Testamentary Trusts and the Proposed 30% Minimum Tax: What Treasury's Consultation Paper Means for Your Will

On 8 July 2026, the Commonwealth Treasury released a consultation paper on the implementation of the Government's proposed 30 per cent minimum tax on discretionary trust income. The measure is proposed to commence on 1 July 2028. It is not law. Consultation is open, and the final design will be shaped by responses to the paper and by the ordinary legislative process.

Testamentary trusts sit at the centre of the paper because the Government has confirmed its intention that they be exempt from the new tax — including future discretionary testamentary trusts established for genuine testamentary purposes. That confirmation is welcome, but it is not the end of the story. The paper canvasses conditions on the exemption and questions about what counts as a testamentary trust for these purposes. The detail matters.

This article outlines what has been announced, what the consultation paper actually asks, and the practical implications for people who already hold a testamentary trust Will, for those considering one, and for executors and trustees currently administering estates.

The Announced Policy

The Government has proposed that, from 1 July 2028, distributions of net income from discretionary trusts to Australian resident beneficiaries be subject to a minimum effective rate of tax of 30 per cent. In broad terms, where a distribution would otherwise be taxed in the beneficiary's hands at less than 30 per cent, additional tax would be imposed to bring the effective rate up to that floor.

The stated policy rationale is to limit the perceived tax benefit of income splitting through discretionary trusts to adult beneficiaries on lower marginal tax rates. It is a targeted change to the taxation of trust distributions, not a general rewrite of Division 6 of the Income Tax Assessment Act 1936.

The Consultation Paper

Treasury's paper does two things. First, it explains the architecture the Government proposes to adopt: which trusts are within scope, how the minimum rate is proposed to operate, and how it interacts with the existing rules on trust distributions. Second, it asks a series of specific questions about design choices where alternatives exist. Those questions are the practical substance of the consultation.

Several categories of trust are proposed to be outside the measure. The most important, for our clients, is the proposed exemption for testamentary trusts. That exemption is confirmed in principle. What remains open is the detailed conditions attached to it.

The Testamentary Trust Exemption

The paper confirms that all types of testamentary trusts — including discretionary testamentary trusts, protective trusts, superannuation proceeds trusts and life-interest arrangements — are proposed to be exempt from the 30 per cent minimum rate, provided the trust has been established for genuine testamentary purposes.

This is a meaningful confirmation. It preserves the central benefit of a testamentary trust: the ability, for Australian tax purposes, to distribute income to minor beneficiaries of a deceased estate at ordinary adult marginal rates rather than the punitive Division 6AA penalty rates. The excepted trust income rules in section 102AG of the Income Tax Assessment Act 1936 are a separate regime. The consultation paper does not propose to abolish them.

Proposed Conditions on the Exemption

The exemption is not proposed to be automatic. Treasury canvasses two principal conditions:

• Source of assets. The property of the trust must derive from the estate of the deceased will-maker. Assets that are added to the trust after establishment from sources unrelated to the estate may not attract the exemption on the income they produce. This is a well-established concept mirrored in the existing excepted trust income rules and is unlikely to cause difficulty for properly-drafted testamentary trusts.
• Beneficiary class and control. The paper raises the question of whether the exemption should be limited to trusts whose beneficiary class and control arrangements reflect ordinary testamentary intentions. Treasury is asking, in effect, whether a discretionary testamentary trust with an extremely wide beneficiary class should be treated identically to a more focused family arrangement. This is one of the more significant unresolved questions.

The final position on these conditions will affect how testamentary trusts should be drafted and administered in the years leading up to 1 July 2028.

When Is a Testamentary Trust "Established"?

This is the most under-appreciated point in the paper. It is tempting to read the proposal as a straightforward distinction between "old wills" and "new wills". It is not.

A testamentary trust is not established the day the Will is signed. It comes into existence on the will-maker's death — and, in practice, only once the executor has administered the estate and transferred the relevant assets to the trustee. A Will signed a decade ago will produce a testamentary trust that is established after the will-maker dies, which may be long after 1 July 2028.

Treasury has not yet settled on the point in time at which a testamentary trust is treated as established for the purposes of the exemption. The candidate tests include the date of the Will, the date of death, the date of the grant of probate, and the date the trust is first funded. Each choice produces different results for the millions of Australians who already hold testamentary trust Wills and who will die after 1 July 2028.

Until the establishment test is settled, a simple "grandfathering by will date" is not a safe assumption.

Implications for Existing Testamentary Trust Wills

For clients who already have a testamentary trust Will, the sensible course is measured review, not wholesale redrafting:

• Confirm the current Will still reflects the family circumstances, intended beneficiaries and choice of trustee, executor and appointor.
• Note that the primary policy benefit of a testamentary trust — income splitting to minors at ordinary marginal rates under section 102AG — is not proposed to change.
• Do not amend the Will simply to try to secure a particular result under conditions that are not yet finalised. Amendments made on the basis of an unenacted proposal risk being inconsistent with the final rules.
• Where an existing Will is due for review for ordinary reasons — marriage, separation, a new child, a change in assets or a change in trustee — take the opportunity to draft with the proposed reform in mind.

Impact on Executors of Pending Estates

Executors currently administering an estate are subject to the law as it stands. Nothing in the consultation paper alters an executor's duties under the Administration and Probate Act 1958 (Vic) or under the terms of the Will.

Where a testamentary trust is to be established, timing choices — such as when to transfer assets into the trust and when the trust is treated as established — should be discussed with the estate's legal and tax advisers. See our companion articles on executor duties in Victoria and the taxation of testamentary trusts.

Impact on Existing Testamentary Trustees

Trustees of existing testamentary trusts should not make immediate structural changes in response to the consultation paper. The proposed exemption is expected to extend to trusts already in existence. Ordinary annual trustee obligations — preparing accounts, making distribution resolutions before 30 June, and lodging the trust return — remain unchanged.

Trustees should, however, keep clean records of the trust's source of funds. If the final rules restrict the exemption to income produced by estate-sourced assets, clear evidence of what came from the deceased estate and what did not will matter.

Planning Considerations Between Now and 1 July 2028

A short list of practical considerations for the consultation period:

• Review timing. Estate planning reviews scheduled in the ordinary course should proceed. There is no benefit to rushing a review before the design is known.
• Drafting flexibility. New testamentary trust Wills should be drafted with sufficient flexibility to accommodate whichever version of the final rules is enacted, including power to vary administrative arrangements without disturbing the exemption.
• Superannuation. Superannuation proceeds do not automatically form part of the estate, but binding death benefit nominations can direct them to the legal personal representative and, in turn, to a testamentary trust. See superannuation and your Will.
• Blended families. The interaction between the exemption and life-interest arrangements used in blended-family estate planning should be watched closely as the paper is finalised.
• Advice. Where a family has significant discretionary trust structures alongside a testamentary trust, coordinated legal and tax advice will be required in the lead-up to 1 July 2028.

What This Article Is Not

This article is a general summary of a Treasury consultation paper released on 8 July 2026. It is not:

• legal advice on any specific Will, estate or trust;
• taxation advice within the meaning of the Tax Agent Services Act 2009;
• financial product advice within the meaning of the Corporations Act 2001; or
• a description of enacted law. The proposed measure is not law. The final design may differ from what is described here.

Anyone considering action in response to the proposal should obtain advice tailored to their circumstances before acting.

Frequently Asked Questions