The paper provides some clarity on how the measure will operate once implemented. Key takeaways from the paper include:

• The 30% withholding tax paid by the trustee of a discretionary trust will not be creditable against a beneficiary’s Medicare levy;
• The carve out for testamentary trusts will not apply to assets “injected” into the testamentary trust after 12 May 2026;
• The 30% withholding tax will apply to distributions made by a discretionary trust to a charity but will not be refundable to the charity;
• It is recognised that a broader definition of “fixed trust” will need to apply than the current strict definition applied for the purposes of the trust loss rules;
• The rollover relief to allow taxpayers to transition out of discretionary trusts and into companies or fixed trusts will be restricted such that the transferee must have fixed interests e.g. one class of shares.

Unfortunately, the most significant issues with the proposal are not dealt with by the consultation paper. They are:

• What relief, if any, will be granted from state duty on the transfer of assets from the discretionary trust to the transferee entity?
• What protection, if any, will be given to trustees who transfer trust assets to a rollover entity in which beneficiaries of the discretionary trust who have received distributions in the past have no equity interest?

Ominously the paper raises the spectre that the director penalty notice regime (or similar) may be extended to situations where a corporate trustee does not remit the appropriate withholding to the Tax Office.

The final date for submissions in response to the paper is 31 July 2026.

If you would like to discuss how these proposed changes may affect your Trust structure, please contact Philip Diviny, Principal : philip.diviny@madgwicks.com.au

The information provided in this article is general in nature and cannot be relied on as legal advice, nor does it create an engagement. Please contact one our lawyers listed above for advice about your specific situation.