Testamentary Trusts under the proposed minimum tax: understanding the exclusion for existing assets
What is changing?
In the 2026–27 Federal Budget, the Government announced the introduction of a 30 per cent minimum tax on the taxable income of discretionary trusts, to commence from 1 July 2028. The tax will be paid by the trustee, with non-corporate beneficiaries receiving non-refundable tax credits for the tax paid, which can be used to offset their own income tax liabilities. The stated policy objective of the measure is to better align the tax rate on income earned through discretionary trusts with the tax rates paid by workers on wages and salaries.
While the measure applies broadly to discretionary trusts, a number of exclusions have been announced. Among them is an exclusion for income from assets of discretionary testamentary trusts existing at the announcement date (12 May 2026). For clients with existing testamentary trust arrangements, or who are considering estate plans that involve discretionary testamentary trusts, this exclusion requires close consideration.
The testamentary trust exclusion - existing assets only
The Budget materials provide that "income from assets of discretionary testamentary trusts existing at announcement" will be excluded from the minimum tax. This is an asset-level exclusion, not a trust-level exclusion. What is protected is income derived from assets held by the testamentary trust as at the announcement date, not the trust itself.
The practical consequence is that income from new assets acquired by the testamentary trust after the announcement date does not appear to qualify for the exclusion. For example, if a discretionary testamentary trust sells an investment property held at announcement and reinvests the proceeds in a different asset, it is unclear whether income from the replacement asset would continue to receive excluded treatment. A conservative reading of the announcements would suggest it would not.
New discretionary testamentary trusts created after the announcement date will be fully subject to the 30 per cent minimum tax, with no exclusion available.
Capital gains - an unresolved question
The exclusion refers to "income from assets" of existing discretionary testamentary trusts. Capital gains realised on the disposal of those same assets do not appear to fall within the scope of this exclusion as currently described. Capital gains form part of a trust's taxable income, and on the wording of the announcements, a capital gain realised on the sale of a grandfathered asset would appear to remain subject to the proposed 30 per cent minimum tax rate. This has significant implications for testamentary trusts holding appreciating assets such as real property or shares.
How this compares with other excluded structures
The asset-level, date-limited nature of the testamentary trust exclusion is unique among the announced exclusions. Other trust types, including fixed trusts, fixed testamentary trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts, are excluded entirely, regardless of when their assets were acquired. Similarly, other excluded income types (such as primary production income and income relating to vulnerable minors) carry no temporal restriction, they are excluded regardless of when the relevant activity commenced or the relevant assets were acquired.
The restriction of the testamentary trust exclusion to assets held at announcement therefore appears to be a deliberate policy choice, designed to grandfather existing arrangements while preventing new wealth from being sheltered through discretionary testamentary trusts in the future.
Could the exclusion be read more broadly?
It may be possible to interpret the use of the word “assets” in the Budget materials more broadly. For instance, one could argue that income derived from replacements of excluded assets (where the original asset is sold and the proceeds reinvested) should also receive excluded treatment, on the basis that the economic substance of the trust's holdings has not changed. This argument would draw on the concept of tracing through trust corpus.
However, the Budget materials do not support this reading expressly. It can also be compared with the 2018-19 Budget materials which resulted in the enactment of s 102AG(2AA), which proposed that the concessional tax rates available to minors would be “limited to income derived from assets that were transferred from the deceased estate or the proceeds of the disposal or investment of those assets” and, therefore, expressly contemplated the process of tracing the assets to the estate rather than limiting the concession to those assets already held by the testamentary trust.
In the absence of further legislative clarity in respect of the current Budget materials, clients who wish to preserve the excluded income treatment of their testamentary trust arrangements should consider adopting a conservative position. This may include retaining existing assets where possible and avoiding unnecessary turnover of the trust's investment portfolio pending further guidance.
The value of the exclusion - not just for minors
The testamentary trust exclusion is commonly associated with the tax benefits available to minor beneficiaries, who currently enjoy adult marginal tax rates on excepted trust income from a testamentary trust (rather than the penalty rates that would otherwise apply under Division 6AA). That benefit is well understood.
The exclusion will also be valuable for all adult beneficiaries of existing discretionary testamentary trusts. Under the proposed minimum tax, a beneficiary receiving a trust distribution will receive a non-refundable credit for the 30 per cent tax paid by the trustee. That credit can only be used to offset the beneficiary's own income tax liability, it is not refundable.
On current tax rates (2028–29), an individual would need assessable income of approximately $200,000 before their average effective tax rate reaches 30 per cent. For any beneficiary with income below that threshold, a portion of the non-refundable credit will be wasted, it will reduce their tax to nil but produce no further benefit. The excluded income treatment for existing testamentary trust assets avoids this problem entirely: income from excluded assets is not subject to the minimum tax, so no credits are generated and no wastage arises. The beneficiary receives the full economic benefit of their entitlement.
This makes the exclusion particularly valuable in the many testamentary trust arrangements where adult children, spouses or other family members receive distributions and have moderate incomes.
What should you do now?
If you have an existing discretionary testamentary trust, or if you are involved in estate planning that contemplates the establishment of such a trust, we recommend seeking advice promptly. Key considerations include:
Existing trusts: Review the assets held as at 12 May 2026 to understand which income streams may qualify for excluded treatment, and consider whether changes to the trust's investment strategy could inadvertently compromise the exclusion.
Timing of trust establishment and asset vesting: The exclusion applies to income from assets of discretionary testamentary trusts "existing at announcement."
A testamentary trust does not come into existence at the date of death. It comes into existence when deceased estate administration has been completed to the point where assets vest in the trustee of the testamentary trust, rather than remaining with the executor as estate assets.
For estates where administration was ongoing at the announcement date, questions may arise as to whether:
the testamentary trust was “existing” at that date; and
particular assets had been transferred to or commenced being held by the testamentary trust (as distinct from the deceased estate) before that date.
The distinction may determine whether income from those assets qualifies for excluded treatment. Each estate’s position will need to be assessed on its facts.
Estate planning in progress: If a will is being drafted or updated, you should consider building flexibility into their testamentary trust provisions.
The measure may be amended during consultation, or may never be introduced in its current form. If that occurs, you will generally want to retain the discretionary testamentary trust as their preferred structure.
However, if the measure proceeds as announced, you may wish to have the option of determining, at the time of the testator’s death, which of the following approaches best suits the beneficiaries:
retaining a discretionary testamentary trust structure, where the benefits (including asset protection and retained tax advantages for the main residence) justify accepting the minimum tax;
directing assets to beneficiaries personally or through a fixed testamentary trust;
directing assets into an existing structure; or
a combination of these approaches.
Drafting testamentary trust provisions with sufficient flexibility to accommodate these options will be an important consideration.
We are continuing to monitor the consultation process closely. Please contact us if you would like to discuss how these changes may affect your existing arrangements or your estate planning.
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Edward Skilton
Principal
T +61 3 9611 0145 | M +61 429 077 166
Eeskilton@sladen.com.au
Magdalena Njokos
Special Counsel
T +61 3 9611 0134 | M +61 432 356 899
Emnjokos@sladen.com.au
Will Monotti
Senior Associate
T +61 3 9611 0127 | M +61 437 669 463
E wmonotti@sladen.com.au
