What is being proposed?
- The Federal Government has announced a proposed 30% minimum tax on discretionary trust income, as part of the 2026–27 Federal Budget reforms.
- The proposed start date is 1 July 2028, although the measures are not yet law and may change following consultation and draft legislation.
- The reforms are aimed at reducing the tax flexibility of discretionary trusts, particularly the ability to distribute income
across family members on lower marginal tax rates.
How would the tax work?
- Trustees of discretionary trusts would be required to pay a minimum 30% tax rate on the taxable income of the trust, unless a higher tax rate already applies.
- Beneficiaries would still include trust distributions in their own personal tax returns and receive a non-refundable tax credit for the tax already paid by the trustees.
Present exclusions
We note that the proposed reforms are targeted at discretionary trusts and do not apply to a range of other trust structures, including fixed trusts (such as deceased estates and Wills that do not incorporate discretionary testamentary trust structures), complying superannuation funds and special disability trusts.
What does this mean for your Will?
- Discretionary Testamentary Trusts are still relevant, but with a different focus.
- Under the proposed changes the tax advantages of income splitting may be reduced, particularly where distributions are made to lower-income beneficiaries;
- However, this does not remove the broader legal benefits of these structures, noted below.
- It is important to recognise that discretionary testamentary trusts are not purely tax-driven vehicles and should continue to be considered within a broader estate planning and inter-generational transfer of wealth framework.
Key estate planning benefits of discretionary testamentary trusts
Tax planning
- Although the ability to income split between beneficiaries may be less tax‑advantageous than it currently is, it may still provide a benefit where beneficiaries are on the highest marginal tax rates and there are beneficiaries that can be distributed to on a lesser personal marginal tax rate, as the 30% rate (minimum rate) is still comparatively lower.
- There are proposed carve outs to the tax treatment of discretionary testamentary trusts which won’t be known until the legislation is introduced, however, there are suggestions that these may include exemptions/concessional tax treatment in respect of distributions to vulnerable beneficiaries and/or minors.
Asset protection
- Assets held within a discretionary testamentary trust, if structured correctly, may offer protection from external risks affecting beneficiaries, as they are not held by such beneficiary personally.
- This can be particularly valuable where beneficiaries:
- are at risk of a future relationship breakdown or divorce;
- are exposed to creditors, business risks or insolvency; and/or
- may have financial management vulnerabilities or other personal risks.
- For many clients, asset protection remains one of the primary drivers for including a discretionary testamentary trust
structure in their Will.
Inter vivos discretionary trusts
- Discretionary trusts (i.e. the typical family trust) established during one’s lifetime continue to play a key role in structuring wealth, especially if the 30% minimum tax rate is still lower than the personal marginal tax rate of some of the potential primary beneficiaries of such trusts, as noted above in relation to discretionary testamentary trusts.
- They are commonly used for:
- asset protection during life, for example, the event of a marital breakdown or where a beneficiary is subject to creditor claims (for example, due to business failure or insolvency);
- inter-generational wealth planning;
- flexibility in managing family wealth and distributions;
- mitigation of risk of attack to the Estate, as assets held within the trusts are not owned by the deceased personally and therefore may fall outside the pool of estate assets available upon death to be included in the pool of assets that can be available in a claim for further provision from the estate (i.e. will contest claim).
While the proposed tax changes may reduce their effectiveness from a pure income-splitting perspective, to minimise overall tax, they still serve as an important part of the provision of asset protection for beneficiaries and, further, intergenerational wealth planning.
The question of timing
- Overall, the proposed reforms are not yet enacted into legislation and their final form and operation remain uncertain.
- Importantly, the tax treatment of a testamentary discretionary trust will depend on the law in force at the time of death, rather than the date on which the Will is prepared.
- As a result, current Wills should not be amended solely based on proposed (and unconfirmed) tax changes, without careful consideration.
- The inclusion of such discretionary testamentary trust structures in your Wills can also be important from the perspective of affording beneficiaries with certainty/asset protection.
- Such considerations need to be assessed on a case-by-case basis.
- Asset protection vehicles that also can offer inter-generational tax planning, being the inter vivos discretionary trust, may also serve as important armour in the structuring kit, despite the proposed tax reform to the tax treatment of such trusts.
Should you have any further queries on the implications that such proposed reforms may have on your estate planning or current structures, please feel free to contact us on 03 9598 9489.
