2026 Federal Budget: New 30% Minimum Tax on Discretionary Trusts
The Federal Budget handed down on 12 May 2026 proposes significant changes to the taxation of discretionary trusts. Some of those changes affect testamentary discretionary trusts, a structure commonly used in estate planning.
Quick summary
- The Federal Budget proposes a 30% minimum tax on the income of discretionary trusts, including some testamentary discretionary trusts, from 1 July 2028.
- The minimum tax applies to testamentary discretionary trusts established after the budget announcement on 12 May 2026. Trusts already in existence on that date have some protection for income from assets held at the time.
- The legislation has not yet passed, and the final detail will depend on how it is drafted. Reviewing your Will now is still worthwhile, but major decisions should be made carefully and with advice.
What is a testamentary discretionary trust?
- A discretionary trust is one where the trustee decides how income and assets are distributed among beneficiaries. By contrast, a fixed trust predetermines each beneficiary’s entitlements upfront.
- A testamentary trust is a trust created through your Will that comes into effect when you pass away.
A testamentary discretionary trust combines both elements. Rather than leaving assets directly to beneficiaries, assets are held in a trust and the trustee decides how and when income and capital are distributed among beneficiaries after you’ve passed away.
Why create a testamentary discretionary trust?
These trusts have been a popular tool in estate planning because they offer flexibility, asset protection, and, in some cases, tax advantages.
A big tax advantage has historically come from income splitting: distributing trust income to beneficiaries on lower marginal tax rates, including children, to reduce the overall tax paid by the family.
What are the tax changes proposed by the Federal Budget?
From 1 July 2028, a 30% minimum tax is proposed to apply to the taxable income of certain discretionary trusts. The tax is paid at the trustee level.
Individual beneficiaries receive non-refundable credits for the tax already paid by the trustee, which can be applied against their own income tax liability.
The effect is that the income-splitting advantage, particularly distributing income to children or lower-income family members, is substantially reduced.
Even if income is distributed to a beneficiary on a lower marginal tax rate, the trust still pays 30% upfront. Because the credit is non-refundable, lower-income beneficiaries cannot claim back any excess.
What if the beneficiary is already paying tax at 30% or more?
For beneficiaries who already pay tax at 30% or more, the proposed changes will not increase the overall tax paid. The measure is targeted specifically at situations where distributions to low-income beneficiaries have reduced the family’s overall tax liability.
It’s important to note that this is proposed legislation. It has not yet passed Parliament, and the final scope of the changes will depend on how the legislation is drafted.
Why are the changes happening?
The Government’s position is that discretionary trusts allow some families to pay significantly less tax than workers on comparable incomes.
Treasury analysis found that families with discretionary trusts paid, on average, around four percentage points less tax than families with comparable incomes who don’t use a trust.
The proposed 30% minimum tax is intended to bring the tax rate on trust income closer to the 30% marginal rate paid by wage earners on incomes between $45,001 and $135,000.
What trusts and income are excluded?
Not everything is affected. The minimum tax is not proposed to apply to:
- Fixed testamentary trusts
- Complying superannuation funds
- Special disability trusts
- Deceased estates
- Charitable trusts
Certain categories of income are also proposed to be excluded, including primary production income, income relating to vulnerable minors, and (importantly for estate planning) income derived from assets held by a testamentary discretionary trust that was already in existence as at 12 May 2026.
This means that if your Will already contains a testamentary discretionary trust, income from assets held by that trust at budget night has some protection.
Testamentary discretionary trusts established after 12 May 2026, and new assets contributed to existing trusts after that date, are not protected.
Should I update my Will and remove the testamentary discretionary trust?
For most people, no. At least not without taking specific advice first.
Income splitting is only one reason testamentary discretionary trusts are recommended in estate planning. These trusts also protect inheritances from relationship breakdowns and creditors, and those protections are not affected by the proposed changes.
Many testamentary discretionary trust Wills also include a provision allowing beneficiaries to elect not to use the trust structure if certain conditions are met. This means specific advice can be sought at the relevant time, based on the law as it stands then.
At Whyte, Just & Moore, we continue to recommend testamentary discretionary trusts as a cornerstone of well-structured estate planning. The right approach will depend on your specific circumstances, and we recommend speaking with both your lawyer and your accountant.
Speak with our Wills & Estates team
If you have questions about how these proposed changes affect your Will or estate plan, get in touch with Whyte, Just & Moore in Geelong. Our Wills & Estates team can help you work through your specific circumstances and understand your options.
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