Key Concerns Arising for Charities from the Exposure Draft Legislation to Impose a Minimum Tax on Discretionary Trusts

04 Oct Key Concerns Arising for Charities from the Exposure Draft Legislation to Impose a Minimum Tax on Discretionary Trusts

In this update we outline Fowler Charity Law’s analysis of the Australian Government’s Exposure Draft legislation proposed to implement its budget commitment to tax discretionary trusts. Our prior update here outlined the potentially detrimental effect on distributions from discretionary trust to Australian charities and not-for-profits.

The Commonwealth Government’s Minimum tax on discretionary trusts Exposure Draft legislation now proposes that ‘all distributions from trusts to registered charities and deductible gift recipients will be excluded from the minimum tax.’[1] This means that businesses that elect to stay within a discretionary trust structure will retain the ability to distribute pre-tax dollars to charities and DGRs at their current levels, and with the discretion to include new charities and surplus amounts from time to time. This is a welcome response to concerns expressed by the charity sector.

However, as we identify in our submission to Treasury, there are a number of remaining ongoing concerns that have the potential to significantly undermine the Government’s declared intent ‘to ensure there is no disincentive for these distributions to continue.’[2] These issues can be summarised as follows:

1. The exclusion from minimum tax income in discretionary trust distributions made to registered charities and DGRs will not address the concern that discretionary trusts will migrate to other structures with more favourable tax treatment where their beneficiaries are below an average 30% tax rate. To enable continuing distributions to be made to charities, those entities that rollover to a base rate entity may decide to retain the discretionary trust as a shareholder in the company. However, to ensure the discretionary trust shareholder can continue its current levels of support to charities, it would be necessary to grant those charities that receive distributions from a discretionary trust shareholder a further ability to claim a refundable tax offset (in the form of a franking credit) that is attached to the franked dividend paid by the base rate entity to the discretionary trust and then to the charity. We are concerned, however, that the interaction between the proposed minimum tax provisions and the existing franking credit rules could give rise to confusion as to whether the refundable treatment of franking credits attributable to distributions to charities and DGRs is clearly preserved. In our view, there are multiple ways in which the drafting casts uncertainty over the ability of the charity to claim the franking credit.
2. To provide sufficient certainty to the sector, the reforms should expressly exclude the possibility that the Minister may impose a cap on the amount that discretionary trusts can give to charities and deductible gift recipients (‘DGRs’). Further, it is our submission that the Minister’s ability to impose a cap on distributions to self-assessing non-charitable income tax exempt entities (such as sporting clubs and community organisations) should be removed so to not limit the quantum of this giving into the future.
3. It is further proposed that the election framework should be modified to establish a voluntary conversion framework allowing discretionary trusts to convert into a hybrid trust structure in which family holdings are limited to fixed units and in which a separate non-fixed discretion to make distributions to charities is provided.
4. Although the legislative package (ostensibly) seeks to preserve charitable flow-through of franked distributions via discretionary trusts, the proposed rollover provisions may prevent those trusts from retaining shares after restructuring. This could force business owners to choose between their charitable giving and lower-tax corporate treatment, reducing donations and undermining the Government’s stated intent. The rollover rules should be amended so that a trust that retains non-discretionary shares in the transferee company can access the rollover provisions. The same should be afforded to discretionary trusts that convert into a hybrid trust structure in which family holdings are limited to fixed units and in which a separate non-fixed discretion to make distributions to charities is retained.
5. Finally, we note that there are various intractable consequences of the reform. In particular, businesses could be forced to choose between the ongoing 30% minimum tax and potentially significant CGT/stamp-duty and restructuring costs, with particular uncertainty as to whether changing from a discretionary to a fixed trust could itself alter beneficial interests and trigger duty. Because the election is fixed for all time, with significant tax consequences for variations, the option to change from a discretionary to a fixed trust will result in inequitable outcomes for families. Even with the exception now offered for distributions to charities and NFPs and the modifications proposed in this submission incorporated thereto, those business owners that will be paying more tax as a result of the reform will have less income to donate to charities and NFPs. Consequently, in light of the concerns raised in this submission, we hold the view that the reforms, if enacted (even where incorporating the alterations identified in this submission), should only apply to discretionary trusts established after 01 July 2028. Existing discretionary trusts should be grandfathered under the current regime.

[1] Australian Government, Minimum Tax on Discretionary Trusts Exposure Draft Legislation Explainer (03 September 2026) 1 available at https://consult.treasury.gov.au/c2026-799771

[2] Ibid 2.