Key points:
- Testamentary trusts have secured a major win, with genuine structures proposed to be exempt from the new 30% minimum tax.
- The exemption comes with guardrails, as injected assets may still be caught by the new rules.
- Now is the time to review trust structures before the proposed reforms take effect.
- Proposed rollover relief could make restructuring simpler and more tax-efficient before the new rules take effect.
Over the last few weeks, much attention has been given to the Federal Government’s proposed introduction of a 30% minimum tax on discretionary trusts from 1 July 2028.
What we currently know
1. A minimum tax on discretionary trusts
Under the proposal, trustees of discretionary trusts would be required to pay a minimum tax of 30% on the trust’s taxable income from 1 July 2028. The trustee-paid tax would generally generate a non-refundable tax offset for beneficiaries, ensuring that overall tax paid on trust income is not less than 30 per cent, subject to various exclusions and concessions.
The Government’s stated objective is to reduce opportunities for income splitting through discretionary trusts and more closely align the taxation of trust income with the taxation of employment income.
2. A welcome exemption for testamentary trusts
While the measure is primarily aimed at limiting the tax advantages that can arise through income splitting in discretionary trust structures, it has generated significant interest among families who use testamentary trusts as part of their estate planning arrangements.
Following the announcement in the 2026–27 Federal Budget, concerns emerged that testamentary trusts could inadvertently be captured by the new regime, potentially undermining long-established estate planning strategies that help protect family wealth and support vulnerable beneficiaries.
However, subsequent Government announcements and the consultation paper (as mentioned in section 4 below) have provided greater clarity, including a significant rollback of the originally anticipated impact on testamentary trusts.
Following an announcement on 18 June 2026, income from all types of testamentary trusts (including discretionary) will be exempt from the minimum tax provided the trust is established for genuine testamentary purposes. This represents a significant softening of concerns that arose following the Budget announcement.
The exemption will generally apply where:
- The income is derived from assets originating from the deceased estate.
- For trusts established on or after 1 July 2028, beneficiaries will generally need to be individuals or income tax-exempt entities.
- Assets injected into the trust after Budget night (7.30pm AEST on 12 May 2026) that are unrelated to the deceased estate will remain subject to the minimum tax.
3. Existing benefits for minors remain a key consideration
The Government acknowledges the unique role testamentary trusts play in supporting families, particularly where minor children are involved.
Under existing rules, minors receiving distributions from testamentary trusts can generally access adult tax rates, including the tax-free threshold, provided the income is derived from assets of the deceased estate. The Government has also proposed excluding income relating to vulnerable minors from the minimum tax in a manner broadly consistent with current tax settings.
For many families, these concessions remain a key reason for incorporating testamentary trusts into their estate planning arrangements.
4. Consultation paper released 8 July 2026
Further detail behind the Government’s intentions was finally made available earlier this month, with a paper released inviting public input.
While the framework of the rules is largely as anticipated, a few key observations arise from the paper:
- The 30% non-refundable credit is proposed to not offset the Medicare levy, in effect meaning that the minimum tax rate would be 32%, rather than the announced 30%.
- The 70% approximate tax rate for distributions to corporate beneficiaries is confirmed in the paper. This confirms our previous expectation that discretionary trusts making use of corporate beneficiaries will need to restructure their affairs prior to commencement of the new rules in 2028/29.
- The proposed rollover mechanism (to defer the usual CGT event that would arise upon a transfer of assets between entities) is likely to be based on the existing Small Business Restructure Rollover, but broadened to include passive assets, with further requirements including:
- The entity in receipt of the rolled over assets must be structured with fixed ownership interests;
- The trust entity must roll out essentially all of its assets to qualify for the CGT relief on rollover;
- Notably, the consultation paper is silent on stamp duty relief, which may remain a material cost for taxpayers undertaking restructures.
- Questions such as whether a discretionary trust would be entitled to a cash refund or a carry forward loss/offset in instances where it receives income subject to greater than 30% tax (such as excess franking credits), are yet to be resolved.
Looking ahead
As the Government continues to receive feedback on the latest tax amendments, many families with testamentary trust arrangements welcome the decision to exempt genuine testamentary trusts from the proposed minimum tax. However, several important design details continue to be refined, including integrity rules around injected assets, beneficiary eligibility and the interaction of the new regime with broader trust taxation rules.
In relation to testamentary trusts, while many of these may ultimately fall outside the new regime, families should not assume all structures will be unaffected. A review of estate plans, wills or existing trust arrangements, can help confirm whether existing structures remain fit for purpose and identify any issues before the new rules take effect.
For taxpayers with non-testamentary discretionary trusts, the proposed minimum tax may have significant implications for existing structures. Understanding the potential tax impact and available restructuring options will be essential. Our team can help assess your position and identify practical strategies to prepare for the changes.
We will continue to monitor developments and future draft legislation closely and keep clients informed as the proposals move from consultation to legislation.
If you would like to understand how the proposed reforms may affect your family’s estate planning arrangements, please contact our Private Business and Family Advisory team.
