If you receive discretionary trust distributions or expect to realise a capital gain, the 30% minimum tax could increase the amount you pay. This article explains how the minimum tax differs from ordinary marginal tax rates and demonstrates the potential impact at various income levels.

The 2026–27 Federal Budget proposed a 30% minimum tax for two types of income:

  • capital gains, effective from 1 July 2027, which is now law; and
  • certain trust distributions proposed to apply from 1 July 2028. Exposure draft legislation has been released and consultation completed; however, the measure is not yet law and remains subject to change before being introduced into Parliament.

Although the proposed mechanisms differ for capital gains and trust distributions, their practical effects may be similar.

What income may be exempt from these measures?

Different exemptions apply to each measure.

The minimum tax on capital gains will not apply where the taxpayer receives certain means-tested income support payments, such as the age pension.

For trust distributions, exemptions are expected to include distributions from fixed widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

As the trust distribution proposal has not been finalised, its operation will depend on the legislation ultimately enacted.

How does a minimum tax differ from marginal tax rates?

Australia applies marginal tax rates to individual taxpayers. This means different portions of a person’s taxable income are taxed at progressively higher rates.
For the 2026–27 financial year, the first $18,200 of taxable income is tax-free. Income above that amount is taxed at rates ranging from 15% to 45%, depending on the taxpayer’s total taxable income. This is illustrated using the below:

Income up to $18,200
No tax payable.

Income from $18,201 to $45,000
Tax payable: 15% of the amount over $18,200.

Income from $45,001 to $135,000
Tax payable: $4,020 plus 30% of the amount over $45,000.

Income from $135,001 to $190,000
Tax payable: $31,020 plus 37% of the amount over $135,000.

Income over $190,000
Tax payable: $51,370 plus 45% of the amount over $190,000.

A 30% minimum tax may change this outcome for affected income. If the tax that would otherwise apply is lower than 30%, the taxpayer may be required to pay the difference. Taxpayers whose affected income is already taxed at an effective rate of at least 30% may experience little or no change.

Trust distributions

Under the proposed changes, the trustee is required to pay tax at 30% upfront. An eligible individual beneficiary would generally receive an offset for that tax in their personal tax return. However, because the offset is non-refundable, it cannot generate a cash refund if it exceeds the beneficiary’s tax liability.

The effect of this is illustrated through the below examples. Assume a resident individual receives only trust distributions and has no other income. For illustrative purposes, the tax rates for the year ending 30 June 2027 have been used.

If the individual receives a trust distribution of $20,000, they may pay no income tax under the ordinary rules. Under the proposed minimum tax, however, the trustee would pay $6,000, being 30% of the distribution. The beneficiary would receive a corresponding non-refundable tax credit, but because they have no ordinary income tax liability against which to apply it, the credit would not produce a refund. The $6,000 would therefore represent an additional tax cost.

The estimated additional tax cost, per beneficiary at other distribution levels is:

  • $50,000 distribution: additional tax cost of approximately $9,730
  • $100,000 distribution: additional tax cost of approximately $9,480
  • $150,000 distribution: additional tax cost of approximately $8,430
  • $200,000 distribution: additional tax cost of approximately $4,130
  • $230,000 distribution: no additional tax cost

Companies are proposed to be excluded from accessing the offset. Distributions to corporate beneficiaries could therefore be taxed at both the trust and company levels. The overall outcome would depend on the company tax rate but could effectively amount to a maximum tax of 60%.

As currently proposed, franking credits received by a trust can be offset against its 30% payment requirement, with any excess to be refunded to the trustee.

Issues may arise where distributions are made from a profit-making trust to a loss-making trust, as the related credit is non-refundable and the recipient trust may not receive the full benefit of the credit.

The proposed measures may also affect the tax benefit associated with deductible expenditure, such as personal superannuation contributions and deductible donations. While these deductions may reduce taxable income under the ordinary tax rules, they may not always deliver the same reduction in overall tax payable under the proposed minimum tax regime. Taxpayers should consider this when assessing the expected after-tax benefit of such deductions.

Capital gains

The minimum taxation on capital gains works differently to the proposals for trust distributions. Under the new rules, the taxpayer’s tax liability is calculated twice, once including the capital gain and once excluding it. The difference between the two amounts represents the tax attributable to the capital gain. Where the tax attributable to the gain is less than the 30% benchmark, the taxpayer will be required to pay the shortfall as additional tax.

Taxpayers on lower marginal tax rates are more likely to be affected. As the 30% marginal tax bracket applies to taxable income above $45,000, a taxpayer with at least $45,000 of other taxable income before the relevant capital gain may see little to no additional tax.

What should you consider?

Depending on the final legislation and the taxpayer’s broader financial position, there may be opportunities to reduce or manage the impact of the minimum tax. This may include:

  • reviewing future distribution strategies;
  • considering commercial remuneration for beneficiaries who are actively working;
  • assessing whether a business restructure may be appropriate; and
  • reviewing the timing of capital gains events; and
  • being more cautious about the tax outcomes of deductible expenditure.

Any strategy should be considered in conjunction with the trust deed and the relevant provisions of the income tax acts.

We can help assess the impact of the proposed measures and identify opportunities that may be available based on your circumstances.

This article was co-written by Lawrence Taing, Assistant Manager Business Advisory Melbourne.