Testamentary trusts and the minimum tax: did the Government change its position, or was it just a misstatement?
When the Government announced a minimum tax on discretionary trusts, practitioners across the country asked the same question: what about testamentary trusts? The answer they received depended on which Government document they read, and when they read it.
Over a four-month period from May to September 2026, the Government issued a series of public statements describing the treatment of testamentary trusts under the proposed minimum tax. Several of those statements described testamentary trusts as being "excluded" or "exempt" from the regime. They listed testamentary trusts alongside fixed trusts, superannuation funds, and special disability trusts: trust types that the exposure draft genuinely excludes at the structural level.
The exposure draft legislation released on 3 September 2026 tells a different story.
Testamentary trusts are not excluded from the definition of a minimum tax trust. They remain minimum tax trusts. The relief operates only at the income level, and only where specific statutory criteria are satisfied. The gap between what the Government said and what the legislation provides is not merely semantic. It has practical consequences for the drafting and administration of testamentary trusts.
This article traces the evolution of the Government’s public statements, explains what the exposure draft provides, and identifies the key issues that practitioners and their clients will need to manage.
The evolution of the Government's position
Budget night: 12 May 2026
On Budget night, the Treasurer, Dr Jim Chalmers, announced that the Government would introduce a minimum tax on discretionary trusts from 1 July 2028. The initial announcement did not exclude testamentary trusts from the proposed regime. For practitioners and their clients with testamentary trust structures, this was a significant concern.
18 June 2026: Tax reform implementation for small business and startups
On 18 June 2026, the Treasurer and the Prime Minister, the Hon Anthony Albanese MP, issued a joint media release titled Tax reform implementation for small business and startups. The release contained two statements relevant to testamentary trusts.
In a bullet point list of implementation details, the release stated:
“Confirming that income from all types of testamentary trusts will be exempt from the minimum tax, including future discretionary testamentary trusts, with implementation details included in further consultation.”
Joint media release, Treasurer Dr Jim Chalmers and Prime Minister the Hon Anthony Albanese MP, Tax reform implementation for small business and startups, 18 June 2026.This was the broader statement. It said that income from all types of testamentary trusts would be exempt, without qualifying the exemption by reference to the source of the trust’s assets. The reference to future discretionary testamentary trusts extended the statement to trusts not yet established.
Under the heading “Trusts reform and other elements,” the same release stated:
“In response to targeted consultation following the Budget, the Government will exempt income from all types of discretionary testamentary trusts from the minimum tax provided they are established for genuine testamentary purposes.
The exclusion will be limited to income from assets of the deceased estate. For discretionary testamentary trusts established on or after 1 July 2028, the exclusion will only apply to trusts that can only benefit individuals and income tax exempt entities.”
Joint media release, Treasurer Dr Jim Chalmers and Prime Minister the Hon Anthony Albanese MP, Tax reform implementation for small business and startups, 18 June 2026.This was the earliest Government statement that included the narrowing language. It limited the exclusion to income from assets of the deceased estate. It also stated that, for discretionary testamentary trusts established on or after 1 July 2028, the exclusion would apply only where the trust could benefit individuals and income tax exempt entities. The two passages created an internal tension within the same document: the bullet point summary said that all types of testamentary trusts would be exempt without qualification, while the later comment expressly limited the exclusion to estate-sourced income.
Small Business Explainer (18 June 2026)
Released on the same date as the Tax reform implementation media release, the Government’s Capital Gains Tax and Discretionary Trusts Reform Small Business Explainer contained the following under the heading "Exemptions":
“Income from all types of discretionary testamentary trusts will be exempt from the minimum tax provided they are established for genuine testamentary purposes. These include:
– that income will need to come from assets of the deceased estate, with income from assets added after Budget night, 7.30pm on 12 May 2026 unrelated to the deceased estate subject to the minimum tax; and
– that the trust can only benefit individuals and income tax exempt entities if it is established on or after 1 July 2028.”
Capital Gains Tax and Discretionary Trusts Reform Small Business Explainer, page 3.The opening sentence of this passage adopted the broad language of an income-level exemption. The bullet points that followed, however, attempted to narrow that exemption by reference to criteria that now appear in the exposure draft - the asset-source test and the beneficiary class limitation. This document was therefore closer to the actual legislative position than the Treasurer's media release, although its opening sentence still overstated the breadth of the relief.
8 July 2026: Consultation paper media release
On 8 July 2026, the Treasurer, Dr Jim Chalmers, released a media statement accompanying the consultation paper on implementation. The media release contained two statements relevant to testamentary trusts. The first listed testamentary trusts as an exempt trust type:
“Other types of trusts will be exempt, including fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, testamentary trusts, deceased estates and charitable trusts.”
Treasurer Dr Jim Chalmers, Consultation on discretionary trusts reform implementation, 8 July 2026.This statement lists testamentary trusts alongside fixed trusts, superannuation funds, and special disability trusts. Fixed trusts, special disability trusts, deceased estates, and complying superannuation entities are listed in subsection 101AB(1) and are therefore excluded at the structural level.
A separate paragraph in the same media release adopted narrower language:
“We will also exempt income from all types of discretionary testamentary trusts from the minimum tax provided they are established for genuine testamentary purposes.”
Treasurer Dr Jim Chalmers, Consultation on discretionary trusts reform implementation, 8 July 2026.
This second statement was ambiguous. It could be read as consistent with the first (referring to the income of trusts that are themselves exempt), or it could be read as a narrower position (exempting only the income, not the trust as a class). At the time, many practitioners read the two statements together and placed reliance on the broader formulation.
Exposure draft media release: 3 September 2026
On 3 September 2026, the Treasurer released the exposure draft legislation. The accompanying media release and the Treasury fact sheet published with the draft legislation contained broad statements about testamentary trusts. The media release contained the broadest and most unqualified statement of the principal Government statements discussed in this article:
“Deceased estates and all discretionary testamentary trusts established for genuine testamentary purposes will also be excluded.”
Treasurer Dr Jim Chalmers, Exposure draft legislation – Minimum tax on discretionary trusts, 3 September 2026.The Treasury fact sheet published with the draft legislation repeated the same message:
“Deceased estates and all discretionary testamentary trusts established for genuine testamentary purposes will also be excluded.”
Treasury fact sheet, Minimum tax on discretionary trusts: exposure draft legislation explainer, 3 September 2026.This statement drew no distinction between testamentary trusts and deceased estates. It described both as being "excluded.” It used the word "excluded" rather than "exempt,” echoing the language of a structural carve-out rather than a conditional income-level relief.
The explanatory memorandum to the Treasury Laws Amendment (Tax Reform No. 4) Bill 2026 (EM) was more precise than the media releases. Paragraph 1.10 referred to “income from testamentary trusts which are established for genuine testamentary purposes” as a kind of income excluded from the minimum tax, while paragraph 1.26 referred to “income of a testamentary trust that meets certain conditions.” The drafting materials therefore described an income-level exclusion, even though the public messaging often used trust-level language.
What these statements have in common
Across the four principal documents and statements that used exemption or exclusion language, the Government conveyed a consistent impression: that testamentary trusts, as a class, would sit outside the minimum tax regime. Whether described as "exempt" or "excluded,” the public messaging treated testamentary trusts as though they would receive the same structural treatment as fixed trusts, superannuation funds, and deceased estates.
The exposure draft legislation does not deliver that outcome. Testamentary trusts remain minimum tax trusts. The relief is conditional, operates only at the income level, and depends on satisfying criteria that many existing testamentary trust structures may not meet.
What the exposure draft provides
Testamentary trusts remain minimum tax trusts
Proposed section 101AB of the Income Tax Assessment Act 1936 (ITAA 1936) defines a "minimum tax trust" as a trust estate that is none of the following:
a fixed trust (within the meaning of section 272-65 in Schedule 2F);
a special disability trust;
the trust estate of a deceased person;
a complying superannuation entity (within the meaning of the Income Tax Assessment Act 1997 (ITAA 1997); or
a trust estate of a kind determined by the Minister under subsection 101AB(2).
Testamentary trusts do not appear in that list. They are not excluded from the definition of a minimum tax trust. They remain minimum tax trusts, subject to the minimum tax, unless a separate income-level exclusion applies.
The EM confirms this distinction. Paragraph 1.20 of the EM states:
“The estate of a deceased person is treated as a trust for income tax purposes and is not intended to be covered by the minimum tax. This exclusion covers assets of a deceased estate that are held while the deceased estate is under administration. It is distinct from a testamentary trust, which is discussed in the section below in relation to income that is excluded from the minimum tax.”
Explanatory memorandum to the Treasury Laws Amendment (Tax Reform No. 4) Bill 2026, paragraph 1.20.The EM expressly distinguishes deceased estates (which are excluded as a trust type under proposed section 101AB) from testamentary trusts (which are not excluded as a trust type but have certain of their income excluded under proposed section 101AD).
The income-level exclusion: proposed section 101AD
Section 101AC provides that the minimum tax income of a minimum tax trust is so much of its net income as is not excluded by section 101AD or 101AE. Proposed section 101AD therefore provides the mechanism by which certain income of a testamentary trust may be excluded from the minimum tax. It does not exclude the trust. It excludes specific income, and only where three cumulative conditions are satisfied.
Condition (a): the trust must be established as a result of a will, codicil, order or intestacy
The trust must satisfy the description in paragraph 102AG(2)(a) of the ITAA 1936. That is, the trust estate must be one that resulted from a will, a codicil, an order of a court that varied or modified the provisions of a will or codicil, an intestacy, or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the laws relating to the distribution of the estates of persons who die intestate.
This is the foundational requirement. The phrase “genuine testamentary purposes” appears in the note to subsection 101AD(1) and in the explanatory memorandum; it is not a separate operative statutory condition. The operative conditions are those in paragraphs 101AD(1)(a) to (c).
Condition (b): the income must satisfy the property nexus test or the grandfathering provision
The assessable income must satisfy one of two alternative limbs.
The first limb requires the income to be of a kind covered by subsection 102AG(2AA) of the ITAA 1936 that is derived to benefit a beneficiary of the trust estate from property. Subsection 102AG(2AA) was inserted by Schedule 1 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020 and applies to assets acquired by or transferred to the trustee on or after 1 July 2019. It was introduced as part of amendments to Division 6AA that limited the minors' tax concession for testamentary trust income. It imposes a property nexus test: the property must have been transferred to the trustee to benefit the beneficiary from the estate of the deceased person, or must, in the Commissioner’s opinion, represent accumulations of income or capital from property satisfying the earlier limb.
The second limb is a grandfathering provision. It applies where the income is derived from property transferred to the trustee before 7.30 pm by legal time in the Australian Capital Territory on 12 May 2026 (Budget night). This grandfathers income from property that was already held by the testamentary trust at Budget night, regardless of whether that property originated from the deceased estate.
Condition (c): for trusts established on or after 1 July 2028, the beneficiary must be an individual or exempt entity
For testamentary trusts established on or after 1 July 2028, proposed paragraph 101AD(1)(c) imposes a further condition. The beneficiary to whose benefit the income is derived must be an individual or an exempt entity (within the meaning of the ITAA 1997). Income derived for the benefit of a corporate beneficiary, another trust, or a partnership will not qualify for the exclusion.
These three conditions are cumulative. If any one of them is not satisfied in respect of a particular income stream, the relevant amount remains minimum tax income. Under section 12AB of the Income Tax Rates Act 1986, the minimum tax operates as a top-up: the rate is the shortfall between the rate otherwise payable and 30 per cent, so that the income bears tax at a rate of at least 30 per cent.
Issues for practitioners
The exposure draft raises a number of issues that practitioners and their clients will need to consider carefully. We set out the principal issues below.
The trust-level versus income-level distinction
The public statements led some practitioners and clients to expect that testamentary trusts would sit entirely outside the regime, like fixed trusts or complying superannuation funds. The legislation instead leaves testamentary trusts within the minimum tax trust definition and excludes only qualifying income under proposed section 101AD.
Accordingly, income from property unrelated to the deceased estate and acquired after Budget night will remain subject to the minimum tax. This distinction is important for client advice and for reviewing existing structures.
The property nexus test
The exclusion for income sourced from estate property depends on subsection 102AG(2AA) of the ITAA 1936. That subsection was inserted by Schedule 1 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020 and applies to assets acquired by or transferred to the trustee on or after 1 July 2019. Its application in the present context raises two distinct questions: first, whether the property nexus test captures replacement assets; and secondly, whether the phrase “to benefit the beneficiary” restricts the exclusion by reference to the beneficiary class as determined by the testator.
The replacement asset issue: what the EM assumes and what the legislation says
Paragraph 1.36 of the EM states that the exclusion covers “accumulation of income or capital from such property, including, for example, if an asset is sold and replaced with another asset as part of a normal arms-length transaction.” The legislation relies on the cross-reference to subsection 102AG(2AA) of the ITAA 1936 in subparagraph 101AD(1)(b)(i) to achieve that result.
Subsection 102AG(2AA), however, does not state this expressly. Subparagraph 102AG(2AA)(b)(i) requires the property to have been transferred to the trustee to benefit the beneficiary from the estate, while subparagraphs 102AG(2AA)(b)(ii) and (iii) cover property that, in the Commissioner’s opinion, represents accumulations of income or capital from property satisfying the earlier limb.
Subsection 102AA(4) provides that a reference in Division 6AA to income derived from particular property includes a reference to income derived from property that, in the opinion of the Commissioner, represents that property. The replacement-asset outcome therefore has support but depends on an opinion-based test and an indirect cross-reference rather than an express rule in section 101AD itself.
The practical question is whether the Commissioner will accept that a replacement asset represents the original property in the circumstances. In practice, executors and trustees regularly deal with estate property in ways that involve substitution: selling property to discharge estate liabilities or resolve a family provision claim; retaining or reinvesting sale proceeds while determining tax and other liabilities; replacing an original asset following a compulsory acquisition, takeover, or other unavoidable transaction; or applying estate property or its proceeds to meet a beneficiary’s education, care, housing, or maintenance needs under the trust terms.
In Sladen Legal’s submission on the exposure draft, we recommended that the legislation state expressly in proposed section 101AD itself that the exclusion extends to property acquired in substitution for, or from the proceeds of, original estate property, rather than relying on an indirect cross-reference to subsection 102AG(2AA).
The “to benefit the beneficiary” question
The EM, at paragraph 1.14, described the first requirement of the property nexus test as follows:
“The first requirement is that the property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person concerned, as a result of the will, codicil, intestacy or order of a court mentioned in paragraph 102AG(2)(a). This requirement ensures that the income from property that is unrelated to the deceased estate is not treated as excepted trust income for the purposes of Division 6AA. It also ensures that only beneficiaries included in the class of beneficiaries by the deceased, rather than an entity which was later added to the class of beneficiaries, can have excepted trust income under paragraph 102AG(2)(a).”
Explanatory memorandum to Treasury Laws Amendment (2019 Measures No. 3) Bill 2019, paragraph 1.14.Subsection 102AG(8) largely answers this question for Division 6AA. Where property is transferred to the trustee and the trustee has a discretion to pay or apply income derived from that property to or for the benefit of specified beneficiaries, or beneficiaries included in a specified class, the property is taken to have been transferred for the benefit of each specified beneficiary or each beneficiary in that class.
For Division 6AA purposes, this addresses the case where the testator directed property to a class. The residual issue is whether that deeming carries into proposed section 101AD, which borrows subsection 102AG(2AA) but operates in a different context and adds its own beneficiary test in paragraph 101AD(1)(c). A related question arises where the trustee amends the trust deed after the testator’s death. If a trustee narrows or changes the beneficiary class, for example by a deed of variation, does proposed section 101AD(2) deny the exclusion on the basis that the change was a “scheme” entered into for the purpose of causing the exclusion to apply? The breadth of the anti-avoidance provision creates uncertainty on this point.
The beneficiary class limitation for post-1 July 2028 trusts
For testamentary trusts established on or after 1 July 2028, proposed section 101AD(1)(c) requires the beneficiary to whose benefit the income is derived to be an individual or an exempt entity. The statutory text uses the singular: "the beneficiary referred to in paragraph (b).” On its face, this tests the specific beneficiary who actually receives the benefit of the income in a given year of income.
The EM, however, uses broader language. Paragraph 1.38 states:
“A further limitation on the exemption for net income of testamentary trusts will apply if the trust estate is established on or after 1 July 2028. From that date onwards, the net income of a discretionary testamentary trust will only be excluded from the minimum tax if the beneficiaries of the trust are individuals or exempt entities. This means that if the testamentary trust has beneficiaries that are corporate entities or other trusts, the net income of the trust will be subject to the minimum tax.”
Explanatory memorandum to the Treasury Laws Amendment (Tax Reform No. 4) Bill 2026, paragraph 1.38.The EM uses the plural "beneficiaries" and refers to "the beneficiaries of the trust" as a class, not the specific beneficiary who receives income in a given year. The explanatory memorandum suggests that if the trust has beneficiaries that are corporate entities or other trusts, the entire trust's net income is subject to the minimum tax. This is a broader test than the statutory text appears to impose.
If the ATO adopts the EM's broader reading, a testamentary trust with a standard wide beneficiary class may lose the exclusion entirely. This is significant because standard discretionary trust drafting in Australia typically includes companies and other trusts as default beneficiaries, even where the testator's practical intention was that income would only ever be distributed to individuals. Many existing testamentary trusts will contain precisely this type of wide beneficiary class.
In our submission, Sladen Legal recommended that the exclusion should not treat every corporate beneficiary as disqualifying, and that the legislation should permit corporate beneficiaries where their inclusion forms part of a bona fide asset protection or succession plan.
The anti-avoidance provisions
Proposed subsections 101AD(2) to (5) contain anti-avoidance and integrity rules that apply specifically to the testamentary trust income exclusion.
Subsection 101AD(2) provides that the exclusion does not apply if the net income was derived "directly or indirectly under or as a result of a scheme" that was entered into or carried out for the purpose, or for purposes that include the purpose, of causing the exclusion in subsection (1) to apply. Subsection 101AD(3) operates only if the Commissioner is satisfied, having regard to the circumstances in which property is transferred to the trustee and any other relevant matters, that the relevant property became property of the trustee as a result of a scheme entered into for the purpose, or for purposes that include the purpose, of causing the property to form part of the trust estate and causing subsection (1) to apply.
These provisions are potentially broad, although subsection 101AD(4) requires a purpose that is merely incidental to be disregarded. Subsection 101AD(5) gives "scheme" the same meaning as in the ITAA 1997, where the term is defined in subsection 995-1(1). That definition extends to any agreement, arrangement, understanding, promise, undertaking, plan, proposal, course of action or course of dealing. Any arrangement that structures a testamentary trust to satisfy the criteria in proposed section 101AD could potentially be characterised as a scheme with the relevant purpose.
This creates a tension. On the one hand, the Government has provided a specific exclusion for testamentary trust income that meets defined criteria. On the other hand, the anti-avoidance provisions may capture deliberate steps taken to satisfy those criteria, subject to the requirement that merely incidental purposes are disregarded. There is an existing parallel in the integrity design: subsections 102AG(4) and (5) already deny excepted trust income where an agreement was entered into for the purpose of securing that the income would be excepted trust income, while disregarding a purpose that is merely incidental. Practitioners advising testators on the drafting of wills that create testamentary trusts will therefore need to consider whether the very act of structuring the will to meet the section 101AD conditions could be treated as a scheme for the purposes of subsections (2) or (3).
A further example illustrates the breadth of the risk. A will may name a remote corporate gift-over that is intended to operate only if every individual beneficiary has died. If the trustee never distributes to that company, its presence in the drafting should not by itself defeat the exclusion. The relevant question, as Sladen Legal submitted, should be what the trustee has actually distributed or applied, rather than the outer limits of the class described in the will.
A specific concern arises where a trustee exercises a power of variation to narrow the class of beneficiaries to individuals and exempt entities, so that the trust retains the exclusion. That action is one the Government would ordinarily prefer taxpayers to adopt, because it brings the trust within the policy objective of the exclusion. Subsections 101AD(2) and (3), however, may treat such a variation as a “scheme” entered into for the purpose of causing subsection (1) to exclude the net income. The fact that the variation achieves the precise outcome the legislation is designed to encourage does not, on its face, protect the trustee from the integrity provisions.
In our submission on the exposure draft, Sladen Legal recommended that the legislation expressly provide that a variation limiting the class of beneficiaries to individuals and exempt entities does not, of itself, engage the integrity rules in subsections 101AD(2) to (5). We also recommended that the integrity provisions be confined to arrangements in which obtaining the exclusion was the dominant purpose, or one of the principal purposes, of the arrangement, rather than extending to ordinary estate planning.
Interaction with existing will structures
Many existing testamentary trust wills were drafted well before this reform was contemplated. They were designed to take advantage of the income tax benefits available under Division 6AA, including the concessional tax treatment of income distributed to minor beneficiaries.
Those wills typically contain beneficiary classes that include corporate entities and other trusts. This is standard in Australian discretionary trust drafting. The inclusion of corporate beneficiaries provides flexibility for the trustee in managing distributions and for tax planning across a family group.
For testamentary trusts established on or after 1 July 2028, these standard provisions may inadvertently cause the trust to fail the condition in proposed section 101AD(1)(c), if the ATO adopts the broader reading suggested by paragraph 1.38 of the EM. A testamentary trust that includes companies or other trusts in its beneficiary class may be unable to access the income exclusion, even if income is only ever distributed to individuals in practice.
Practitioners will need to review existing testamentary trust wills in light of the exposure draft. For testators who have not yet died and whose wills create testamentary trusts, the question of whether the beneficiary class should be narrowed to include only individuals and exempt entities will be a pressing one. That question, in turn, must be weighed against the flexibility that a wider beneficiary class provides for other purposes.
In our submission, Sladen Legal recommended that the transitional protection extend to the testamentary arrangements contained in wills signed before the release of the exposure draft legislation, even where the relevant trust is constituted only after 1 July 2028. A testamentary trust that holds inherited property for a person who cannot safely manage it, or that delays and tailors’ assistance as needs develop, serves a protective function that a fixed entitlement cannot replicate.
A related concern arises for wills executed before the release of the exposure draft legislation. A will-maker who later loses testamentary capacity cannot revise an estate plan to respond to a new tax rule. The same issue arises where death occurs soon after commencement: a plan settled years earlier may be tested against a regime that did not exist when the will was made. The transitional rule in the exposure draft (which grandfathers property transferred before Budget night) does not fully address this. It protects property already held by the trust, but it does not protect the testamentary arrangements contained in the will itself. A testamentary trust established after 1 July 2028 under a will executed in, say, 2024, will be subject to the beneficiary class limitation in proposed section 101AD(1)(c), even though the testator had no opportunity to respond to that requirement.
Looking ahead
The gap between the Government's public statements and the actual statutory drafting creates genuine uncertainty for practitioners and their clients. Testamentary trusts have long been a central feature of Australian estate planning. The introduction of the minimum tax on discretionary trusts will require a careful reassessment of how these structures are drafted and administered.
Sladen Legal has lodged a submission with Treasury on the exposure draft addressing the issues identified in this article. We will continue to monitor the Government's response to submissions and any amendments to the legislation as it progresses through Parliament.
In the interim, practitioners should consider the implications of the property nexus test and the beneficiary class limitation and remain alert to the breadth of the anti-avoidance provisions. The consultation closed on 18 September 2026, and Sladen Legal lodged its submission before that date.
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