Federal Government Proposes New “Fixed Beneficiary” Option for Discretionary Trusts
The Federal Government has released draft legislation and further guidance regarding its proposed 30% minimum tax on discretionary trusts, due to commence from 1 July 2028. In response to feedback from small business owners, accountants and industry groups, the Government has introduced a potential alternative that may allow some trusts to avoid the new tax without undertaking a costly legal restructure.
What was originally proposed?
As announced in the 2026–27 Federal Budget, discretionary trusts would be subject to a minimum 30% tax at the trustee level from 1 July 2028. The Government’s stated objective is to reduce perceived tax advantages arising from the ability of discretionary trusts to distribute income among family members and other beneficiaries on lower marginal tax rates. Fixed trusts are generally excluded from the proposed minimum tax regime.
This announcement prompted many advisers and business owners to consider whether their existing discretionary trust structures should be converted into companies or fixed trusts before the new rules commence.
The concern: Costly restructures and stamp duty
One of the major concerns raised during consultation was that converting a discretionary trust into an alternative structure may trigger significant legal costs, capital gains tax consequences and, in some cases, state-based stamp duty. For businesses holding valuable property or investments, these costs could make restructuring impractical.
The proposed solution: Fixed beneficiary election
Under the draft legislation released by Treasury, trustees may be able to effectively opt out of the discretionary trust tax regime by agreeing to move from discretionary distributions to a fixed-income entitlement model. Rather than requiring a complete restructure into a new fixed trust or company, the proposal would allow certain trusts to retain their existing structure while operating on the basis of fixed beneficiary entitlements.
In simple terms, the trustee would no longer have the flexibility to determine who receives trust income each year. Instead, beneficiaries would receive predetermined entitlement percentages, similar to a fixed trust arrangement. Provided the trust complies with these requirements, it may be exempt from the proposed 30% minimum discretionary trust tax.
What does this mean for you?
For many family groups and small business owners, the proposed fixed beneficiary option may represent a middle ground between maintaining the existing trust structure and undertaking a costly legal restructure.
Avoiding the proposed 30% minimum tax on discretionary trusts.
Reducing the need for asset transfers that could trigger stamp duty or CGT consequences.
Retaining the existing trust vehicle and asset protection structure.
Simplifying future compliance where beneficiaries are comfortable with fixed entitlements.
However, the trade-off is significant. The hallmark feature of a discretionary trust is flexibility. Electing to adopt fixed beneficiary entitlements would generally mean surrendering the ability to vary income distributions between beneficiaries from year to year. Making the election may also undo some of the asset protection benefits of a discretionary trust.
Important: The proposal is not yet law
At the time of writing, the draft legislation is still subject to consultation and may change before being introduced into Parliament. Further details are expected regarding eligibility requirements, transitional arrangements and how fixed entitlement elections will operate in practice. The Government has opened consultation on the exposure draft legislation, and professional bodies are continuing to advocate for modifications to the proposed rules.
What should clients do now?
While no immediate action is required, clients operating through discretionary trusts should begin reviewing their structures ahead of the proposed 1 July 2028 commencement date. In particular, consideration should be given to:
The importance of distribution flexibility within the family group.
The use of bucket companies and other trust planning strategies.
Potential restructuring costs.
Whether a fixed beneficiary arrangement could provide a suitable alternative under the final legislation.