Imagine a small café owned by a husband and wife, with the business held through their family trust. In a tough year, it makes $40,000 profit and the couple haven’t paid themselves a wage. Under today’s rules, they would generally pay no tax. Under the proposed 30% minimum tax on discretionary trusts, they could pay $12,000, with no way to get it back.

This is one of the biggest changes to family trusts in decades. The legislation is now before Parliament and is not yet law, but the rules are currently intended to start from 1 July 2028. Below we explain how it would work, who is likely to pay more and the options trustees will have.

At a glance

From 1 July 2028: the trustee pays a minimum 30% tax on the trust’s income
Hardest hit: lower-income family members, retirees relying on franking refunds, and trusts that distribute to a company
Three options: pay the tax, make a one-off election to fix distributions, or restructure

How the Minimum Tax Works

Under the proposed rules, the trustee of a discretionary trust would pay a minimum 30% tax on the trust’s net income, less a few exclusions such as primary production income and distributions to charities. Treasury’s data from the 2023 financial year shows around 350,000 active small businesses operate through discretionary trusts in Australia.

Individual beneficiaries would still declare their distributions and receive a tax offset, essentially a credit, for the 30% already paid. There are two important catches:

The credit is non-refundable. If a beneficiary’s own tax is lower than the credit, the unused amount is lost.
Companies get no credit at all. Profits distributed to a company are effectively taxed twice.

Who Is Likely to Pay More

Lower-Income Family Members

The credit can’t be used against the 2% Medicare levy. So a beneficiary normally taxed below 30% would effectively pay 32% once they are over the Medicare levy threshold. University students, retired parents and spouses working part-time, the people family trusts have traditionally supported, are likely to be among the most affected.

Family Businesses in a Lean Year

Back to the café. Today, the $40,000 can be split $20,000 to each of the couple, and after the low income tax offset, neither pays personal tax. Under the proposed rules, the trustee pays $12,000 up front. Each of them receives a $6,000 credit, but with no tax to use it against, the $12,000 is simply gone.

Retirees Relying on Franking Credits

Many retirees hold shares in a family trust and live off fully franked dividends. Today, if the trust receives a $70 dividend with a $30 franking credit and passes it on, a low-income beneficiary can have that $30 refunded by the ATO. Under the proposed rules, the trustee uses the franking credit to pay the minimum tax, and the beneficiary receives a non-refundable $30 credit instead. Across a portfolio, that could mean thousands of dollars a year in lost refunds.

Trusts That Distribute to a Company

Some families distribute profits to a company within their group, often called a bucket company, to cap tax at the company rate. Because companies receive no credit, $100,000 sent to a company would attract $30,000 at the trustee level and a further $25,000 to $30,000 in company tax. That is close to 60 cents in the dollar.

The Three Options for Trustees

If the legislation passes in its current form, trustees will broadly have three paths.

1. Pay the Tax

The trust carries on as it is, and the trustee pays the minimum tax where it applies. For families whose beneficiaries already pay 30% or more, the extra cost may be manageable.

2. Elect to Become an Excluded Election Trust (EET)

In the 2028–29 financial year only, a trust that exists on 1 July 2028 can elect to become an Excluded Election Trust (EET) and avoid the minimum tax. The catch is that the trust effectively becomes fixed. The trustee nominates beneficiaries and a set percentage for each, and must distribute in exactly those proportions every year.

The split can generally only change if a beneficiary dies or there is a relationship breakdown. Distributing outside it, even once, cancels the election. That year’s income is then taxed at 47%, and the trust can never elect again. It is a one-time decision that could apply for decades.

3. Restructure Under Rollover Relief

From 1 July 2027 to 30 June 2030, temporary rollover relief would let trusts move assets into a company or fixed trust without triggering income tax or capital gains tax (CGT) at the time. Restructuring in the 2027–28 year avoids the minimum tax altogether.

The relief has real limits. Every asset must move by 30 June 2030, or the relief is lost entirely. It doesn’t cover stamp duty, which can be the largest cost for a trust holding property. Trust losses don’t carry across, and choosing the rollover rules out the EET election.

Practical Steps to Take Now

Map your structure: List your trusts, beneficiaries and any companies in the group.
Model the impact: Compare what you pay now with what you would pay under the new rules.
Review your trust deed: Check who can benefit and whether changes could create extra tax or duty costs.
Plan early: A restructure can take months, and the rollover window opens on 1 July 2027.

How Xcel Advisory Can Help

Choosing between these paths is a significant decision. Our advisers can help with:

Modelling the impact on your trust and family
Assessing whether an EET election suits your circumstances
Planning a restructure under rollover relief
Reviewing how profits are distributed to companies in your group

Find out more about our Tax and Compliance and Business Advisory services.

Final Thoughts

The proposed minimum tax would change how many families use discretionary trusts, and some choices will only be available once. While the legislation is still before Parliament, there is time to understand your position and plan carefully rather than react at the last minute.

If you are a trustee of a discretionary trust and would like to understand how these changes could affect your structure, contact Xcel Advisory today.

This article contains general information only and does not take into account your individual circumstances. Please contact Xcel Advisory for advice specific to your situation.