What are the proposed discretionary trust tax changes?
The Federal Government has announced proposed reforms as part of the 2026–27 Federal Budget that would introduce a 30% minimum tax on discretionary trust income.
The proposed changes are intended to reduce the tax flexibility traditionally associated with discretionary trusts, particularly the ability to distribute income across family members on lower marginal tax rates.
At this stage, the reforms are not yet law. Draft legislation and consultation are still expected, meaning the final form of the measures may change.
The proposed commencement date is 1 July 2028.
How would the proposed 30% trust tax work?
Under the proposed reforms, trustees of discretionary trusts would generally be required to pay a minimum 30% tax on the taxable income of the trust, unless a higher rate already applies.
Beneficiaries would still declare trust distributions in their own tax returns. However, they would receive a non-refundable tax credit for the tax already paid by the trustee.
The proposed measures are aimed primarily at discretionary trusts and are not expected to apply to certain other trust structures, including:
- fixed trusts;
- complying superannuation funds; and
- special disability trusts.
There are also indications that certain concessions or carve-outs may apply to testamentary discretionary trusts, vulnerable beneficiaries, or minors, although the detail is not yet known.
Will testamentary trusts still be effective?
Yes. While the proposed reforms may reduce some of the traditional tax advantages associated with testamentary discretionary trusts, these structures are still expected to remain highly relevant in estate planning.
Importantly, testamentary trusts are not used solely for income splitting or tax minimisation. They also play a significant role in:
- asset protection;
- inter-generational wealth planning;
- managing family wealth flexibly;
- and protecting vulnerable beneficiaries.
Even if the tax effectiveness of income splitting is reduced, a 30% minimum rate may still provide advantages in circumstances where beneficiaries would otherwise be taxed at higher personal marginal rates.
How could the changes affect your Will?
For many people, the proposed changes will not necessarily mean they should remove testamentary discretionary trust provisions from their Will.
The broader legal and protective benefits of these structures may still justify their inclusion, particularly where beneficiaries:
- operate businesses;
- face creditor exposure;
- are at risk of relationship breakdowns; or
- require assistance managing wealth responsibly.
Importantly, the tax treatment of a testamentary discretionary trust will depend on the law in force at the time of death, not when the Will was prepared.
As a result, Wills should generally not be amended solely because of proposed reforms that are not yet legislated.
Are family trusts still worth using?
Inter vivos discretionary trusts — commonly referred to as family trusts — are still expected to remain valuable wealth structuring tools.
Although the proposed reforms may reduce the effectiveness of income splitting from a tax perspective, family trusts continue to offer important benefits, including:
- asset protection;
- flexibility in managing family wealth;
- inter-generational planning; and
- reducing exposure to estate disputes or family provision claims.
Where beneficiaries are already on higher marginal tax rates, the proposed 30% minimum tax may still produce tax efficiencies in some circumstances.
Asset protection benefits of testamentary trusts
One of the key reasons testamentary discretionary trusts remain widely used is asset protection.
When structured correctly, assets held within a testamentary trust may not be owned personally by beneficiaries. This can help protect those assets from:
- relationship or divorce disputes;
- creditor claims;
- insolvency risks; and
- poor financial decision-making.
For many families, these protective features remain one of the primary reasons for incorporating testamentary trust structures into a Will.
Should you review your estate plan now?
The proposed reforms are not yet law and their final form remains uncertain.
However, the announcement does provide a useful opportunity to review your estate planning arrangements and ensure your structures still align with your long-term objectives.
Estate planning decisions should not be driven solely by tax considerations. Asset protection, family circumstances, succession planning, and flexibility all remain important factors.
Whether a testamentary discretionary trust or family trust structure remains appropriate will depend on your personal circumstances and should be considered on a case-by-case basis.
Frequently asked questions
Will discretionary trusts be taxed at 30%?
Under the proposed reforms, discretionary trusts would generally be subject to a minimum 30% tax rate on trust income. However, the reforms are not yet law and the final legislation may differ.
Are testamentary trusts still worth it?
Yes. Testamentary trusts continue to provide important asset protection, succession planning, and wealth management benefits, even if some tax advantages are reduced.
Should I change my Will because of the proposed trust tax changes?
Not necessarily. The proposed reforms are not yet legislated, and the tax treatment of testamentary trusts will depend on the law in force at the time of death.
When will the discretionary trust tax changes start?
The proposed commencement date is 1 July 2028, although this may change depending on the legislative process.
Do the proposed trust reforms apply to family trusts?
Yes. The reforms are aimed primarily at discretionary trusts, including many family trust structures.
Will testamentary trusts lose their tax advantages?
Some tax benefits, particularly income splitting advantages, may be reduced. However, testamentary trusts may still provide tax efficiencies in certain circumstances and continue to offer significant non-tax benefits.
Are the discretionary trust tax changes law yet?
No. The reforms are currently proposals only and have not yet been enacted into legislation.
