Key Takeaways
- Labor proposes a 30 % minimum tax on all trusts (including testamentary and discretionary trusts) effective 1 July 2028.
- The tax will be levied on the trustee when income is distributed; it does not trigger tax simply upon death.
- Existing testamentary discretionary trusts created before the announcement (12 May 2026) are expected to be grandfathered and exempt from the new rate, though final legislation is pending.
- Under current rules, trusts can distribute income to minor beneficiaries at adult marginal rates, making the first $18,200 of income tax‑free; the flat 30 % rate would erase this advantage.
- Alternatives such as fixed trusts are exempt from the new tax but offer little flexibility, no asset protection, and limited succession‑planning benefits.
- Capital Gains Tax (CGT) will shift from a 50 % discount to an inflation‑adjusted model with a 30 % baseline; inheriting a main residence generally remains CGT‑free due to the main‑residence exemption.
- Negative‑gearing treatment for inherited properties is uncertain and will depend on whether the law treats the beneficiary as having “acquired” the asset at inheritance.
- Because the measures have not yet passed into law, stakeholders should monitor developments and seek tailored professional advice before restructuring estates.
Overview of the Proposed Trust Tax
The federal budget discussion has highlighted Labor’s plan to impose a 30 % minimum tax on all trusts, commencing 1 July 2028. This flat rate would apply to testamentary, discretionary, and other trust structures, with the trustee responsible for paying the tax on any distributed income. The proposal aims to curb the use of trusts for low‑tax income distribution, particularly in inheritance planning where beneficiaries often receive distributions at lower marginal tax rates.
Current Benefits of Testamentary Trusts
Testamentary discretionary trusts have been popular because they allow trustees to allocate income to minor beneficiaries at adult marginal tax rates. Under the existing system, the first $18,200 of income (including capital gains) distributed to a minor is tax‑free, providing a significant tax‑efficiency advantage for families seeking to preserve wealth across generations. Additionally, these trusts offer flexibility in dictating how and when assets are accessed, aligning with the settlor’s wishes.
Impact of the 30 % Minimum Tax
If the 30 % floor is enacted, the tax‑free threshold for minor beneficiaries would disappear, as all distributed income would be subject to at least a 30 % tax. Nicholas Parker of Coote Family Lawyers notes that this would markedly reduce the attractiveness of testamentary trusts for inheritance planning, removing a key incentive that presently encourages their use. The change would affect the trustee’s distribution decisions, potentially prompting a shift toward other structures or acceptance of higher tax liabilities.
Grandfathering Provision and Legal Uncertainty
Labor has indicated that testamentary discretionary trusts existing before the announcement on 12 May 2026 would be exempt from the new tax, a grandfathering clause intended to protect those who have already structured their estates. However, the final legislation has not yet been passed, leaving room for amendment. Emma Blay of Barry Nilsson cautions that relying on this provision carries risk; any changes to the law could affect the status of existing trusts, and premature restructuring might trigger adverse capital gains, stamp duty, or other tax consequences.
Alternatives: Fixed Trusts and Their Limitations
One suggested workaround is to move assets into a fixed trust, which Labor’s proposal exempts from the 30 % minimum tax. Fixed trusts, however, provide minimal flexibility: beneficiaries have set entitlements, the trust cannot adapt to changing circumstances, and they offer little asset protection against legal claims such as family court disputes or bankruptcy. Blay argues that while fixed trusts avoid the new tax, they sacrifice the succession‑planning advantages that make testamentary trusts valuable.
Recommendations for Estate Planners
Parker advises that testamentary trusts should still be considered in estate planning despite the higher potential tax, because they retain flexibility to respond to evolving family dynamics and financial needs. Blay recommends that trust holders await the final form of the legislation before making any structural changes, emphasizing the importance of obtaining personalized professional advice that reflects individual circumstances, rather than acting on speculative interpretations of the budget measures.
Capital Gains Tax Changes
Beyond trust taxation, Labor proposes to replace the current 50 % CGT discount with an inflation‑adjusted model, retaining a 30 % baseline tax. Hayder Shkara of Melbourne Family Lawyers explains that inheriting an asset does not itself trigger CGT; the tax arises only upon a later disposal. For example, a daughter who inherits her father’s investment property would face no immediate CGT bill, but any future sale for profit could attract CGT based on the inflation‑adjusted calculation.
Main Residence Exemption and Holding Period
The main‑residence exemption is expected to continue shielding the family home from CGT, provided the property qualifies as the owner’s principal place of residence. Shkara notes that the length of time an asset is held before sale will remain a key factor, as the prior 50 % discount will still apply until 1 July 2027, after which the inflation‑adjusted regime takes effect. Consequently, the timing of disposals will influence the effective CGT rate for inherited investment properties.
Negative Gearing Considerations for Inherited Property
The treatment of negatively geared properties passed through estates remains ambiguous. If the law regards the beneficiary as having “acquired” the property at the point of inheritance, the asset could fall under the new regime, potentially disallowing negative‑gearing deductions. Conversely, if the property is deemed to have been acquired by the deceased prior to the budget announcement, existing grandfathering arguments may allow the negative‑gearing benefits to persist until the property is sold. Shkara stresses that clarity will only emerge once the final legislation is enacted.
Conclusion and Advice
The proposed trust tax and CGT reforms represent a significant shift in how wealth can be transferred and invested in Australia. While the 30 % minimum tax on trusts threatens to erode some of the traditional tax‑efficiency benefits of testamentary structures, the grandfathering clause offers a temporary safeguard for existing arrangements. Investors and estate planners should stay informed about legislative developments, avoid premature restructuring, and seek tailored advice to navigate the evolving landscape while preserving their estate‑planning objectives.