Testamentary trusts have long been a mainstay of estate planning. They protect inherited assets, give a trustee room to respond to changing family circumstances and, for minor beneficiaries, allow income to be taxed at adult rates. The Government's proposed 30 per cent minimum tax on discretionary trusts does not abolish those benefits. It does, however, change the rules that will determine whether a testamentary trust can keep them.
Status of the legislation
Two Bills contain the minimum tax: the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 (Tax Reform Bill) and the Income Tax Rates Amendment (Minimum Tax on Discretionary Trusts) Bill 2026 (Rates Bill). The Tax Reform Bill sets out the rules, including the exclusion for testamentary trust income. The Rates Bill sets the rate.
The Government introduced the Bills into the House of Representatives on 14 October 2026. On 15 October 2026, the Senate referred them to the Senate Economics Legislation Committee, which is due to report by 13 November 2026. The Bills are not yet law, and Parliament may amend them before they pass. Sladen Legal has made a submission to the Committee, and several of the points below reflect the concerns we have raised. If enacted in their current form, the provisions will apply to assessments for income years starting on or after 1 July 2028.
The basic rule
The trustee of a "minimum tax trust" will be assessed, and liable to pay tax, on so much of the trust's net income as is "minimum tax income". The rate is 30 per cent. To the extent the trustee already pays tax on that income at a lower rate, the minimum tax tops the rate up to 30 per cent. No further minimum tax is payable if the trustee already pays tax at 30 per cent or more.
The Tax Reform Bill defines a minimum tax trust by elimination. A trust is a minimum tax trust unless it is one of a list of excluded trusts, which includes fixed trusts, special disability trusts, and the trust estate of a deceased person. A discretionary testamentary trust is not on that list. It will therefore generally be a minimum tax trust.
The protection for testamentary trusts instead sits at the level of income. Proposed section 101AD of the Income Tax Assessment Act 1936 (ITAA 1936) excludes qualifying testamentary trust income from minimum tax income. If all of a testamentary trust's net income qualifies, no minimum tax is payable, even though the trust is technically a minimum tax trust.
Deceased estates are separately excluded
The Tax Reform Bill excludes the trust estate of a deceased person from being a minimum tax trust altogether. The Explanatory Memorandum explains that this covers the assets of a deceased estate while the estate is under administration, and that it is distinct from a testamentary trust. While the executor is still administering the estate, the minimum tax should not be relevant. The issue arises once property passes to the trustee of the testamentary trust.
The testamentary trust exclusion
Under proposed subsection 101AD(1), net income of a trust is excluded from minimum tax income if three conditions are met.
The trust is established as a result of a will, codicil, court order, or intestacy, as described in paragraph 102AG(2)(a) of the ITAA 1936.
The income is either of a kind covered by subsection 102AG(2AA) of the ITAA 1936 (broadly, income derived from property of the deceased estate and accumulations of that income), or is derived from property transferred to the trustee before 7.30 pm (ACT legal time) on 12 May 2026 (Budget night).
If the trust is established on or after 1 July 2028, the beneficiary under the instrument establishing the trust can only be an individual, an exempt entity, or the trustee of a special disability trust.
The exclusion is then subject to two integrity rules, discussed below. A note to the provision states that the exclusion only covers net income of trusts "established and administered for genuine testamentary purposes".
Which income is protected
The second condition borrows the existing rules that already govern excepted trust income for minors under Division 6AA. The Explanatory Memorandum states that the exclusion covers assets from the deceased person's estate transferred to the trust, and accumulations of income or capital from that property, including where an asset is sold and replaced in a normal arm's-length transaction.
The legislation is less explicit than the Explanatory Memorandum. Subsection 101AD(1) relies on the incorporated rules in subsection 102AG(2AA) and contains no express statement about replacement assets. The Budget-night limb, which protects income derived from property transferred to the trustee before 12 May 2026, contains no express equivalent for accumulations or replacement assets at all. Trustees should not assume that a court will read the Explanatory Memorandum’s broader description into the text.
The corollary is that the exclusion does not protect income from property that did not come from the estate. The Explanatory Memorandum states that income from property injected after Budget night, unrelated to the deceased estate, will be subject to the minimum tax. A family that has historically used a testamentary trust as a convenient vehicle for other family wealth should expect that income to be taxed at 30 per cent at trustee level from 1 July 2028.
Testamentary trusts often hold estate property for decades. Over that time, trustees sell and replace assets, borrow against them, and fund improvements from new money. In our submission, we pointed out that the Bills offer no detailed method or safe harbour for tracing and apportioning mixed sources of funding. Until Parliament addresses that gap, trustees should keep clear records showing that each asset traces back to estate property and should be cautious about mixing estate property with funds from other sources.
The beneficiary restriction for trusts established on or after 1 July 2028
This is the change most likely to affect existing wills. For a testamentary trust established on or after 1 July 2028, the income is only excluded if the beneficiaries under the trust instrument are limited to individuals, exempt entities, and trustees of special disability trusts. The Explanatory Memorandum states that if the testamentary trust has beneficiaries that are corporate entities or other types of trusts, the net income of the trust will be subject to the minimum tax.
On the Explanatory Memorandum's reading, the test asks who may benefit under the will, not who actually benefits. Many well-drafted wills deliberately include related companies and trusts within the class of beneficiaries, so the trustee can adapt to whatever circumstances exist when the will-maker dies. Under the Bills as drafted, the presence of that flexibility may cost the trust its exclusion, even if the trustee never distributes to a company or another trust.
Our submission recommended replacing this test with one based on actual benefit, so that minimum tax applies only to amounts actually appointed to a non-qualifying entity. We also noted that the statutory words could be read as applying to the particular beneficiary who derives the income, rather than the whole class, and asked Parliament to resolve the ambiguity.
When is a testamentary trust "established"?
The beneficiary restriction turns on the date the trust is established, not the date the will is made. The Bills do not define "established". The Explanatory Memorandum says that existing trust, succession, and property law concepts govern the time a testamentary trust is established and that, generally, this will be when property transfers to the trustee.
The practical consequences are significant. A will signed years ago may fall within the restriction if the will-maker dies, or the estate is administered, after 1 July 2028. Two wills in substantially the same terms may produce different results depending on when death occurs and how quickly the executor distributes the estate, matters the will-maker cannot control. Conversely, a trust established before 1 July 2028 is not subject to the restriction merely because it continues to operate afterwards.
Our submission recommended that trust provisions in a will signed before 1 July 2028 be treated in the same way as a trust established before that date, that the legislation specify a single statutory event at which a testamentary trust is established, and that a genuine amendment, court order, or settlement of an estate dispute not create a new trust.
The integrity rules
Even if the three conditions are met, the exclusion does not apply in two cases. First, income is not excluded if it was derived directly or indirectly under a scheme entered into or carried out for a purpose, or for purposes that include a purpose, of obtaining the exclusion. Secondly, income is not excluded if the Commissioner is satisfied that property became trust property as a result of a scheme with purposes that include both bringing the property into the trust and obtaining the exclusion. Both rules disregard a purpose that is merely incidental.
The threshold is low. The relevant purpose need not be the principal or dominant one. The Explanatory Memorandum, in discussing the parallel capital gains rule, states that the corresponding integrity rule does not apply to genuine estate or succession planning arrangements, even where they involve choices informed by tax consequences. That statement is helpful, but it is not in the legislation.
The Explanatory Memorandum also describes the Commissioner’s power in subsection 101AD(3) as directed to schemes entered into for the purpose of avoiding the minimum tax. The text is wider: it applies where the purposes merely include obtaining the exclusion. Similarly, the Explanatory Memorandum says a taxpayer can object to the Commissioner’s decision under that subsection, but the subsection itself contains no express objection right. Ordinary rights to object against an assessment remain.
Our submission recommended a single integrity rule that applies only where obtaining the exclusion is the principal or dominant purpose, together with objective safe harbours for ordinary estate planning and administration and an express objection right.
How beneficiaries are affected
Where the income is excluded
For a qualifying testamentary trust, the position of beneficiaries should be largely unchanged. Excluded income is not minimum tax income, so the trustee pays no minimum tax on it. Beneficiaries continue to be taxed under the existing trust rules in Division 6 of the ITAA 1936.
Minor beneficiaries continue to benefit from the existing treatment of excepted trust income under section 102AG of the ITAA 1936. That concession remains one of the main reasons to use a testamentary trust, and the minimum tax does not remove it.
Because the exclusion operates on the income, rather than on the identity of the recipient, a testamentary trust established before 1 July 2028 can continue to distribute qualifying income to a corporate beneficiary without that income becoming subject to the minimum tax.
Where the income is not excluded
The trustee will pay the minimum tax on any testamentary trust income that is minimum tax income. This may occur, for example, because the income derives from injected property, or because a trust established after 1 July 2028 has a non-qualifying beneficiary class.
An individual beneficiary who is presently entitled to a share of that income will be entitled to a non-refundable tax offset equal to 30 per cent of their share of the minimum tax income. A beneficiary on a lower marginal rate will lose the benefit of that lower rate because the offset is not refundable.
Corporate beneficiaries receive no offset. The Explanatory Memorandum explains that this prevents taxpayers negating the minimum tax by distributing through a company. The result, as our submission illustrates, is that $100 of minimum tax income distributed to a company that is not a base rate entity bears $30 of minimum tax at trustee level and a further $30 of company tax, an effective rate of 60 per cent before any dividend reaches a shareholder. Trustees of testamentary trusts that hold shares in a corporate beneficiary or distribute to a corporate beneficiary should model that outcome carefully.
Capital gains
Schedule 4 to the Tax Reform Bill also introduces changes to the taxation of capital gains, including a minimum tax on certain capital gains of individuals. Proposed section 119-20 of the Income Tax Assessment Act 1997 provides a comparable exception for a capital gain an individual makes as a beneficiary of a testamentary trust, to the extent the gain relates to income that is excepted trust income under paragraph 102AG(2)(a) of the ITAA 1936 in relation to that beneficiary.
The Explanatory Memorandum states that, in this context, the exception applies regardless of the age of the beneficiary. The text does not say so expressly. Section 102AG applies the concept of excepted trust income to beneficiaries who are prescribed persons (broadly, minors), so it is not clear that the provision achieves the outcome the Explanatory Memorandum describes for adult beneficiaries. Parliament should clarify the point. The exception is subject to its own integrity rules in section 119-25 and does not cover gains a beneficiary makes outside the trust, such as on selling an asset received from the trust.
Section 100A still matters
The minimum tax does not replace the existing integrity rules. Section 100A and Part IVA of the ITAA 1936 remain available to the Commissioner, and the Bills do not contain a comprehensive rule coordinating them with the minimum tax.
For testamentary trusts, section 100A risk arises mainly once beneficiaries reach adulthood. Section 100A does not apply to a minor's entitlement, because it operates only on beneficiaries who are not under a legal disability. However, distributions to adult beneficiaries may be reimbursement agreements if the funds are applied for the benefit of parents or other family members. If section 100A applies, the Commissioner assesses the trustee at 47 per cent and may raise the assessment at any time.
The ATO's guidance provides some assistance. In Example 6 of Taxation Ruling TR 2022/4 Income tax: section 100A reimbursement agreements, the ATO concludes that section 100A does not apply where a will requires a grandchild's income to be accumulated and reinvested until the grandchild turns 25. Example 10 of Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements – ATO compliance approach places a testamentary trust that pays an adult daughter an allowance and invests the balance for her future benefit in the green zone. In each example, the arrangement flows from the terms of the will itself. The ATO more readily accepts such arrangements as ordinary family dealing than understandings reached after death.
Our submission asked that the legislation or the Explanatory Memorandum state whether complying with the minimum tax has any bearing on section 100A. In the meantime, trustees should assume that paying 30 per cent at trustee level does not cure a section 100A problem.
What should will-makers do now?
The measures remain in Bill form. The Bills are before a Senate inquiry and have not yet passed Parliament. Any will changes made now may therefore need further changes once the Bills pass, or even after they pass if the Government introduces further amending legislation, as it has done for the new CGT measures. For many will-makers, there is no need to act before the final form of the law is known.
The timing of the beneficiary restriction also matters. It depends on when the testamentary trust is established. If a will-maker is terminally ill and likely to die well before 1 July 2028, so that the testamentary trust in the will is established before that date, the measures would not apply to that trust.
The greatest risk lies with will-makers who lose capacity before changing their will and then die on or after 1 July 2028, or within about 6 months before that date. In that case, the testamentary trust may be established after the measures commence. The trust would then be subject to the new rules, and its income would not be excluded from the minimum tax. A will-maker who has lost capacity cannot change their will, and the executor must administer the estate under the existing will.
Will-makers in that position, or at real risk of losing capacity, should consider executing a codicil now. A further codicil may be needed if the Bills change as they progress through Parliament. Even so, acting now is the best way to protect the families of those will-makers from the adverse consequences outlined in this article.
For those will-makers, we are recommending a codicil that:
Requires property passing from the estate to the testamentary trust, and the income and property derived from it, to be held as a separate sub-trust and recorded separately in the trust's accounts;
Limits the beneficiaries who can receive income of that sub-trust to individuals, exempt entities, and trustees of special disability trusts;
Allows the trustees, with the appointor's consent, to widen the class of beneficiaries in specified circumstances, such as if the minimum tax rules are repealed or changed; and
Provides that the new clauses do not apply if the trust is established before the minimum tax commences and cease to apply if the minimum tax rules are repealed.
Some advisers may consider relying on a power of variation in an existing will to narrow the beneficiary class after death. We do not recommend that approach. A variation made mainly to obtain the exclusion is likely to fall within the integrity rules, with the result that the trust income would be subject to the minimum tax. The will should contain the beneficiary restrictions from the outset, and the will-maker should review the will again once the final legislation passes.
What should executors and trustees do now?
Identify when each testamentary trust is, or will be, established. For an estate still in administration, the timing of transfers to the trustee may determine whether the beneficiary restriction applies.
Review the beneficiary class of any testamentary trust likely to be established on or after 1 July 2028 and obtain advice before relying on any power to vary it.
Keep clear records tracing each asset of the testamentary trust back to estate property and avoid adding property from outside the estate.
Review any corporate beneficiary structures and unpaid present entitlements held by or within testamentary trusts, given the double tax outcome for corporate beneficiaries of minimum tax income.
Continue to administer distributions to adult beneficiaries with section 100A in mind, documenting that each distribution is made for the beneficiary's own benefit.
Concluding comments
The Government has accepted that “genuine” testamentary trusts should sit outside the minimum tax, and the exclusion in the Bills reflects that in part. The difficulty lies in the detail. As drafted, the exclusion depends on who could benefit rather than who does, and on when the trust happens to be established rather than when the will was made. It is also subject to integrity rules with a low threshold.
Those features may bring ordinary estate plans within the minimum tax for reasons unconnected with the mischief the measure targets. Sladen Legal has asked the Committee to recommend amendments to address them. Until Parliament settles the final form of the law, the prudent course is to review wills that contain testamentary trusts now, while the will-maker can still act.
Sladen Legal continues to monitor the progress of the Bills.
If you would like to discuss how the proposed changes may affect your estate plan or a testamentary trust you administer, please contact:
