Testamentary trusts spared from proposed 30 per cent minimum tax rate
Following our earlier article on the 2026-2027 Federal Budget announcements, the government recently announced that it will be making adjustments to the proposed 30 per cent minimum tax rate for non-fixed testamentary trusts.
Subject to the specific legislation being introduced and passed by Parliament, the announcement confirms that the existing concessional tax treatment for these types of trusts will remain intact.
Key takeaways
- the taxation planning benefits of testamentary trusts remain viable;
- careful consideration is required to ensure the testamentary trusts are structured correctly when being drafted, and then funded correctly after death to ensure compliance with the legislation; and
- documentation, asset tracing and complying with the intention of the testamentary trust will become increasingly important.
What's changed?
The exemption will only apply to discretionary testamentary trusts established for ‘genuine testamentary purposes’.
Arrangements that seek to contribute non-estate assets into an existing testamentary trust, or that attempt to replicate testamentary trust benefits outside of a deceased estate context, are unlikely to receive concessional treatment.
It remains unclear whether the legislation will be drafted so that the exclusion applies:
- only to income generated from assets owned by the deceased prior to their death; or
- to income generated from assets owned by the deceased prior to their death and to income generated from assets acquired in the testamentary trust from the proceeds of sale of any existing assets.
The concession is also being narrowed to ‘genuine’ family or charitable arrangements. This means beneficiary class of the trusts may need to be limited to individuals and income tax exempt entities, rather than beneficiary classes which introduce companies or other entities for tax planning purposes.
The government’s media release suggests testamentary trusts with broader beneficiary classes that include companies and trusts may still be subject to the proposed 30 per cent minimum tax.
The announcement comes as welcome news for families who have incorporated testamentary trusts into their succession planning, particularly for asset protection purposes.
Why testamentary trusts still matter
Testamentary trusts established under the terms of Wills have long been valued for their ability to distribute income to beneficiaries, including minors, while accessing adult marginal tax rates rather than punitive minor tax rates.
This feature, in addition to asset protection and intergenerational planning, has made testamentary trusts a key estate planning tool in Australia.
Our specialist Private Clients team can provide advice on how these changes might impact your structures and planning.
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