The Crackdown on Discretionary Trusts
The 2026-27 Federal Budget has dropped. Buried beneath the headline economic figures are some of the most significant changes to trust and estate taxation in recent years. If your Will includes a Testamentary Trust, or your family holds long-term assets like property or shares, the rules around how that wealth is taxed on transfer are proposed to change substantially. As a result, you need to be aware. Below, we break down exactly what’s being proposed. Furthermore, learn why now is the time to review your estate plan. We note that legislation to enact these changes has not yet passed. This article outlines the likely changes as currently described in the Federal Budget.
For decades, Testamentary Discretionary Trusts (TDTs), trusts created within your Will that take effect when you pass away, have been the gold standard for estate planning. They’ve offered strong asset protection. Importantly, they have given families the ability to legally reduce the tax paid by surviving family members through income splitting among beneficiaries. That could be about to change. Starting 1 July 2028, the Government plans to introduce a 30% minimum tax on discretionary trusts.
What Does this Mean for Your Family?
The traditional strategy of legally streaming trust income to lower-taxed family members (such as minor children or non-working spouses) would be severely restricted. Specifically, those members would not receive the full tax benefit. If income is distributed to someone in a lower tax bracket, the trust would still pay a 30% tax upfront. While the beneficiary gets a credit for that tax, any excess credit is permanently lost. Therefore, there are no cash refunds from the ATO.
Case Study
Bill receives an inheritance from his mother’s Will via a TDT. Prior to the end of the Financial Year, the trust distributes income to Bill in the amount of $25,000. Under the old regime, the Trustee does not pay tax on this income; rather, the income is included in Bill’s income tax return. Additionally, this income is added to any other income that Bill had accumulated during the previous financial year through his employment or other investments. However, under the proposed new regime, the Trustee would pay a minimum 30% tax on this $25,000. It would still be included as income on Bill’s tax return. Moreover, Bill would receive a non-refundable tax credit equal to the 30% tax paid by the Trustee. If Bill’s marginal tax rate for that year is more than 30%, then his tax position is largely unaffected. He would be able to utilise the whole of the tax credit to offset his tax liability. He would then pay any top-up to his marginal tax rate, if required. However, if Bill’s marginal tax rate is less than 30%, he will not receive any refund for the difference.
Note: If a testamentary trust is already operating (meaning the person has already passed away prior to Budget night on 12 May 2026), it is “grandfathered” and exempt from these new rules. However, if you are currently alive and have a TDT drafted into your Will, your future estate will likely be caught by the new regime.
The End of Tax-Free Income for Minors
One of the greatest historical benefits of a Testamentary Trust was the ability to distribute income to minor children or grandchildren. This could be used to pay for school fees, for example, at standard adult tax rates. Consequently, this allowed families to utilise the adult tax-free threshold for kids (currently approximately $18,200 per year).
Under the new 30% tax floor, this benefit is practically neutralised for new trusts. Moving forward, distributions to minors from new discretionary trusts would effectively be taxed at a flat 30%. This wipes out the traditional tax-free advantage that helped so many young families get ahead.
Case Study
Serena receives an inheritance from her father’s Will via a TDT. The Beneficiaries of the trust include Serena, her children, her spouse and related parties. Prior to the end of the Financial Year, the trust distributes income to Serena’s daughter Kayla (who is 15 years of age and does not work or earn any other income) in the amount of $18,200. Under the old regime, the Trustee does not pay tax on this income; rather, the income is included in Kayla’s income tax return. Because the income Kayla receives is under the tax-free threshold, Kayla will pay no income tax on this distribution. However, under the new regime, the Trustee would pay a minimum 30% tax on this $18,200 ($5,460 tax payable). It would still be included as income in Kayla’s tax return. Moreover, Kayla would receive a non-refundable tax credit equal to the 30% tax paid by the Trustee (i.e. a credit of $5,460). Because Kayla’s marginal tax rate is effectively nil, the credit of $5,460 will not be refunded. Ultimately, this means that the net income retained by the family is $5,460 less than under the previous regime.
The “Bucket Company” Strategy May No Longer Work
Many families use a “bucket company” to cap their tax rate on trust distributions at the corporate tax rate. Under the new budget measures, if a trust distributes income to a corporate beneficiary, the company receives no credit whatsoever for the 30% tax paid by the trust. Thus, this results in severe double taxation and effectively ends this popular wealth-retention strategy.
A Massive Overhaul of Capital Gains Tax (CGT)
Effective 1 July 2027, the famous 50% CGT discount is proposed to be abolished. It would be replaced with an inflation-adjusted system and a minimum 30% tax on capital gains. Even more importantly for legacy planning: assets purchased before 1985, which have historically been completely exempt from CGT, would be brought into the tax net for any future capital growth that occurs after 2027.
If you are planning to pass down a family farm, commercial property, or business shares, the future tax bill your children will face when they eventually sell those assets could increase significantly if these measures are enacted.
At a Glance: Current vs Proposed
| Issue | Current position | Proposed position (if enacted) |
| Trust income to lower-taxed family members | Taxed in the beneficiary’s hands at their marginal rate | Trust pays a 30% minimum tax; any excess credit is non-refundable |
| Income to minors (excepted trust income) | Taxed at ordinary adult rates; tax-free threshold can apply | Effectively taxed at 30% for new trusts |
| Distributions to a bucket company | Capped at the corporate tax rate, with a credit available | No credit for the 30% trust tax (double tax) |
| 50% CGT discount | Available on assets held 12+ months | Proposed to be replaced (inflation-adjusted; 30% minimum tax) |
| Pre-1985 (pre-CGT) assets | Exempt from CGT | Future capital growth proposed to be taxed |
| Asset protection via a TDT | Strong protection for beneficiaries | Unchanged by these proposals |
What Should You Do Next?
The era of the discretionary trust (including a TDT) as a pure, hyper-efficient tax vehicle is changing, but that does not mean you are out of options, and it certainly does not mean that a TDT in your Will is no longer beneficial for your family. The asset protection benefits for your beneficiaries of including a TDT in your Will have been unaffected by these changes, and these are quite often the driving factor for considering a TDT in your Will.
We don’t have a crystal ball regarding the future legal or tax landscape. This is the reason why we often recommend flexibility in relation to these TDT structures in your Will rather than rigidity. We now often include the ability for your beneficiaries to “opt out” of the trust structure if (after obtaining legal and financial advice) it is deemed to be not worthwhile in their situation, resulting in your beneficiaries receiving their inheritance directly, as they would under a simple will. The benefit with this structure (as opposed to simply having a simple will) is that if they are in crisis or at the time of your death or likely to be in crisis in the future (family breakdown, bankruptcy, etc.), they have the ability to quarantine their inheritance in a correctly structured TDT to protect it.
The most crucial step you can take right now is to pull your Will out of the drawer. While none of these measures is law yet, the sensible step is to review your plan now so you are ready whichever way they land.
Speak to one of our Accredited Specialists about a comprehensive Will and Estate Plan Review; we will look at your current structures and help you prepare for these proposed changes so that your family’s wealth remains protected.
Speak to an Accredited Specialist. Request a confidential review of your Will and estate plan using the form below. Alternatively, call us on (02) 9523 5535 for a same-day callback. Our Wills and Estates team can see you in Cronulla, Menai or the Sydney CBD.
