May Budget #2b Franking Credits and the New Trust Minimum Tax

Franking Credits and the New Trust Minimum Tax: The Unanswered Question

This post follows on from Budget Series #2, which covered the new 30% minimum tax on discretionary trusts starting 1 July 2028. If you haven't read that one yet, it's worth doing so first, this post digs into one specific issue that affects trust clients who hold shares or operate a business through a company structure.

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Why franking credits matter inside a trust

If your discretionary trust holds Australian shares, it almost certainly receives franked dividends. A franked dividend comes with an attached franking credit; which represents the tax the company has already paid on its profits at the corporate rate (either 25% for small companies or 30% for larger ones) before distributing them to shareholders.

Under the current system, those franking credits pass through the trust to beneficiaries, who can use them to offset their personal tax liability. And crucially, if the franking credits exceed a beneficiary's tax liability, they receive the excess back as a cash refund. This has been a significant feature of holding a share portfolio inside a trust - the refundability of excess franking credits can be genuinely valuable, particularly where distributions are made to lower-income beneficiaries.

The same principle applies where a trust receives a franked dividend from a small business company, for example, where a company operates the business and pays a franked dividend up to a discretionary trust, which then distributes to family members.

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So what happens to franking credits under the new minimum tax?

Here is where we have to be direct with you: the Government has not yet answered this question.

The budget papers explicitly state that the Government will consult with stakeholders on "how trustees use excess franking credits" as part of the design process for the minimum tax. This is not a detail that was accidentally omitted from the Budget night announcements, it is a genuinely complex design question that has been flagged for consultation before legislation is drafted.

What we do know is how the minimum tax works mechanically, and from that we can identify the problem clearly.

From 1 July 2028, the trustee pays 30% minimum tax on the trust's total taxable income before distributions go to beneficiaries. Taxable income inside a trust that holds franked shares includes the grossed-up dividend amount — that is, the cash dividend plus the attached franking credit. So a $7,000 cash dividend from a fully franked share carrying a $3,000 franking credit is included in the trust's taxable income as $10,000.

Under the current system, that $3,000 franking credit flows through to beneficiaries and is refundable if their tax is less than $3,000 on that income. Under the new system, the trustee has already paid 30%, being $3,000, on that $10,000 of grossed-up income as the minimum tax. The franking credit and the minimum tax are the same amount. The question the Government has not yet answered is: do the franking credits offset the trustee's minimum tax liability, flow through to beneficiaries separately, or get absorbed and effectively lost?

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The three possible outcomes; and why they matter

There are broadly three ways the legislation could resolve this, and the difference between them is significant.

Outcome 1, Franking credits offset the trustee's minimum tax

The trust uses the franking credits to reduce or eliminate its minimum tax liability on the franked dividend income. This would be the most favourable outcome, it would mean the minimum tax doesn't create additional tax on income that has already been taxed at the corporate rate. The net tax position on franked dividend income would remain at 30%, the same as it is today for fully franked dividends from a standard company. Under this outcome, holding shares inside a trust doesn't become materially worse for franked dividend income specifically.

Outcome 2, Franking credits flow through to beneficiaries as they do now, alongside the minimum tax credit

Beneficiaries receive both a credit for the trustee's minimum tax and their share of the franking credits. If this is the case, beneficiaries on higher marginal rates may actually be slightly better off on franked income relative to the current system. However, the refundability question remains; the trustee-level minimum tax credit is explicitly non-refundable. If franking credits lose their refundability in this context, lower-income beneficiaries lose something valuable.

Outcome 3, Franking credits are absorbed and lost at the trust level

The trust pays 30% minimum tax, the franking credits are counted toward satisfying that liability, and nothing flows through to beneficiaries. This would be the worst outcome; it would mean double-counting of tax on the same income, and beneficiaries who previously received refundable franking credits would receive nothing. For a trust with a significant share portfolio generating substantial franked dividends, this could meaningfully reduce the after-tax return.

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What about the small business company distributing to the trust?

This is the scenario that affects many of our business-owning clients. A common structure is a trading company that pays tax at 25% and periodically pays franked dividends up to a discretionary trust, which then distributes to family members. The franking credits attached to those dividends, representing the 25% already paid by the company, currently flow through to beneficiaries and are refundable where their personal rate is below 25%.

Under the new rules, when that franked dividend lands in the trust, the trust's taxable income increases by the grossed-up amount. The trustee then owes 30% minimum tax on that income. But the company has only paid 25%, so the franking credit attached is only 25 cents per dollar, while the minimum tax is 30 cents per dollar. This means there's a potential 5% gap, a top-up minimum tax, even before we resolve the question of whether the franking credits offset the trustee's minimum tax or flow to beneficiaries.

This is a real issue for small business owners, and it's another reason why the consultation outcome matters enormously.

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What should you do right now?

The honest answer is: wait. The legislation hasn't been drafted, the consultation hasn't happened, and the franking credit treatment is one of the most consequential unresolved design questions in this entire reform package.

What you should not do is make any significant restructuring decisions, selling shares out of a trust, restructuring a company that pays dividends to a trust, or winding up a trust, based on assumptions about how franking credits will be treated under rules that don't yet exist in their final form.

What is worth doing now is having a conversation with us so we can map out which of your arrangements are potentially affected, understand what's at stake for your specific situation, and be ready to move quickly once the consultation outcome and draft legislation are released. The rollover relief window opens 1 July 2027, there is time, but not unlimited time.

We will be monitoring the consultation process closely and will update you as soon as meaningful detail is available.

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This post is general information based on the 2026–27 Federal Budget papers released 12 May 2026 and does not constitute personal financial or tax advice. The legislative design of the minimum tax on discretionary trusts — including the treatment of franking credits — is subject to consultation and has not yet been finalised. Please speak with us before making any changes to existing arrangements.

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Next in the series: Capital Gains Tax — how the new indexation method replaces the 50% discount, what the 30% minimum rate means, and why understanding how indexation works matters regardless of how long you've held your assets.

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