The Government 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 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 latest DT tax proposal is similar to the previous proposal floated by former Labor leader Bill Shorten in 2017 that was used in the Labor’s 2019 Federal election campaign, resulting in an election loss. These policies also included changes to negative gearing, the capital gains tax (CGT) discount and extra rules limiting the use of franking credits.
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%.
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 mechanism to collect the new tax is yet to be announced but may be similar to existing mechanisms.
One existing mechanism is s 98 that requires a trustee to pay tax on behalf of a beneficiary who is entitled to trust income and is under a legal disability (such as a minor) or is a non-resident of Australia. Another existing mechanism is s 99A, discussed above.
We suspect the mechanism will require the trustee maintaining more records, eg, to determine what types of income are subject to the new 30% tax and when franking credits offset the NRT Credit.
Franking credits:
The Treasury paper states 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 large public companies) 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.
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. 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), not the ITAA 1936.
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.
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;
- complying superannuation funds including SMSFs;
- special disability trusts;
- deceased estates;
- charitable trusts;
- primary production income;
- certain income relating to vulnerable minors;
- amounts to which non-resident withholding tax applies; and
- income from assets of testamentary trusts existing at 7.30pm 12 May 2026.
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.
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.
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.
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
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By Daniel Butler, Director ([email protected]) and Fraser Stead, 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 www.dbalawyers.com.au.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
25 May 2026
