New trust tax draft could preserve bucket companies — but with less flexibility

The Government announced a 30 per cent minimum tax on discretionary trusts in the 2026–27 Federal Budget, with a proposed commencement date of 1 July 2028.

Broadly, the proposal requires the trustee to pay tax of at least 30 per cent on taxable income caught by the regime.

Beneficiaries would still be assessed on their share of trust income under the ordinary trust rules, and eligible non-corporate beneficiaries would generally receive a non-refundable tax offset for the minimum tax paid by the trustee.

Corporate beneficiaries were deliberately treated differently. Under the original design, a company receiving a trust distribution would not receive the corresponding minimum-tax credit. That was a major issue for groups using corporate beneficiaries.

A corporate beneficiary is commonly used when the owners of a business do not want all of the trust's profit assessed personally in the same year. Not every company that receives a trust distribution exists solely for that purpose, but the arrangement is common enough that the shorthand has stuck.

A discretionary trust might distribute some income to the owners and the balance to a company. The company pays tax at the applicable company tax rate — which is not always the base rate entity rate, since many passive corporate beneficiaries may be subject to the 30 per cent company rate — with the remaining funds potentially retained within the group. Any later distribution of company profits to shareholders is dealt with through the dividend and franking system.

There are already important rules governing these arrangements, including Division 7A.

The proposed minimum trust tax introduced another layer. Under the original proposal, the trust could pay 30 per cent minimum tax on income distributed to the company, while the company would still be assessed on the trust income without a credit for that trustee-level tax. Depending on the group's circumstances, that could produce a very high combined tax cost.

For many existing structures, it raised an obvious question: do we need to restructure before 1 July 2028? The exposure draft now provides another possible answer.

The Government is proposing an elective regime for certain discretionary trusts that exist on 1 July 2028.

Rather than transferring assets to a company or a fixed trust, the trustee could nominate specific beneficiaries and set fixed percentage entitlements to the trust's income and capital. If the requirements are satisfied, the minimum tax would not apply.

Under the current draft, the existing legal trust can remain in place and the assets do not necessarily need to be transferred. Each nominated beneficiary generally has the same percentage entitlement to income and capital, and there is no general annual reallocation at the trustee's discretion.

Importantly, nominated beneficiaries can include individuals, trusts and certain companies. That is the part that changes the discussion around corporate beneficiaries.

Instead of the trust being caught by the 30 per cent minimum tax and then distributing income to a company that cannot claim the credit, the trust could potentially use the election and have the nominated share taxed to that company under the ordinary rules.

It is worth being precise about what the election does. The trust deed and the legal structure may remain discretionary. The exposure draft is providing an elective tax treatment based on fixed nominated entitlements. The trust remains in place, but for the purposes of the election its future economic entitlements are effectively fixed between the nominated beneficiaries.

The reason discretionary trusts have traditionally been useful is in the name. The trustee generally has discretion each year about which beneficiaries receive income and how much, subject to the trust deed and the tax law. That allows the distribution position to change as circumstances change.

The election works differently. Once beneficiaries and percentages are nominated, they cannot simply be revisited each June.

Trusts distribute income for many reasons, and the annual decision often takes account of who earned more salary during the year, who has a lower marginal tax rate, who needs cash, who is working in the business, or whether someone is on parental leave. Under the proposed election, that annual discretion is substantially reduced.

Current materials indicate that changes to nominated beneficiaries may only be permitted in limited circumstances, including events such as the death of a nominated beneficiary or family breakdown. The precise list is a matter for the final legislation.

This is not a minor administrative condition. It is a commercial and family decision.

So the question is not simply whether you want to avoid the 30 per cent minimum tax. It is whether you are prepared to give up a substantial amount of the trust's future distribution flexibility to do it.

Assume a family trust operates a business, and the owners decide each June how to distribute income between themselves and a corporate beneficiary.

One year that might be 40 per cent to Owner A, 20 per cent to Owner B and 40 per cent to the corporate beneficiary. The following year could be completely different.

Under the proposed election, the family might instead nominate fixed percentages — for example, Owner A 30 per cent, Owner B 30 per cent and the corporate beneficiary 40 per cent.

The important point is not the tax calculation. It is that those percentages then become the continuing nominated position rather than an annual decision.

Illustrative example only. The legislation remains in draft.

This is another reason the election should not be treated casually.

Under the current exposure draft, the election can be revoked by the trustee, and can also be automatically revoked in certain circumstances — including where distributions are made inconsistently with the nominated entitlements.

Current draft commentary indicates the consequences in the revocation year are potentially severe, including taxation of the trustee at the highest marginal rate plus Medicare levy rather than simply reverting to the 30 per cent minimum tax for that year. The minimum-tax regime may then apply in later years.

The draft also deals with capital gains in the revocation year, including the availability of the CGT discount and indexation. Those details need to be read against the final legislation rather than summarised into a single rule.

The practical point is that this is intended to be a genuine commitment to fixed economic entitlements, not an election a trustee makes one year and ignores the next.

The Government has not removed the proposed restructuring relief. The exposure draft retains a three-year rollover period from 1 July 2027 to 30 June 2030 for eligible restructures out of discretionary trusts.

Broadly, the relief is intended to allow assets to move from a discretionary trust into structures such as a company or a fixed trust without triggering immediate income tax consequences, including capital gains tax, where the requirements are met.

But income tax is only one consideration. A restructure can involve state stamp duty, legal costs, finance and lender consent, contracts, property titles, licences, employee arrangements, asset protection, succession and commercial agreements. Federal rollover relief does not remove those consequences.

On the election, the Government has said it would not require a restructure and is not expected to result in state and territory stamp duties. That is the wording being used, and state and territory revenue-law consequences may still need to be checked independently based on the trust, its assets and the relevant jurisdiction.

The exposure draft goes further than the election. Treasury has also proposed a new, broader definition of a fixed trust.

The stated intention is to help ensure a range of commercial trust types that do not have material discretionary elements affecting beneficiaries' rights or entitlements are not captured by the minimum tax. The Government has referred to widely held trusts, managed investment trusts, bare trusts and employee share trusts.

This could be particularly relevant to unit trusts and other commercial structures, although it does not mean every unit trust will automatically qualify. Whether a particular trust falls within the proposed definition depends on its deed and the final drafting.

This is an area where business owners should be careful not to assume everything has now been resolved.

The Government has separately been considering the treatment of unpaid present entitlements — UPEs — involving corporate beneficiaries and Division 7A. That question became more prominent following the High Court's 2026 decision in Commissioner of Taxation v Bendel, which rejected the Commissioner's argument that the corporate beneficiary's UPEs in that case were loans for Division 7A purposes.

Treasury's July consultation considered the interaction between UPEs, corporate beneficiaries and the minimum trust tax. The Government has now confirmed that legislation implementing the earlier announced UPE measure will be progressed separately.

So even if the election preserves the ability to nominate a company as a beneficiary, that does not override Division 7A, existing loan rules, UPE rules, section 100A or the other trust integrity provisions.

For groups with existing UPEs, Division 7A loans and corporate beneficiaries, those matters need separate review, and both pieces of legislation will eventually need to be considered together.

Not necessarily. There are now potentially three broad paths for an affected discretionary trust.

Keep the annual flexibility and operate under the proposed minimum-tax regime. For some groups, that flexibility may be worth more than the tax.

Keep the existing legal trust structure and assets in place, and accept fixed economic entitlements — including, potentially, a fixed percentage to a corporate beneficiary.

Move to a company, fixed trust or another structure where the long-term commercial and tax position supports it.

There is no universal answer. The right comparison needs to consider far more than the headline tax rate.

The first thing is not to restructure a trust because of a headline. The legislation is still in draft, consultation on the exposure draft closes on 18 September 2026, and the Government has indicated further tranches covering administrative and integrity matters are still to come.

There is also time before the proposed 1 July 2028 commencement.

What is useful now is understanding the exposure. For a group using a discretionary trust, that means working through a straightforward set of questions.

What income does the trust earn? What assets does it hold? Does it operate the business or hold investments? Who currently receives distributions? Is there a corporate beneficiary, and why is it used? Are there existing UPEs or Division 7A loans?

Then the harder ones. How much do distributions genuinely change from year to year? How important is future discretion to the family? What assets would need to move under a restructure, and could state duties or other commercial costs arise?

Once those facts are on the table, the proposed options can be compared properly.

The Government has not abandoned the 30 per cent minimum tax on discretionary trusts.

But the fixed-distribution election materially changes the options available to some existing trusts. For some groups, restructuring may no longer be necessary. For others, giving up the flexibility of a discretionary trust could be too high a price.

Understand the exposure now. Make structural decisions once there is enough legislative certainty to compare the options properly.

If your business or investment structure includes a discretionary trust and corporate beneficiary, this is now something worth modelling well before 1 July 2028.

Wakefield Pacific will continue to follow the legislation as it develops and work through the options with affected clients once there is enough certainty to make sensible decisions. If you want to talk it through, speak with our team. You can also read our summary of the 2026–27 Budget changes for business and how we think about structuring for the business you want.