On Tuesday 12 May 2026, the Treasurer handed down the 2026–27 Federal Budget. It must be remembered that most Budget night announcements are only statements of intended change. And so it was with this Budget, with the Government announcing important changes to the proposals for taxation for testamentary discretionary trusts on 18 June 2026.
Budget night announcements
The Budget proposed that, from 1 July 2028, the trustee of a discretionary trust will be liable to pay tax at a minimum of 30% on the trust’s taxable income. Currently, trustees do not pay tax on the discretionary trust’s taxable income, except in certain circumstances (e.g. undistributed income). Leaving to one side the issue of corporate beneficiaries, the proposal outlined that the 30% tax paid by the trust will be treated as a non-refundable tax credit for beneficiaries. This means that beneficiaries whose average tax rate would attract a higher taxation liability than 30% will be required to pay additional tax and beneficiaries whose average tax rate is less than 30% will not receive a refund of the tax paid by the trustee.
It should be noted that the proposed changes were going to apply to discretionary trusts but not to fixed trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts. There were also some proposed exemptions for primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at the date of the announcement.
Concerns held by trust and estate practitioners
The immediate response from many trust and estate practitioners was to point out on social media, to each other, and to the press, that taxation is not the major purpose for a testator adopting a testamentary discretionary trust as part of their estate plan.
As STEP Australia highlighted in its media release on 13 May 2026, testamentary trusts are a longstanding estate planning structure used for protecting and supporting families, often for deeply personal reasons.
The Budget Papers raised other concerns, including the lack of detail of when beneficiaries would be considered “vulnerable minors” and what is meant by “assets of discretionary testamentary trusts existing at announcement”.
Federal Government’s announcement on 18 June 2026
It was a relief to trust and estate practitioners that the Federal Government announced on 18 June 2026 that income from all types of discretionary testamentary trusts established for genuine testamentary purposes will be exempt from the proposed minimum tax regime. However, this announcement raised other issues including:
(a) the meaning of a testamentary discretionary trust being “established on or after 1 July 2028”. For example, it is not clear, in the context of the proposal, when a testamentary trust is said to be “established”. And, although it appears that the July 2028 date may have been intended to allow testators to consider their estate planning and make any desired changes, it is not helpful to testators who have lost capacity to make a will. Nor is it helpful if a testator cannot afford to obtain specialist legal and tax advice to review their arrangements;
(b) the requirement that future testamentary discretionary trusts “can only benefit individuals and tax exempt entities”. Does this mean that if the beneficiaries of the trust include a broader range of potential beneficiaries (as can occur because of, for example, consideration of the rule in Saunders v Vautier) that the trust is caught by the minimum tax rate? Or does the minimum tax rate only apply if the trustee distributes to beneficiaries who are not individuals or a tax exempt entity? If the latter, does the minimum tax rate then apply to all trust income or just that which is distributed to beneficiaries which do not fall within the exceptions?
STEP Australia provided a submission to the Federal Treasurer on 23 June 2026 which addresses the updated proposal in detail, including those issues touched on above. It is worth reading.
Further advocacy on the issue of discretionary trusts
STEP Australia has now made a submission in relation to the effect of the Federal Government’s proposals on inter vivos discretionary trusts, the proposed changes to Capital Gains Tax and Negative Gearing (Tranche 2 Legislation), and the Exposure Draft legislation for the proposed minimum tax on discretionary trusts.
Please consult the STEP Australia website for copies of these submissions.
This is an updated version of an article by Jennifer Sheean first published in the STEP Australia Newsletter, Issue 33 (July 2026).