Testamentary Trusts and the Proposed 30% Minimum Tax on Discretionary Trusts

The Australian Government’s proposed reforms to the taxation of discretionary trusts have caused understandable concern for families, advisers and estate planning lawyers. The central proposal is that, from 1 July 2028, trustees of certain discretionary trusts will be subject to a 30% minimum tax on taxable income. The policy is intended to align the taxation of trust income more closely with the tax rates paid by ordinary wage earners.

Importantly, the most recent Australian Government announcements have indicated that testamentary trusts are intended to be exempt from the proposed minimum tax regime. Naturally, the devil will be in the detail. Treasury has indicated that exempt trusts include testamentary trusts, deceased estates, fixed trusts, widely held trusts, complying superannuation funds, special disability trusts and charitable trusts. The Australian Government has also confirmed that income from all types of discretionary testamentary trusts will be exempt, provided the trust is established for genuine testamentary purposes.

A testamentary trust is a trust created by a Will and generally comes into existence only after the will-maker’s death. These structures are commonly used in estate planning to provide asset protection, flexibility for beneficiaries, and tax-effective administration of inherited wealth. Their use is materially different from ordinary family trusts, which are established during life and may be used as part of broader income distribution arrangements and commonly used by small businesses and for wealth accumulation and preservation.

The current position provides some comfort for clients who have testamentary trusts contained within their wills, or who are considering incorporating testamentary trusts into their estate planning. The Australian Government’s 18 June 2026 announcement expressly confirmed that the exemption is intended to apply not only to existing testamentary trusts, but also to future discretionary testamentary trusts, with further implementation details to follow through consultation.

However, the legislation has not yet found its final resting place. The detailed discretionary trust minimum tax rules are still the subject of Treasury consultation, and the available official material indicates that implementation details remain to be finalised. Treasury’s consultation process closes on 31 July 2026, and seeks feedback on exclusions, rollover relief, excess franking credits and collection mechanisms. Watch this space.

Accordingly, testamentary trusts remain a valuable estate planning tool, but Wills should be reviewed to ensure the trust is drafted for genuine testamentary purposes and aligns with the final form of the legislation once enacted.

We will continue to monitor the consultation process as it closes and keep clients updated as the proposed law is developed, refined and ultimately enacted.

If you require advice or assistance with structure or re-structuring please contact Jarrad Mobbs on 07 4417 4417 or jarrad@mobbsmarr.com.au.