Author: Manuela Schilo
Associate, DFG Legal
In the world of succession law, the past few weeks have been anything but quiet. Against the backdrop of the 2026 Federal Budget, practitioners, advisers and families have been reminded that estate planning does not operate in isolation.
Initially, when the 2026 Federal Budget was released, the Government announced an intention to introduce a 30% minimum tax on discretionary trusts, with the proposed regime to commence from 1 July 2028. Unsurprisingly, this proposed changed ruffled a lot feathers.
The announcement indicated that the proposed minimum tax would apply broadly to discretionary trusts, including testamentary discretionary trusts in existence as of 12 May 2026.
For those who aren’t too familiar with the operation of a testamentary discretionary trust (TDT), they are a type of discretionary trust that is established in a person’s Will. They only come into effect after the death of the will-maker and the terms and conditions of the TDT are set out in the will of the will-maker.
A TDT will typically have an appointor, trustee, guardian and a range of potential discretionary beneficiaries (such as a spouse, children and grandchildren) who are entitled to receive income and/or capital of the trust at the trustee’s discretion. The appointor holds the power to hire and fire the trustee. The trustee is the legal owner of the assets held in the trust, and the guardian approves the exercise of the trustee’s discretion. It is important to note that the assets held in the trust do not form part of the beneficiary’s estate as there is a separation between the legal owner and the beneficiary owner of the trust assets.
Back to how tax impacts TDTs, under the current tax treatment, a TDT is not taxed merely because it is created under a will or because the will-maker dies. Rather, tax consequences arise in relation to income generated by the trust and distributed, or otherwise assessed, in accordance with the applicable trust taxation rules.
The proposed 30% minimum tax would have applied to a trust’s taxable income before distribution to beneficiaries.
This posed a problem for beneficiaries earning less than $45,000 from sources other than trust distributions, for example, salary or wages, who otherwise would not have had to pay tax. These beneficiaries would have lost the benefit of the tax-free threshold and the lower marginal tax rate of 14%. This class would include for example students, retirees, minors and disabled beneficiaries who do not qualify under a special disability trust.
Much to everyone’s relief however, and after plenty of pushback, on 18 June 2026, the Government announced that all testamentary discretionary trusts will be exempt from the proposed new 30% minimum tax on discretionary trusts ‘provided they are established for genuine testamentary purposes’.
The current position is therefore that testamentary discretionary trusts will continue to be relevant for estate planning, including where flexibility is required for beneficiaries such as minors, students, retirees, carers, and vulnerable or disabled beneficiaries.
