Minimum tax on trust distributions – KHQ calls on Federal Government to reduce red tape

As currently framed, the Federal Government’s proposed minimum tax on discretionary trusts has the potential to effectively force many small businesses to restructure. While the proposed rollover relief is a welcome step, KHQ Lawyers has argued that many taxpayers may face substantial costs and administrative burdens simply to access that relief. In a recent submission to Treasury, Ben Elbaum (Special Counsel) and Jack Stuk (Principal) from KHQ’s Tax & Structuring team proposed an additional solution: a Fixed Entitlements Election (FEE) that could deliver the Government’s policy objectives without forcing costly business restructures. 

Business restructures have inherent costs 

The consultation paper (released on 8 July 2026, with submissions having closed on 31 July 2026) contemplates a rollover that would allow taxpayers to transition from discretionary trust structures into arrangements with more fixed economic outcomes. KHQ supports the availability of that rollover. However, as our submission highlights, for many businesses restructuring out of a discretionary trust is far from straightforward. 

Even relatively simple businesses may face a long list of practical challenges, including: 

• Establishing new entities and registrations. 
• Obtaining new ABN, GST, PAYG, payroll tax and WorkCover registrations. 
• Opening new bank accounts and satisfying AML/CTF requirements. 
• Transferring business names, trademarks and licences. 
• Obtaining landlord, financier and supplier consents. 
• Managing employee transitions and insurance changes. 
• Incurring legal, accounting and advisory costs. 

As illustrated in KHQ’s submission, these requirements create significant costs and productivity losses for small businesses without necessarily generating any economic benefit. 

Duty costs create further barriers 

The submission also identifies stamp duty as a major obstacle to restructuring in many circumstances. Many business entities hold real estate, which will generally be dutiable in all Australian jurisdictions. Some jurisdictions also impose duty on the transfer of business assets, such as goodwill and IP. While certain duty exemptions may apply, they often do not align neatly with the proposed federal rollover provisions. 

Taking these costs into account, for many family businesses, the transaction costs of the proposed rollover may well outweigh the potential benefits of restructuring. 

A better solution 

Rather than pushing taxpayers to transfer businesses and assets into new structures, KHQ proposes that existing discretionary trusts should be permitted to make an irrevocable Fixed Entitlements Election (FEE). 

Under the proposed FEE: 

• Trustees would nominate beneficiaries and specify fixed entitlement percentages. 
• Distributions made in accordance with those fixed proportions would continue to be taxed at the beneficiaries’ ordinary marginal tax rates. 
• Distributions outside those proportions would be subject to the proposed minimum tax regime. 
• The election would generally be irrevocable. 
• Limited flexibility would exist to transfer entitlements in circumstances such as death, incapacity or family law events. 

KHQ submits that this approach would achieve the apparent policy goal of reducing flexibility in trust income allocations while avoiding the significant costs, disruptions and compliance burdens associated with wholesale business restructures. 

Keeping it simple 

The proposed minimum tax on discretionary trusts is likely to have significant implications for small businesses, family groups and investment structures throughout Australia. While tax policy objectives are important, implementation mechanisms should minimise unnecessary costs and disruption wherever possible. 

KHQ’s submission seeks to provide a practical alternative that aligns with the Government’s stated objectives while reducing complexity, compliance costs and administrative burdens for taxpayers and government alike. By allowing trusts to elect fixed economic entitlements without transferring assets or businesses, policymakers may be able to achieve the desired tax outcomes in a more efficient and commercially realistic manner. 

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