Monthly technical briefing - August 2026

In this update, we’ll aim to answer key questions we’ve received from advisers. We’ll also help you get up to speed with technical developments for the period from 24 June 2026 to 27 July 2026, including a summary of the latest technical developments impacting the advice provided to clients.

In this edition, the Adviser query of the month considers the tax implications of exceeding the transfer balance cap and whether they can be reduced by rectifying the excess early.

Adviser query of the month

Question

A client recently retired and commenced an account based pension in July 2026.

Due to the market movement of the investments used to commence the pension, the commencement value was $2.15 million.

As this was their first retirement phase income stream, their transfer balance cap (TBC) is $2.1 million, and they’ve exceeded their TBC by $50,000.

Can you explain:

1. What are the tax implications of exceeding the TBC?
2. Can anything be done to reduce the amount of TBC tax? 
3. How much needs to be commuted?

Answer

The excess transfer balance tax neutralises the financial benefits of the tax-free pension environment when a member exceeds their TBC.

Exceeding the TBC is very different to exceeding a contribution cap and proactively rectifying breaches can reduce the amount of tax payable. This is unlike exceeding a contribution cap where the individual must generally wait for the ATO determination and follow the ATO’s release process*.

Another difference is that the ATO usually issues TBC determinations in a much shorter time frame. When compared to excess non-concessional contribution cap determinations, earnings are calculated over a shorter time frame.

^{* An exception to this is where the fund returns the excess contributions on the basis of error. Importantly, both APRA and the ATO take the view that there are very limited circumstances in which this can occur for super funds.}

Notional earnings

Notional earnings is relevant for determining the level of tax payable and the amount that must be commuted to rectify the excess. The following table contains a summary of these and demonstrates when these values can be different:

As noted in the table above, the end date for the calculation period can be different for tax and commutation purposes. The situation where these figures differ are where the individual doesn’t rectify the excess before the ATO determination and the calculation end date in each scenario will be:

• Tax - the date the excess is rectified 
• Commutation – the date of the ATO determination

Tax implications of exceeding the TBC

For first time breaches of an individual’s TBC, the notional earnings is taxed at 15 per cent. For subsequent breaches, the notional earnings are taxed at 30 per cent.

This is a personal tax liability rather than a super fund tax liability. That said, the individual can source the funds to pay this tax from any funds they have access to, in which case they may want to withdraw funds from their super benefits to cover this expense.

Taking action to reduce the tax implications of exceeding the TBC

Action can be taken to help reduce the tax implications of exceeding the TBC. This is different to exceeding a contribution cap where you generally need to wait until the ATO raise the determination, which is usually quite some time after the end of the financial year the contributions are made.

As you can see from the table above, the sooner the excess is rectified, the lower the notional earnings and therefore the amount of tax payable.

Once the excess is rectified in full, the ATO will issue a notice regarding the tax payable. To help manage a client’s expectations, it’s good practice to inform them that they/their tax agent will be notified of the tax liability irrespective of the time it takes to fix the excess.

Determining the amount to be commuted

If your client is looking to fix the excess before the ATO issues its determination, you’ll need to calculate the amount that needs to be commuted. In practical terms, a commutation is the movement of funds from an income stream that is in the retirement phase to either an accumulation account or paid out of the super environment as a lump sum. Having this payment classified as a pension payment will not be a commutation and will not rectify the excess.

From the table above, you can see that this value is the total amount of the excess plus the notional earnings. The notional earnings calculation starts from the date they first exceed their TBC to the point the excess is rectified.

In calculating the notional earnings end date, you will want to consider the time it will take for this to be implemented, taking into account the time to provide instructions to the fund and for the fund to action the request.

Further information can be found here:

ATO – Law Companion Ruling LCR 2026/9 – Transfer balance cap

ATO – General Interest Charge

Taxation of discretionary trusts consultation – 2026-27 Federal Budget

As part of the 2026-27 Federal Budget, the Australian Government announced its intention to introduce a 30 per cent minimum tax on discretionary trusts, effective from 1 July 2028.

The stated purpose of this measure is to "better align the tax rate on trust income with the tax rates paid by workers" and to counteract "income splitting". Income splitting, in this context, refers to arrangements where trustees of discretionary trusts allocate income to beneficiaries with lower marginal tax rates, potentially allowing high-income or high-wealth individuals to pay less tax compared to salary and wage earners, thereby reducing the progressivity of the tax system.

The fundamental basis of trust taxation will largely remain unchanged. Trustees will continue to determine beneficiaries' entitlements to trust income, and beneficiaries will still be assessed on their share of the trust's taxable (net) income. However, under the new framework, the trustee will be required to pay a minimum 30 per cent tax on the trust's taxable income.

Scope and Exclusions

The minimum tax will specifically apply to discretionary trusts, which are identified as offering greater tax planning opportunities than other trust types. The consultation paper seeks feedback on a precise definition of ‘discretionary trust’ to avoid unintended breadth, particularly for modern commercial trusts where trustees typically retain powers to alter entitlements or amend trust deeds.

Several trust types and types of income will be excluded from this minimum tax:

• Testamentary trusts: These trusts, established under a will, will be exempt if they are set up for genuine testamentary purposes. This exemption specifically covers income from assets of the deceased estate, with income from unrelated assets injected after 7:30 pm AEST on 12 May 2026 becoming subject to the minimum tax. For trusts established on or after 1 July 2028, they must solely benefit individuals and income tax-exempt entities. Fixed testamentary trusts are also excluded.
• Other trust types: Fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts are excluded.
• Primary production income: This type of income, encompassing farming and agricultural business income, will be excluded to avoid modifying existing concessions.
• Income related to vulnerable minors: Certain income distributed to minors will be excluded, aligning with existing rules for disability, injury, and orphans. This includes investment income from loss of parental support, personal injury, workers' compensation, criminal injuries, life insurance, and benefits from certain funds on death or family breakdown, as well as income from deceased estate assets.
• Distributions to foreign residents: To maintain the effectiveness of Australia's double tax agreements, distributions to foreign resident beneficiaries comprising dividends, interest, and royalties subject to foreign resident withholding tax will be excluded.
• Income tax-exempt entities: While charitable trusts are explicitly excluded, feedback is sought on the treatment of distributions to other income tax-exempt beneficiaries. These entities typically cannot use the non-refundable tax offsets generated by the minimum tax due to lacking an income tax liability.

Taxing point and beneficiary treatment

The minimum tax will be imposed at the trustee level, with the trustee responsible for calculating, reporting, paying the tax, and notifying beneficiaries of their entitlements and the associated non-refundable minimum tax offset.

• Individual Beneficiaries: Individuals will still be assessed on their share of the trust's taxable income at their marginal rates. They will receive a non-refundable minimum tax offset for the tax paid by the trustee.

While this offset can reduce an individual’s tax to nil, any excess offset cannot be refunded and cannot be carried forward. It cannot be used to reduce an individual’s Medicare levy.

Example – taken from Consultation Paper (link below)

Trust A is a discretionary trust subject to the minimum tax. In 2028-29, Trust A has $200,000 of trust income. Trust A’s taxable income is also $200,000.

Trust A has multiple beneficiaries that the trustee typically distributes to from year-to-year. However, for 2028-29 the trustee makes only Individual A presently entitled to all of Trust A’s income ($200,000).

The trustee is liable for the 30 per cent minimum tax on Trust A’s taxable income ($200,000). Therefore, the trustee is liable for $60,000 minimum tax.

Consistent with the current law, because Individual A is presently entitled to all of Trust A’s income, Individual A will be assessed on all of Trust A’s taxable income ($200,000).

Individual A will also receive a minimum tax offset to reduce their income tax liability. As Individual A is assessed on 100 per cent of Trust A’s taxable income, they will also receive a tax offset equal to 100 per cent of the minimum tax payable by the trustee ($60,000).

Individual A does not have any other income and is subject to marginal tax rates. Therefore, before the minimum tax offset is applied, Individual A would have a $55,602 tax liability in 2028-29, and an additional $4,000 Medicare levy liability. Individual A can then use $55,602 of their $60,000 minimum tax offset to reduce (and discharge) their tax liability (excluding the Medicare levy). The remaining $4,398 of the offset is not refundable (for example, could not be used to extinguish the Medicare levy liability). This means Individual A would only be liable to pay their $4,000 Medicare levy liability (being 2 per cent of their total taxable income of $200,000).

• Corporate Beneficiaries: Corporate beneficiaries will not receive the minimum tax offset for tax paid by the trustee. This approach aims to prevent companies from converting the offset into refundable franking credits that could then be passed on to non-corporate shareholders who are also trust beneficiaries. A corporate beneficiary will be assessed on its entitlement and liable for its corporate tax rate without the benefit of the minimum tax offset.

A distribution to a corporate beneficiary will be subject to a combined rate of tax of 60 percent (i.e. 30 per cent paid by the trust and 30 per cent paid by the company). Subsequent tax consequences will also need to be considered when looking to access the distribution from the corporate beneficiary (e.g. a dividend to shareholders).

Example – taken from Consultation Paper (link below)

Trust A is a discretionary trust subject to the minimum tax. In 2028-29, Trust A has $100,000 of trust income. Trust A’s taxable income is also $100,000.

Trust A has multiple different beneficiaries that the trustee typically distributes to from year-to-year. However, for 2028-29 the trustee chooses to make only Company A presently entitled to all of Trust A’s income ($100,000).

The trustee is liable for the 30 per cent minimum tax on Trust A’s taxable income ($100,000). Therefore, the trustee is liable for $30,000 minimum tax.

Consistent with the current law, because Company A is presently entitled to all of Trust A’s income, Company A will be assessed on all of Trust A’s taxable income ($100,000). Company A cannot receive a minimum tax offset to reduce their income tax liability based on the minimum tax payable by the trustee.

Company A does not have any other income and is subject to the 30 per cent corporate tax rate. Therefore, Company A will have a $30,000 tax liability.

As Company A cannot receive a minimum tax offset to reduce its income tax liability for tax payable by the trustee, it is liable to pay $30,000. Company A can create $30,000 franking credits after the tax liability is paid to the Australian Taxation Office.

The operation of the imputation system when Company A issues franked distributions to its shareholders remains unchanged.

• Trustee Beneficiaries: Trustee beneficiaries will include the distribution in their taxable income and be entitled to a minimum tax offset. If the trustee beneficiary is itself a discretionary trust subject to the minimum tax, the offset must be applied against its own income tax liability (including its minimum tax).

This offset is non-refundable, cannot be carried forward, and cannot be passed onto further beneficiaries

These rules aim to discourage complex tax planning via chains of discretionary trusts.

If the trustee beneficiary is not a discretionary trust subject to the minimum tax, the offset may be passed on to its eligible non-corporate beneficiaries.

Implementation considerations

The consultation paper seeks feedback on several key implementation aspects:

• Rollover relief: Expanded rollover relief will be available for three years from 1 July 2027 to facilitate restructuring out of discretionary trusts into entities like companies or fixed trusts, without immediate capital gains or other income tax consequences. This relief will be based on the existing Small Business Restructure Rollover (SBRR) but will be extended beyond small businesses to discretionary trusts of any size.

   

  Key features of the proposal include:

  • The rollover is not intended to allow for the continuation of substantially equivalent discretionary distribution outcomes through alternative legal structures.

    The transferee must not be a discretionary trust subject to the minimum tax, a complying superannuation fund, or an income tax-exempt entity.

    Similarly, the relief is not intended to apply to companies with multiple classes of shares that allow dividends or capital to be directed between participances on a discretionary basis.

  • Features distinguishing this rollover from SBRR include no requirement for a ‘genuine restructure’ and coverage of all trust assets, including those generating passive income.

    The relief requires transferring ‘all, or essentially all’, of the trust's assets to the new structure. The transferee must not be a discretionary trust subject to the minimum tax, a complying superannuation fund, or an income tax-exempt entity.

  • To address ultimate economic ownership, a new statutory family unit is proposed, distinct from the existing family group definition in trust loss rules, allowing for clear rights and no material discretionary elements.

  • The rollover will also prevent Family Trust Distributions Tax from arising during restructuring, even if a trust has an existing family trust election. Feedback is also sought on alternative approaches, such as allowing trusts to make an irrevocable election to be treated as a fixed trust for tax purposes.

• Treatment of excess franking credits: Trusts receiving franked dividends must use franking credits to offset their income tax liabilities. Two options are being considered for excess franking credits: either refunding them to the trustee or allowing them to be carried forward to offset future tax liabilities. Each option has implications for compliance costs and integrity rules.
• Collection mechanisms: The minimum tax will be paid by the trustee. To ensure effective collection, complementary changes may be necessary, including providing the Commissioner of Taxation with a similar right of reimbursement from trust assets, making directors of corporate trustees jointly and severally liable for the tax, and potentially adopting earlier collection mechanisms like Pay As You Go (PAYG) instalments.
• Bendel case interactions: Views are sought on any interactions between the High Court's decision in Commissioner of Taxation v Bendel (regarding unpaid present entitlements of corporate beneficiaries not being 'loans' for Division 7A purposes) and the minimum tax, especially given an announced but unenacted measure to bring UPEs within Division 7A.

The consultation closed on 31 July 2026.

Further information can be found here: Treasury – Consultation – Minimum tax on discretionary trusts