Minimum Tax On Discretionary Trusts: Impact For Fund Managers

Obtaining certainty of being classified as a ‘fixed trust’ is now more important than ever for fund managers as the trustees of most non-fixed trusts are proposed to be subject to a 30% minimum tax from 1 July 2028. Treasury has been busy: exposure draft legislation released last week gives legislative form to another proposal from the ground-breaking 2026 Federal budget which has already seen hundreds of pages of legislation and explanatory material in various stages from exposure draft through to enactment.

Trustees of discretionary trusts face three choices: pay the minimum tax, make a one-time fixed distribution election into the electable regime, or restructure using a specific roll-over before 30 June 2030.

This note summarises the key features of the exposure draft with a focus on the changes to the fixed trust concept for fund managers.

The minimum tax is currently subject to consultation with submissions due on 18 September 2026.

Minimum tax on discretionary trusts

The trustees of certain ‘discretionary’ trusts, to be called minimum tax trusts, are proposed to be subject to a new 30% income tax on certain income from 1 July 2028. Trustees will be taxed in a manner like trustee tax under s 99A, although unlike s 99A the minimum tax is a “top up” tax to ensure at least 30% tax is paid.

Minimum tax trusts are trusts other than ‘fixed trusts’, complying superannuation entities, special disability trusts, trust estates of deceased persons, or other trusts excluded by future legislative instrument. Unlike the public trading trust rules, whether a trust is a unit trust is not relevant to whether it will be a minimum tax trust.

Individual (non-corporate) beneficiaries who receive distributions from minimum tax income are proposed to be entitled to a non-refundable 30% tax offset. Corporate beneficiaries (the classic “bucket company”) are expressly excluded from the offset.

Fixed trusts

Under the current law, a trust is a fixed trust if beneficiaries have fixed entitlements to all the income and capital of the trust, with “fixed entitlements” requiring a vested and indefeasible interest in that income and capital.

Following Colonial First State in 2011, the ATO considers “very few” trusts are fixed trusts without the exercise of the Commissioner’s discretion to treat beneficiaries as having "fixed entitlements”. However, the Commissioner allows certain trustees to treat beneficiaries as having fixed entitlements in the safe harbour in PCG 2016/16.

In response to feedback on 2026 Federal budget announcement, Treasury has added a new test for determining when a trust is a fixed trust in response to feedback on the 2026 Federal budget announcement that the current definition of a fixed trust is too uncertain.

The new definition expands the concept of a fixed trust to include a trust where “there are no material discretionary elements affecting the entitlements or rights of the trust’s beneficiaries”.

The concept of "material discretionary elements" is not defined, but a number of factors are listed in the draft legislation. Unlike the list of factors in Part IVA in other parts of the tax legislation that must be taken into account, the non-exclusive factors listed in the new definition are “matters suggesting” there are no material discretionary elements. These include:

• where beneficiaries have clearly defined, non-discretionary and specific and enforceable entitlements or rights: 
  • to all of the income and capital of the trust, or 
  • in relation to the governance of the trust;
• powers to do things such as vary entitlements or rights, issue new entitlements or rights, issue new interests or deal with administrative matters, providing those powers cannot be used to significantly vary existing entitlements or rights or significantly affect the value of the interests of existing beneficiaries. This would facilitate the issue of and redemption of units at market value. However, a power to issue units at a discount (for example, in the case of an emergency rights issue) or to redeem units at a discount (for example, in the event of a breach of the trust deed) may give rise to uncertainty; and
• the power to vary the instrument establishing the trust, if it can only be varied through a process requiring consent of all beneficiaries or in a way that cannot adversely affect the rights or entitlements of beneficiaries. However, managed investment trusts that are registered schemes may have difficulty qualifying as fixed trusts, even under the new concepts, in the absence of the Commissioner’s discretion since such the constitution of a registered scheme can be modified, or repealed and replaced with a new constitution, by only special resolution of the members of the scheme under the Corporations Act. Such managed investment trusts are unlikely to be fixed trusts under the new concepts unless the trustee can prove that all amendments do not affect the rights or entitlements of beneficiaries. 

A note to the factors provides that the existence of anything contrary to any of those matters suggests that the trust is not a fixed trust.

The factors refer to “significant” (rather than “material”) discretion as affecting fixed entitlements or rights, such that a degree of discretionary elements is acceptable provided it has only “minor or consequential impacts” (presumably this is meant to be inconsequential). 

The term "significant" is not defined and will likely create uncertainty. The ATO has historically treated similar terms as concepts sensitive to context and there is a risk the term could be read restrictively. For example:

• in the equity funded dividend rules, the ATO initially stated that an issue of new shares would be considered to have funded a “substantial” part of a dividend if it equalled 5% or greater of the dividend before settling at 20%; and
• in the thin capitalisation context, “minor or insignificant” refers not to a percentage but to a nominal amount. 

However, given the no "material discretionary elements" concept draws from existing ATO guidance in ATO Practical Compliance Guide PCG 2016/16, it would be reasonable to expect the ATO to interpret the concept with that guidance in mind.

Legislative instruments may also be used to add to the list of factors suggestive of a “material discretionary element”, which may compound the uncertainty surrounding the concept given the list is capable of expansion.

The exposure draft explanatory memorandum states that “other types of trusts that are not minimum tax trusts due to the operation of the law”, including:

• widely held trusts, MITS and AMITS;
• CCIVs and CCIV sub-funds;
• exempt entities, such as charitable trusts;
• bare trusts including solicitor and accountant trust accounts;
• employee share trusts and worker entitlement funds.

The comment that employee share trusts are generally fixed trusts is unusual given the trust deeds for such trusts are typically drafted so that the class of potential beneficiaries includes all past, present and future employees of a corporate group and the trustee may have discretionary powers in relation to unallocated trust property.

A discretionary trust which holds either sponsor units or a limited partnership interest in a general partner of a private equity or venture capital fund for the benefit of employees of the manager will be a minimum tax trust unless an election is made to fix distribution entitlements. 

Why fixed trust status matters more than ever

Fixed trust status has taken on renewed importance as it is now the primary basis on which most trusts will remain outside the new minimum tax regime. Historically, the significance of fixed trust status was context dependent. It mattered less, for example, where no dividends flowed through the trust or where a trust did not have tax losses. From 1 July 2028, fixed trust status will be central to determining whether a trustee is exposed to a 30% minimum tax on the trust's net income.

For trusts other than AMITs, flow through status for trusts will now also be dependent on a trust being neither a public trading trust nor a minimum tax trust, as well as ensuring present entitlement to trust income.

Unfortunately, if the amendments are passed in their current form, trust deeds for many groups may need to be reviewed before the tax commences on 1 July 2028, to ensure trusts are fixed trusts and that deeds operate appropriately in case a trust is a minimum tax trust, consistent with current drafting for public trading trusts. For example, a power to issue different classes of units, even if subject to investor consent, may cause the trust to fail to be a fixed trust. Any trust deed amendments would need to be considered from a resettlement perspective, as well as whether amendments are effective where they purport to fetter a trustee power granted on settlement of the trust

Consideration could be given to whether at least wholly-owned sub-trusts make protective elections into the electable regime would be cheaper than a full trust deed review, but this comes at the downside of needing to notify the Commissioner of each election.

Other key aspects

• Franking credits

Franking credits will not flow through minimum tax trusts (other than franked distributions excluded from minimum tax income) but will shelter liability to the minimum tax and be refundable in respect of any excess. The qualified person rules are contained in repealed provisions of the Income Tax Assessment Act 1936, although they remain technically operative. Those former rules contain a separate definition of “fixed interests” based on vested and indefeasible interests to corpus of the trust. However, it is unclear how the new fixed trust concept will apply for the purpose of those (former) rules.

• Electable regime

Existing non-fixed trusts (as at 1 July 2028) may make a one-time fixed distribution election into the electable regime – a single, irrevocable election to nominate fixed beneficiaries (individuals and eligible companies) for specified proportions of income and capital. A valid election permanently removes the trust from the minimum tax, provided the election is complied with.

The trustee must still consider and make distributions in accordance with the trust deed as usual, but any deviation from the election triggers tax at the top marginal rate and permanently reverts the trust to minimum tax status. The question of whether making the election is a valid operation of the trustee’s power, operates to fetter trustee powers or otherwise constitutes a resettlement of the trust will be an important consideration.

Corporate beneficiaries may be nominated under the election, but only if the company satisfies an "eligible company" test, meaning there are no material discretionary elements in the company's own share and governance structure. Companies with alphabet shares or director-discretion dividend mechanisms will not therefore qualify as eligible companies.

• Rollover relief

A three-year window (1 July 2027 to 30 June 2030) allows affected trusts to transfer all trust assets to a single transferee entity free of immediate income tax consequences. The relief operates as a deferral rather than a permanent exemption, and the transferee must avoid material discretionary elements for four years post-transfer or the relief will be clawed back. The fixed distribution election and rollover relief are mutually exclusive. Importantly, the rollover does not extend to GST, stamp duty, or other state and territory taxes, and any proposed transfer of assets should be considered from a duty perspective.

• Further changes

Further amendments in future legislation are expected to address interactions of the minimum tax with other areas of the tax legislation, including the rules relating to residency, capital gains tax, international taxation, administrative and reporting requirements.

In addition, and to address integrity considerations, the Government will introduce additional targeted integrity rules if required should evidence arise of avoidance or abuse in the context of the minimum tax or in related frameworks in the tax law, such as further anti-streaming rules for corporate distributions.