Updated as at 18 August, 2026.
As part of the 2026-27 Federal Budget, the Australian Federal Government released details of a landmark structural tax reform package, which included the introduction of a minimum 30% tax on income of discretionary trusts.
Initially, the proposal captured testamentary discretionary trusts (trusts created under the terms of a will) from 1 July 2028, subject to limited carve-outs for:
- income from assets of testamentary trusts existing at Budget announcement;
- fixed testamentary trusts; and
- income paid to ‘vulnerable’ minors.
The policy shift, and lack of detail on the proposal, led to significant market uncertainty and concerns that lower-income and minor beneficiaries would be unfavourably affected.
However, within a few short weeks, the Government announced a change in position. It is now proposed that income from all types of testamentary trusts will be exempt from the minimum 30% tax regime, within certain parameters.
Broadly speaking, this is a welcome announcement for private clients, and hints at a recognition of the role testamentary trusts play in genuine asset protection and family succession objectives rather than purely for income splitting purposes. While the details are still evolving and remain subject to consultation, significant implications remain for estate planning as early indications point to a narrowing of the circumstances in which testamentary trusts will continue to receive concessional tax treatment.
This update summarises what is currently known, the likely impact on existing wills, and practical steps private clients should consider now.
Key features of the proposed exception for testamentary trusts
Based on the current announcements, the proposed exception for testamentary discretionary trusts to the 30% minimum tax regime will apply where:
- The trust is established for ‘genuine testamentary purposes’
Although not yet defined, Treasury’s consultation paper released 8 July 2026 indicates that the exception is intended to preserve testamentary trusts used for traditional succession planning and asset protection purposes, rather than structures that facilitate broader tax planning opportunities.
In practical terms, this also suggests that the concessional treatment may not extend to arrangements where testamentary trusts are used to manage or shelter assets that did not originate from the deceased estate (which in practice exists to an extent through the ATO’s interpretation of the excepted trust income rules).
- The income is derived from assets of the deceased estate
Closely aligned with this is an indication that the exception will apply only to income derived from assets of the deceased estate. The consultation paper proposes that income derived from assets unrelated to a deceased estate which are injected into a testamentary trust after 7:30pm AEST on 12 May 2026 (Budget night) will be subject to the minimum 30% tax regime. This aligns closely with existing integrity measures relating to excepted trust income.
Moving forward, trustees and advisers would need to carefully assess any post-death asset injections into the trust or restructuring strategies.
- Restriction on eligible beneficiaries
Finally, the exception is expected to be subject to a restriction on eligible beneficiaries of the testamentary trust. The consultation paper proposes that testamentary trusts established on or after 1 July 2028 will only qualify for the exception where eligible beneficiaries comprise individuals and income tax-exempt entities.
It is not yet known whether the exercise of a variation power (post-death) to remove other beneficiaries will allow the testamentary trust to maintain the concessional tax treatment.
This development is likely to have significant implications for future will drafting practices, requiring careful consideration when updating existing estate plans, particularly as beneficiary classes have historically been defined broadly to include companies and other trusts in which the individual beneficiaries may have an interest.
The consultation paper also confirms that fixed testamentary trusts will remain outside the proposed minimum tax regime. This reinforces that the Government’s focus is on discretionary distribution arrangements rather than testamentary trust structures more broadly.
Potential implications for estate planning strategy – what should clients do now?
While we await further guidance and consultation on these matters, estate plans continue to be considered and prepared. What, if anything, should be done in the meantime?
At this stage, the safest approach appears to be one that incorporates flexibility and the ability to adapt over time.
While careful legal advice tailored to individual circumstances remains critical, consideration might be given to interim strategies such as:
- the inclusion of broad trust amendment powers;
- ‘opt-out’ provisions; and
- other mechanisms designed to adapt the structure of testamentary trust terms in response to future tax law changes.
Clients and advisers should avoid hasty estate planning revisions. Instead, they should take a measured but proactive approach, including reviewing existing wills (particularly those with testamentary trusts), considering whether current trust beneficiary classes remain appropriate, and seeking advice before adding assets to testamentary trusts or undertaking post-death restructuring.
At this stage the key will be remaining informed as the issues are clarified, and being prepared to update estate planning strategies once the legislative framework is settled.
Looking ahead
The proposed changes represent a potential turning point in the taxation and use of discretionary trusts in Australia. While testamentary trusts are likely to retain a privileged position, we can expect this to be accompanied by tighter constraints and greater scrutiny.
For private clients, achieving the right balance between flexibility, control and tax considerations will remain essential components of a comprehensive estate plan. As further detail emerges, timely and considered advice – including collaboration between trusted legal, accounting and financial professionals – will be vital to ensuring estate structures continue to operate as intended and are appropriately tailored to long-term objectives.
Importantly, the proposals remain at the consultation stage and have not yet received Government approval or been enacted. Treasury has sought stakeholder feedback on a number of key design features, including aspects of the testamentary trust exception. The final legislative framework may differ from the proposals described above.
If you would like to discuss how the proposed changes may affect your estate planning, or if you require a review of your current will or related structures, please contact our Wills, Estates & Trusts team for advice.
Important disclaimer: This publication provides general information only and does not constitute legal, tax or financial advice. The proposed measures discussed above are not yet law and may change. You should obtain specific advice about your own circumstances before making any decisions or taking any action.