fixed trusts’ are excluded from the new tax. We examine in more detail below the fixed trust definition as many unit trusts and hybrid trusts may not qualify as fixed trusts. In particular, unless carefully drafted, a unit trust deed that includes some discretion with respect to distributions or has more than one class of units may not qualify as a fixed trust.
Broadly, a hybrid trust is a trust that may include some discretionary elements in relation to distributions and beneficiaries and may also include more than one class of beneficiary or unitholder. As noted below, there is no typical or standard trust deed and each deed needs to be carefully reviewed to determine the terms and provisions in that particular deed.
For more information on the proposed changes to the taxation of DTs, refer to our article here.
What is a fixed trust?
A fixed trust will generally confer fixed entitlements to income and capital for each unitholder.
Although many assume that a unit trust is a fixed trust, the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 confirmed at [15] that:
However, “unit trust”, like “discretionary trust”, in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning …
Accordingly, there is no standard definition of what a fixed trust is and there is no such thing as a standard fixed trust deed or unit trust deed. Indeed, whether a particular trust is fixed depends on the terms of the trust deed and the legislative context, including the following:
- state land tax and duty legislation impose additional tax and duty on non-fixed trusts (see, eg, s 3A(3B) of the Land Tax Management Act 1956 (NSW));
- for a trust to carry forward a revenue loss and to pass on franking credits to beneficiaries, the trust would need to satisfy the definition of fixed trust in Schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936); and
- where an SMSF holds an interest in a trust that is not a fixed trust, the non-arm’s length income provisions in s 295-550(4) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) in relation to income derived by a beneficiary SMSF, other than from holding a fixed entitlement to income, need to be considered.
Thus, there are different types of trusts in existence and each trust needs to be considered in light of the proposed legislative changes. The proposed changes are likely to add greater complexity to the existing legislative landscape.
Fixed trusts
For the purposes of Schedule 2F of the ITAA 1936, a trust is a fixed trust if it confers fixed entitlements to income a capital under s 272-5(1):
If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.
In the context of private unit trusts, s 272-5(2) broadly provides that the mere fact that units can be redeemed and that further units can be issued does not mean that a person’s interest in the trust is defeasible, provided that units are issued or redeemed for a price determined on the basis of the net asset value, according to Australian accounting principles, at the time of the redemption or issue.
However, under the proposed changes for the new 30% tax on trusts, if there are any ‘material discretionary elements’, the trust may not satisfy the fixed trust definition. The draft legislation in proposed s 272-65(2)(a) provides that matters suggesting there are no such material discretionary elements include the following:
(a) the beneficiaries have clearly defined specific and enforceable entitlements or rights:
(i) to all of the income and capital of the trust; or
(ii) in relation to the governance of the trust;
whether or not the entitlements or rights are subject to rules, so long as none of the rules are discretionary;
Draft s 272-65(2)(b) to (d) further provide the following matters suggesting there are no material discretionary elements:
(b) if there are powers to do any of the following:
(i) vary such entitlements or rights;
(ii) issue new entitlements or rights for one or more beneficiaries;
(iii) issue new interests in the trust;
(iv) classify payments received by the trust as income or capital;
(v) deal with administrative matters;
the powers cannot be exercised to significantly vary existing entitlements or rights, or to significantly affect the value of the interests of existing beneficiaries of the trust;
(c) a power to vary the instrument establishing the trust that can only be exercised:
(i) through a process requiring the consent of all beneficiaries; or
(ii) in a way that cannot adversely affect the entitlements or rights of beneficiaries;
(d) a matter determined under paragraph (4)(a) (ie, where the Minister by legislative instrument may declare matters that suggest there are no material discretionary elements).
As you will appreciate from the above provisions, until we have the legislation and Ministerial determinations on what constitutes ‘material discretionary elements’ and what do not, there will be uncertainty as to whether a unit trust can be considered fixed. Moreover, what ‘clearly defined specific and enforceable entitlements or rights … in relation to the governance of the trust’ means will need clarification. Does this require a review of the constitution to each corporate trustee and it shareholders, etc? These matters may take many years to be clarified with case law authority leaving advisers to make decisions without clear legal guidance in the meantime.
ATO views
We will also have to wait to see how the ATO will apply the ‘material discretionary elements’ tests outlined above. In PCG 2016/16 the ATO confirms that for a trust to be a fixed trust for the purposes of Schedule 2F of the ITAA 1936, all beneficial interests must have the same rights to receive the income and capital of the trust.
Review each trust deed
A detailed and careful review of each trust deed and any key documents including unitholder agreements, constitutions of corporate trustees, shareholder details and any variations thereto and any other relevant information will need to be undertaken by an experienced adviser, preferably an experienced lawyer, to provide feedback on the status of each unit trust or hybrid trust.
On the basis of the draft legislation, we suspect that where a unit trust has more than one class of unit on issue, unless the deed is carefully drafted, may not be considered a ‘fixed trust’ under the revised draft of s 272-65 and therefore such a trust will, most likely, be subject to the new 30% minimum tax from 1 July 2028.
Trustees of unit trusts and hybrid trusts should seek advice on what options are available including whether they need to vary the trust deed or redeem one or more classes of units so the trust might be considered a ‘fixed trust’ and therefore will not be subject to the 30% tax from 1 July 2028.
Naturally, there are a range of factors that need to be considered before varying a trust deed or cancelling or redeeming a class of units, such as CGT, duty and other tax and transfer costs. Naturally, an examination of any additional costs and taxes should be undertaken before the new 30% minimum tax commences on 1 July 2028.
The DBA Lawyers’ unit trust
The DBA Lawyers’ unit trust is prepared as a fixed trust. This means that a unitholder has a fixed entitlement to income and capital. Thus, less onerous tax provisions apply under Schedule 2F of the ITAA 1936 (eg, in relation to the trust loss and franking credit provisions). Further, taxable distributions received from a fixed trust should obtain concessional tax treatment on receipt by an SMSF (as compared to 45% for distributions received from non-fixed trusts under s 295-550(4) of the ITAA 1997), even if the SMSF is in pension mode. Further, from 1 July 2028 as a fixed trust, the minimum 30% tax should not apply.
DBA Lawyers is tracking the draft legislation and will be updating its unit trust deed as required once the legislation is passed as law.
Conclusions
The potential impact of a proposed new 30% tax on DTs creates considerable uncertainty and expert advice should be obtained before making any changes until we see the detailed legislation is enacted and guidance material that may issue.
We recommend that clients with unit trusts and hybrid trusts consider obtaining preliminary feedback on their deeds to provide greater time to consider their options on which way to proceed after the legislation is passed as law.
Naturally, DBA Lawyers would be pleased to assist and offers a range of trust services including deeds of variation and tax advice.
Related articles
- Draft legislation released on taxation of trusts
- Companies with more than one share class should consider tax risks
- Proposed changes to the taxation of discretionary trusts from 1 July 2028
- Why should you order trusts from DBA Lawyers?
- Family trust elections – one choice, lasting consequences – Part 1
* * *
By Daniel Butler, Director ([email protected]), Fraser Stead, Lawyer, ([email protected]) and Max Zhang Lawyer, ([email protected]).
Note: DBA Lawyers presents regular SMSF Online Updates. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
29 September 2026
