Proposed Changes to the Tax Treatment of Discretionary and Testamentary Trusts
The Australian Government has proposed a significant change to how certain discretionary trusts are taxed: from 1 July 2028, trustees of affected discretionary trusts would pay a 30% minimum tax on the trust’s taxable income. The measure is not yet law, and important details may change as the legislation progresses.
What is proposed?
Under the exposure draft legislation released in September 2026, a trustee would pay the 30% minimum tax at the trust level. Non-corporate beneficiaries who are presently entitled to a share of the trust’s net income would generally be able to claim a non-refundable income tax credit for tax already paid by the trustee.
In practical terms, the proposal is designed to ensure that at least 30% tax is paid on relevant discretionary trust income, even where distributions might otherwise be directed to beneficiaries with lower marginal tax rates. The Government has also proposed a limited three-year restructure rollover, available from 1 July 2027, to assist trusts that wish to move assets into another type of entity.
Which trusts are affected?
The proposed minimum tax is aimed at certain discretionary trusts. It is not proposed to apply to all trusts. The Government has indicated that fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts would be outside the measure.
Some categories of income are also proposed to be excluded, including:
- Primary production income
- Certain income relating to vulnerable minors
- Amounts already subject to non-resident withholding tax
- Income from assets of genuine discretionary testamentary trusts
What about testamentary trusts?
This is an area that has evolved since the original Budget announcement. The Government now proposes that discretionary testamentary trusts established for genuine testamentary purposes will be excluded from the minimum tax, provided the relevant conditions are met.
For existing testamentary trusts, the proposed exclusion generally relates to income from assets that originated in the deceased estate. However, assets added to an existing testamentary trust after the Budget announcement may be treated differently.
For discretionary testamentary trusts established on or after 1 July 2028, the proposed exclusion is expected to be more limited: the trust will generally need to be established for genuine testamentary purposes, and its beneficiaries will generally need to be individuals or income-tax-exempt entities.
Why this matters for estate planning
Trusts are often used in Wills and family wealth structures for good reasons: flexibility, asset protection, supporting vulnerable family members, and managing income across generations. But the interaction between trust deeds, beneficiary classes, estate assets and tax outcomes can be complex.
A trust deed that was perfectly appropriate when it was drafted may not produce the intended tax outcome under the proposed rules—particularly if it permits corporate beneficiaries, allows later contributions of non-estate assets, or was drafted without the proposed “genuine testamentary purposes” language in mind.
Check your trust or Will
If you have a discretionary family trust, a testamentary trust in your Will, or are considering updating your estate plan, it is worth reviewing the documents now. Key questions include:
- Is the trust a discretionary trust or a fixed trust?
- Does your Will create a testamentary trust, and what beneficiaries can it benefit?
- Are corporate beneficiaries included in the trust deed or Will?
- Are there likely to be assets added to the trust after the deceased’s death?
- Would restructuring be appropriate, and would the proposed rollover relief assist?
Because the rules are still proposed rather than final, clients should avoid making irreversible changes based on media reports or general commentary. The right response will depend on the trust deed, the Will, the nature of the assets, family circumstances, and the final form of the legislation.
Take advice before acting
Before amending a trust deed, changing a Will, distributing trust income, or restructuring assets, clients should obtain competent advice from an Australian tax adviser and an estate planning lawyer. A coordinated review can help ensure that any changes achieve both the intended tax outcome and the client’s broader succession and asset-protection objectives.
This article is general information only and does not constitute legal or tax advice.
