The Government’s proposed minimum 30% non-refundable tax credit (NRT Credit) on trustees of discretionary trusts (DTs) announced in the Federal Budget on 12 May 2026 will have a significant impact on tax planning and investment structures, including impacting SMSFs.
The Treasury Consultation Paper (C-Paper) in respect of these changes was released on 8 July 2026 with the closing date for submissions due by 31 July 2026 (ie, there are only 17 business days to prepare a submission on a very complex and important area of tax law that may impact up to 840,000 DTs and many more beneficiaries).
This article is an update to our prior article issued on 25 May 2026. Our comments in red throughout reflect the key changes in the C-Paper that impact our prior article.
The Government’s justification
The Labor Government’s stated policy behind the proposed change is to improve ‘the fairness and sustainability of the tax system’ as the Government believes DTs can be used to split income between beneficiaries so that the income is taxed at lower marginal tax rates. This results in people with similar levels of income having varying tax outcomes.
The C-Paper states that less than 15% of all active small businesses operate through a DT structure with more than 90% unlikely to be affected by the changes. Businesses that are affected will be afforded an opportunity to restructure out of DTs into other structures such as a company or fixed trust without any capital gains or other immediate tax consequences applying (other than state/territory based taxes such as stamp duty in each of Australia’s eight jurisdictions).
Proposed changes
The changes announced in the Budget are broadly outlined below. Naturally, these proposals are subject to fleshing out the detail and possible further change and deferral. No doubt there will be considerable uncertainty until the draft legislation is finalised and passed as law.
Tax rate and credits:
From 1 July 2028, the trustee of a DT will pay a 30% tax on the taxable income of the trust unless a higher rate applies. For example, a 45% rate plus the 2% Medicare levy can apply where a trustee accumulates income under s 99A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
Individuals and other non-corporate beneficiaries will receive NRT Credits for the 30% tax payable by the trustee which will reduce their income tax payable. This is designed to ensure that tax paid on DT income is not less than 30%.
Individuals will disclose their share of a DT’s taxable income in their income tax return and claim an offset for any NRT Credit against their personal income tax. An individual beneficiary’s share of an NRT Credit will depend on their share of the trust’s taxable income. There is no refund if they are on a lower tax rate. Further, the credit does not offset any Medicare levy.
Trustee beneficiaries who receive an NRT Credit (eg, where DT-1 distributes to DT-2) may apply the credit against their own income tax liability (eg, the 30% tax paid by DT-1 will be able to offset DT-2’s tax).
Collection method:
Trustees of DTs will need to calculate, report and pay the minimum tax as well as notify beneficiaries of their entitlements and associated tax credits.
The C-Paper provides:
- The minimum tax on DTs will be paid by the trustee, as it is the trustee who controls distributions.
- Under trust law, trustees are personally liable for the debts of the trusts they administer and trustees have rights of indemnity from trust assets.
- To address issues with collecting the tax from corporate trustees, the following points are being considered:
- providing the ATO a similar right of reimbursement from trust assets;
- making directors of corporate trustees jointly and severally liable to pay the minimum tax, as well as the potential power for the ATO to issue director penalty notices (DPNs); and
- adopting mechanisms for earlier collection at the trustee level (such as PAYG instalments).
Franking credits:
The prior Treasury paper stated that to ensure that the use of refundable franking credits will not undermine the 30% minimum tax:
- trustees that receive franked dividends will be required to use their franking credits to pay the minimum 30% tax; and
- corporate beneficiates will not receive NRT Credits for tax payable by the trustee, to avoid them converting these to refundable franking credits to avoid the minimum tax.
This may result in a franked dividend carrying a 30% franking credit offsetting the proposed 30% NRT Credit. However, a franked dividend received from a company that is base rate entity carrying a 25% franking credit (eg, dividends from active companies with less than $50 billion turnover) offsetting the proposed 30% NRT Credit. This may result in DTs having to pay a 5% top-up tax so the effective NRT Credit aligns with a 30% tax rate after the 25% franking credit offsets the usual 30% tax.
We suspect DTs may be required to maintain more accounting records to comply with the new measures. The estimated 840,000 DTs in Australia will expect considerable extra administration, complexity and costs under the proposed DT changes.
The C-Paper provides:
- To ensure the use of refundable franking credits does not undermine the minimum tax, trustees that receive franked dividends will be required to use their franking credits to offset their income tax liabilities. This is consistent with the current arrangements in circumstances where a trust is assessed and liable for tax, such as where a trustee retains trust income.
- Excess franking credits may arise where a trustee offsets its income tax liability, including any minimum tax liability, and franking credits remain. This could arise on occasions where franking credits available to the trust exceed the income tax liability of the trustee.
- The Government is considering two options for the treatment of excess franking credits for trustees:
- refunding excess franking credits to the trustee; or
- allowing excess franking credits to be carried forward to reduce the trustee’s future tax liabilities.
We will need to monitor the outcome on this topic as the C-Paper does not make it clear where a DT receives NRT Credits and franking credits, which has priority in offsetting any trustee tax liability.
Rollover relief:
Rollover relief will be available for a period of 3 years from 1 July 2027 to assist small businesses and others to restructure out of DTs of the 2028, 2029 and 2030 financial years. Rollover relief is, among other means, currently available to restructure out of a DT through a range of measures including Division 122A by rolling over an asset to a wholly-owned company, Division 152 CGT small business relief and Subdivision 328G small business restructure relief (SBRR). Each of these three rollover measures are complex, require strict criteria to be satisfied and often do not apply in practice. These measures are also in the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), not the ITAA 1936.
The C-Paper provides:
- The new rollover relief will be based on the existing but modified SBRR as it will apply to all DTs regardless of size. The transferee in the arrangement must not be a DT, a complying superannuation fund or an income tax exempt entity. Thus, the transferee must be a company, fixed trust or individual or a partnership involving one or more of these eligible entities.
- No genuine restructure — Moreover, the relief will not require a genuine restructure and active business assets, revenue assets and assets used to produce passive income will also be included for the new rollover.
- All assets — The rollover will require virtually all of the trust’s assets to be transferred over to the transferee. A nominal amount may be left in the transferor trust to avoid the rollover indirectly requiring the trust to be wound up. (We suspect this might cover the original settled sum but what about real estate and other dutiable property that will give rise to duty and other significant transfer costs?)
- Ultimate economic ownership — The ultimate economic ownership requirement is problematic in the context of a DT where no beneficiary has a fixed entitlement to the trust’s assets. The new rollover will instead use a new statutory family unit which deems the ultimate economic ownership test to be passed where the economic interests in the transferee are held by members of the same family unit as those who controlled the discretionary trust.
- Residency requirement — The new rollover requires the transferor and transferee to be Australian residents.
- Family trust distribution tax (FTDT) — DTs that apply the rollover will also not attract FTDT. Some modifications to the family trust election (FTE) and interposed entity elections (IEE) provisions in Schedule 2F of the ITAA 1936 are expected to facilitate rollovers without incurring FTDT. (We are hopeful these proposed changes will also give rise to other positive changes to these provisions to provide a broader definition of family group to recognise modern families.)
Those considering rolling over to a company with more than one class of share should be aware of the Government’s latest thinking. The C-Paper states that the rollover relief will not apply to assets that are transferred into a company structure with multiple classes of shares that permit dividends or capital returns to be apportioned between the beneficiaries on a discretionary basis. We therefore recommend that consideration be given ahead of 1 July 2027 to review company shareholdings and consider whether additional share classes should be cancelled or redeemed. Naturally, appropriate tax and duty advice should be obtained before undertaking any corporate restructure.
Thus, hopefully some practical and more readily available rollover relief will be forthcoming that will encourage DTs to convert to other structures or be unwound. In particular, a big factor required to facilitate any meaningful change is for state and territory governments to provide relief to a wide range of state and territory taxes that is needed to restructure including stamp duty imposed on dutiable property which in some jurisdictions, in addition to real estate, includes plant and equipment and goodwill.
Without relief from the range of state and territory taxes and related imposts, many DTs will have limited flexibility to restructure. (As noted above, many DTs with dutiable property may not wish to incur the substantial transaction costs of transferring dutiable property but may wish to transfer all other assets. Hopefully, consideration will be given to this prospect.)
Exclusions:
The Budget papers propose to exclude certain types of trusts and income from the new 30% tax, including the following:
- fixed trusts (including fixed testamentary trusts) and widely held trusts;
- DTs are defined in s 272-5 of Schedule 2F of the ITAA 1936 as any trust that is not a fixed trust. The C-Paper notes that consideration will be given to how to appropriately define a DT given the existing definition of fixed trust in Schedule 2F of the ITAA 1936 may result in the scope of DTs for the changes being broader than intended;
- complying superannuation funds including SMSFs;
- special disability trusts;
- deceased estates;
- charitable trusts;
- primary production income;
- This broadly covers income from carrying on a farming or agricultural business, including cultivating plants, maintaining animals and fishing;
- certain income relating to vulnerable minors;
- The C-Paper provides that usually, Division 6AA of the ITAA 1936 applies to tax beneficiaries who are minors at the highest marginal rate. This applies unless the minor is an excepted person or the income is excepted income. Generally, minors that have a disability or are orphans may access the adult marginal tax rates on all trust distributions. Additionally, amounts arising from personal injury, workers compensation and criminal injuries received from minors through trust distributions are also subject to the adult marginal tax rates.
- The minimum tax will broadly be consistent with the existing rules where income that relates to a disability, injury of a minor or an orphan to be excepted from the minimum tax.
- amounts to which non-resident withholding tax applies; and
- In addition, distributions to the extent that they comprise dividends, interest and royalties to foreign resident beneficiaries of DTs to which the foreign resident withholding tax applies will be excluded from the minimum tax.
- Income from assets of testamentary trusts existing at 7.30pm 12 May 2026.
- As announced on 18 June 2026, income from all discretionary testamentary trusts will be exempt from the minimum tax provided they are established for genuine testamentary purposes. However, income will need to come from the assets of the deceased estate with any income from assets injected into the estate after 7:30pm AEST on 12 May 2026 being subject to the minimum tax. The trust can only benefit individuals as well as income tax-exempt entities where the trust is created on or after 1 July 2028.
- This will mean that people with wills that include discretionary testamentary trusts should have them reviewed if they wish to minimise the impact of the new tax from 1 July 2028. Many testamentary trust wills include a range of other beneficiaries, including eligible companies and eligible trusts. Given we never know the ‘hour or the minute …’, it’s best to get this done sooner rather than later!
Some commentators are referring to the new 30% tax as a potential new “death tax” since discretionary testamentary trusts established after the Budget will be caught. There may also be limitations the proposed exclusions, eg:
- Will income from deceased estates be subject to a limited period?
- Will income from farming land in a DT be excluded when the farming business is conducted by another entity that conducts the primary production business?
Family trust elections (FTEs) and interposed entity elections (IEEs):
Before undertaking any restructure, change or distribution a careful review of the FTE and IEE rules need to be and considered to minimise the risk of any family trust distribution tax (FTDT). Hopefully, the Government will make changes to these rules to alleviate some of the current issues with making changes to DT structures and to encourage and facilitate those wanting to wind-up and restructure from DTs into other viable entities.
As noted above, DTs that apply the rollover will also not attract FTDT.
Broadly, it appears the need for these (FTE and IEE) rules will be considerably reduced once the new 30% tax is introduced, eg, a DT distribution to a loss trust will incur a 30% tax from 1 July 2028.
Commissioner of Taxation v Bendel [2026] HCA 18 (Bendel)
The C-Paper notes the recent High Court decision in Bendel and provides:
- There is an announced but unenacted measure (ABUM) from the 2018-19 Budget to bring UPEs within Division 7A, Tax Integrity – clarifying the operation of the Division 7A integrity rule. A measure contained in the July 2020 Economic and Fiscal Update, Revised Start Dates for Tax and Superannuation Measures revised the start date for this ABUM to income years from Royal Assent. The Government is seeking feedback on how to implement this measure.
- While the matters considered in the case predate the minimum tax on discretionary trusts, given the range of trust and private arrangements it may affect, stakeholders are invited to provide views on any interactions between the treatment of UPEs of a corporate beneficiary and the minimum tax that may be relevant.
Conclusions
The potential impact of the proposed new 30% tax on DTs creates considerable uncertainty. Those with DTs should monitor developments and not make any hasty changes without expert advice. As noted above, until we see the detailed legislation finalised as law we can only guess what might happen, and when it may occur.
The C-Paper is the most detailed outline provided to date of likely considerations and changes that the Government is consulting on. However, as noted above, the consultation period is very tight for a matter so comprehensive as the proposed changes and unless proper consideration to all the flow on issues is given with the considered input of industry and the professional bodies, there are likely to be numerous unforeseen issues and unintended casualties.
Naturally, DBA Lawyers will be closely monitoring these changes and is pleased to assist. We offer a range of services including deeds of variation to trusts, tax advice and restructuring options.
Related articles
- Does your trust deed have appropriate income characterisation and streaming powers?
- ATO checklist for trust distributions
- Your discretionary trust may unwittingly be subject to extra duty or land tax
- Why you should order discretionary trusts from DBA Lawyers
- Family trust and FTEs & IEEs
* * *
By Daniel Butler, Director ([email protected]), Fraser Stead, Lawyer, ([email protected]) and Tim Ly, 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.
DBA LAWYERS
9 July 2026
