Australia proposes shift in discretionary trust franking credits

Proposed changes to Australian discretionary trust regulations are set to significantly alter how franking credits are handled. Under draft regulations, trustees of minimum tax trusts will be required to use franking credits to offset their own minimum tax at the trust level, rather than allowing them to flow through to beneficiaries. While trustees can receive a tax offset equal to the value of the franking credit to reduce trust tax liability, the ability to stream these distributions to beneficiaries is expected to change.

The 2026–27 Federal Budget announced a 30 per cent minimum tax on discretionary trusts, slated to begin on 1 July 2028. Although the tax implementation is several years away, the release of draft legislation has created immediate administrative pressure for accounting firms. Practitioners must now manage complex file work, including reviewing trust deeds, minutes, and historical distributions to model potential outcomes and elections.

Proposed measures include a time-limited restructure rollover starting 1 July 2027 and an option to make fixed distributions to pre-nominated beneficiaries. Professional bodies, including CPA Australia, have sought clarification on matters such as stamp duty treatment regarding these elections.