The 2026 Federal Budget has proposed significant changes to the way that certain discretionary trusts are taxed. There were concerns that the proposed changes would affect discretionary trusts that are created in your Will and which come into effect once you pass away, known as testamentary trusts. Testamentary trusts are an important estate planning tool and can offer protection of a beneficiary’s inheritance from relationship breakdowns and creditors, as well as tax advantages for income-splitting between beneficiaries.
It has been proposed that a 30% minimum tax will apply to the taxable income of certain discretionary trusts, paid at the trustee level. The individual beneficiaries then receive non-refundable credits for the tax paid by the trustee, which is then applied against their own tax liability. This would have affected minor or low-income beneficiaries of a testamentary trust who would otherwise have a personal tax rate below 30%, and the income-splitting advantages of a testamentary trust would have been significantly reduced.
However on 18 June 2026, the government clarified that discretionary testamentary trusts will be excluded from the proposed 30% minimum tax affecting other discretionary trusts, provided that the testamentary trust is established for “genuine testamentary purposes”. Currently there has been no definition provided for “genuine testamentary purposes” with further clarification to be provided in a consultation paper to be provided in the coming weeks.
Whilst the finer details to this proposed carve-out have not yet been finalised, this change is welcome news to those who have established or are considering establishing a testamentary discretionary trust in their Will.
Whilst income-splitting between beneficiaries of a testamentary trust is an attractive benefit of establishing such a trust in your Will, a testamentary trust offers other significant advantages to your estate plan. Most importantly, because the beneficiaries do not own the trust assets, their entitlement in the estate is significantly less exposed in family law property settlements, and are protected from any bankruptcy claims. Additionally, it offers protection from the beneficiary themselves, particularly if there may be risks of them managing their own funds, such as substance abuse or mental health concerns.
If you have been considering establishing a testamentary trust as part of your estate plan or want to discuss this option in more detail, Taurus Legal Management’s estate planning department can assist you. Please do not hesitate to contact our firm on 03 9481 2000 for more information on testamentary trusts and how we can assist you in preparing your estate plan.