Among the most significant measures in this year's Budget is a 30% minimum tax on discretionary trust income, effective from 1 July 2028, which marks a fundamental departure from flow-through trust taxation principles and will require careful consideration by trustees, beneficiaries, and their advisers. The Budget also announces an expansion of the venture capital limited partnership and early stage venture capital limited partnership regimes, including increases to investee asset caps and maximum fund sizes from 1 July 2027.
Introduction of a minimum tax on discretionary trusts
The Government will introduce a 30 per cent minimum tax on discretionary trusts to improve the fairness of the tax system and help fund new tax cuts for workers.
From 1 July 2028, trustees will pay a minimum tax of 30 per cent on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.
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 pay the minimum tax; and
- corporate beneficiaries will not receive non-refundable credits for tax payable by the trustee, to avoid them converting these to refundable franking credits to avoid the minimum tax.
The minimum tax is described as applying to discretionary trusts and will not apply to other types of trusts such as fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts.
Some types of income such as primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at announcement will also be excluded.
The Government will provide expanded rollover relief for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust.
Key aspects of the changes will be finalised following consultation with stakeholders. As well as the mechanism for collecting the minimum tax, stakeholder views will also be sought on how the trustee uses franking credits that exceed the minimum tax liability, and on the rollover relief provided to support restructuring.
This measure is estimated to increase receipts by $4.5 billion over the five years from 2025–26.
Departure from flow-through trust taxation
The proposal to impose a flat 30% minimum tax on the taxable income of discretionary trusts at the trustee level represents a fundamental departure from the longstanding flow-through character of trust taxation under Division 6 of the Income Tax Assessment Act 1936 (Cth). Under the existing regime, a trust is not itself a taxable entity in the ordinary case; rather, beneficiaries who are presently entitled to a share of the trust's income are assessed on their proportionate share of the trust's taxable net income at their own marginal tax rates. The introduction of a 30% minimum tax payable by the trustee — with beneficiaries receiving only non-refundable credits — effectively imposes a floor rate on trust income that overrides the progressive rate scale otherwise applicable to beneficiaries. This aligns the minimum rate with the marginal tax rate applicable to taxable income between $45,001 and $135,000, which the Government describes as "more closely aligning the tax rates for trusts with the rates paid by workers and families who earn a living from wages".
The significance of this change is amplified when considered alongside the separate 30% minimum tax on net capital gains applicable to individuals, trusts and partnerships from 1 July 2027. Together, these two measures impose a dual floor on trust income: one on ordinary trust distributions and the other on realised capital gains flowing through the trust. The combined effect is a material compression of the tax benefits historically available through discretionary trust structures, particularly for beneficiaries on lower marginal rates.
The Budget is also silent on how the minimum tax would apply to non-cash distributions. In practice, discretionary trusts routinely make distributions in the form of entitlements to specific trust property, loans back to the trust, or unpaid present entitlements. A further question is whether amendments to section 100A of the Income Tax Assessment Act 1936 (Cth) would be required to prevent arrangements under which a trust distributes income to a beneficiary on a marginal rate of 30 per cent or above (for example, a corporate beneficiary taxed at 25 or 30 per cent), with the economic benefit of the distribution passing to another person under a reimbursement agreement.
Scope of trusts and types of income affected
As mentioned, the minimum tax is described as applying to discretionary trusts and will not apply to other types of trusts such as fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts.
The term “discretionary trust” has no settled statutory definition in the income tax legislation and the exclusion of fixed and widely held trusts (including fixed testamentary trusts) suggests the boundary of the regime will depend on the distinction between fixed and non-fixed trusts — a distinction that has been the subject of persistent difficulty in Australian tax law.
Under the existing law, a trust interest is generally treated as "fixed" for the purposes of various provisions (including Division 6C and the trust loss provisions in Schedule 2F of the ITAA 1936) only where a beneficiary has a vested and indefeasible interest in a share of the trust's income or capital. Many trust deeds — including those drafted with the intention of creating fixed entitlements — contain variation powers, amendment clauses, or default provisions that may prevent interests from satisfying this test. The result is that trusts intended to operate as fixed trusts may fail the existing statutory test and be treated as non-fixed (and therefore "discretionary") trusts for the purposes of the proposed minimum tax.
This issue is well recognised in Australian tax practice and has been the subject of numerous private rulings, ATO guidance, and judicial consideration. The uncertainty it generates is significant: trustees and their advisers may be unable to determine with confidence whether a particular trust falls within or outside the scope of the regime without a detailed analysis of the trust deed and any associated instruments. This may have a significant impact on the funds management industry which makes extensive use of trust structures — including unit trusts, sub-trusts, and special purpose vehicles — many of which may not qualify as "widely held" (because they have a small number of wholesale investors) or "fixed" (because the trust deed contains discretionary powers, such as powers to issue or redeem units, vary entitlements, or allocate particular classes of income to particular unitholders).
Expanding venture capital tax incentives
Increasing VCLP and ESVCLP caps
The Government will expand the venture capital tax incentives to better facilitate venture capital investment and support early stage and growth businesses, by increasing some asset caps not adjusted for over 20 years, to unlock more investment in venture capital by global and local investors – including super funds – supporting the next wave of innovative Australian businesses to start up and scale up. This will give start-ups more opportunities to access venture capital funding, in larger amounts and over a longer period, particularly where traditional finance is harder to obtain.
From 1 July 2027:
- The venture capital limited partnership (VCLP) cap on the asset size of the investee business at the time of investment will be increased to $480 million, from $250 million;
- The early stage venture capital limited partnership (ESVCLP) cap on the asset size of the investee business at the time of investment will be increased to $80 million, from $50 million;
- The ESVCLP tax incentive cap on the asset size of the investee business, at which investment returns can be fully tax exempt, will be increased to $420 million, from $250 million; and
- The maximum fund size of ESVCLPs will be increased to $270 million, from $200 million.
Application to new and existing funds
The increases will apply to new and existing funds and to new investments they make, including where funds make further investments in businesses already held. ESVCLPs must remain in compliance with their existing investment plans or seek approval for a replacement plan.
The eligible venture capital investor program will be closed to new applications from 7.30PM (AEST) 12 May 2026.