What the Government’s proposed exemption means for testamentary trusts, estate planning and minor beneficiaries
The Federal Government’s proposed 30% minimum tax on discretionary trust income has created significant uncertainty and questions for families. Initially, the proposal appeared to capture certain testamentary discretionary trusts, raising concern that one of the key tax advantages of testamentary trusts—particularly for minor beneficiaries—could be reduced or lost. Recent announcements and consultation materials now indicate a change in position: genuine testamentary trusts are proposed to be exempt from the new minimum tax regime, although the final legislation has not yet been enacted and until then it is always possible that there will be a change..
Background: what was proposed?
As part of the 2026 Federal Budget announcements, the Government proposed a 30% minimum tax on income distributed by discretionary trusts from 1 July 2028. Under the proposal, trustees would pay tax at a minimum rate of 30%, with beneficiaries receiving a non-refundable credit for tax paid by the trustee.
For ordinary family discretionary trusts, this could significantly reduce the benefit of distributing income to beneficiaries on lower marginal tax rates. The initial concern was that testamentary discretionary trusts created under wills may also be brought within the regime, particularly where they come into existence after the commencement date.
What is the benefit of testamentary trusts
A testamentary trust is a trust established under a will that generally comes into effect after a person dies. These trusts are commonly used for asset protection, succession planning and flexibility in managing inheritances for children, grandchildren, vulnerable beneficiaries and blended families.
One of the key tax benefits is that income distributed to minors from qualifying testamentary trust assets may be treated as “excepted trust income”. This means the minor can be taxed at ordinary adult marginal tax rates, including access to the tax-free threshold, rather than the punitive minor tax rates that usually apply to unearned income.
The Government’s backflip
Following industry feedback and concern from estate-planning professionals, the Government has indicated that income from testamentary trusts will be exempt from the proposed 30% minimum tax regime, provided the trust is established for genuine testamentary purposes and the income is sufficiently connected to assets of the deceased estate.
This is a welcome development. It recognises that testamentary trusts are not merely income-splitting vehicles. They often serve important non-tax purposes, including protecting inherited assets from relationship breakdown (in some circumstances), bankruptcy risk, poor financial decision-making and claims against vulnerable beneficiaries.
Important limitations and unresolved issues
It’s important to remember that the proposed exemption is not yet law, and the details remain important. In particular, the legislature is still in the process of considering the following:
- whether a trust has been established for genuine testamentary purposes;
- whether income is derived from assets of the deceased estate or from later contributions;
- how the rules apply to wills signed before the commencement date but where death occurs after that date;
- whether borrowed funds, injected assets or related-party arrangements affect eligibility; and
- how the rules interact with the existing excepted trust income provisions for minors.
Key takeaways
- The proposed 30% minimum tax is intended to apply to discretionary trust income from 1 July 2028.
- The Government has indicated that genuine testamentary trusts will be exempt, although the final rules are still subject to consultation and legislation.
- Testamentary trusts continue to offer important asset protection and succession planning benefits.
- Clients should review, not panic – existing wills should be checked once the final detail is available.
- At Lynn & Brown Lawyers we are on top of these changes and if you have concerns, we can advise you once the legislation has been finalised.
If you would like to book a time to speak with one of lawyers for confidential advice, contact us by calling 08 9375 3411.
About the Author: This article was authored by Candice Jonker, Candice graduated from Murdoch University with a Bachelor of Laws and a Bachelor of Business and was admitted to practice in 2019. During her time as a solicitor, Candice has gained experience through various areas of law, including commercial transactions, employment law, business succession, wills and estate planning and estate administration. Candice’s focus over the last several years has been on Estate and Business Succession Planning and Estate Administration, including all aspects of succession including trusts, family arrangements and business and commercial structures. Candice graduated from her Masters in Law in 2023, specialising in Wills & Estates Planning and Estate Administration and became an Accredited Specialist in Wills and Estates in 2025. Candice is also a full member of STEP and the Vice-President for the Collaborative Professionals WA.
