Testamentary trusts have been carved out of Australia's proposed 30% minimum tax on discretionary trusts, removing an important source of uncertainty for estate planning.

The minimum tax was announced as part of the 2026–27 Budget and is proposed to apply from 1 July 2028. However, the measure is not yet law.

Draft legislation released on 3 September 2026 states that deceased estates and discretionary testamentary trusts established for genuine testamentary purposes will be excluded from the proposed minimum tax.

What Is a Testamentary Trust?

A testamentary trust is created through a will and generally begins operating after the death of the person who made the will.

Instead of assets passing directly to beneficiaries, some or all of the estate can be transferred into a trust and managed by a trustee.

Many testamentary trusts are discretionary, allowing the trustee to determine how income or capital is distributed among eligible beneficiaries.

These structures can be used for several estate-planning purposes, including managing assets for younger beneficiaries, protecting inherited wealth and providing flexibility where beneficiaries' circumstances change.

They can also receive particular tax treatment under existing rules.

For example, certain income distributed to minors from qualifying testamentary trusts can be taxed differently from ordinary unearned income received by children.

Why the Original Proposal Raised Questions

The proposed minimum tax is directed broadly at discretionary trusts.

Because many testamentary trusts operate on a discretionary basis, there was initially uncertainty over whether newly created testamentary trusts would fall within the regime.

The original Budget proposal contemplated a minimum 30% tax on the taxable income of affected discretionary trusts from 1 July 2028.

That raised questions for families using testamentary structures because discretionary decision-making is often one of their central features.

A fixed trust can specify beneficiaries and their entitlements in advance, while a discretionary testamentary trust allows the trustee to respond to circumstances as they develop.

The treatment of those structures therefore became an important implementation issue.

The Policy Position Changed

In June 2026, the proposed treatment of testamentary trusts was revised.

The updated position was that income from all types of discretionary testamentary trusts would be excluded from the minimum tax where the trust was established for genuine testamentary purposes.

The September exposure draft carries that position forward.

The draft states that deceased estates and all discretionary testamentary trusts established for genuine testamentary purposes will be excluded from the minimum tax framework.

This means the proposed regime now distinguishes genuine estate-planning structures from ordinary discretionary trusts used during a person's lifetime.

What the Draft Law Means in Practice

Consider a hypothetical will that leaves an investment portfolio to a discretionary testamentary trust for children and grandchildren.

The trustee is given discretion over how income and capital are allocated among those beneficiaries after the will-maker dies.

Provided the arrangement satisfies the final requirements for a genuine testamentary purpose, the proposed minimum tax would not apply to the relevant testamentary trust income.

That is materially different from the treatment proposed for many ordinary family discretionary trusts.

Under the current exposure draft, ordinary discretionary trusts within the regime could become subject to the minimum tax unless an exclusion, election or restructuring pathway applies.

Ordinary Discretionary Trusts Remain in Scope

The testamentary trust exclusion does not amount to a general exemption for discretionary trusts.

The broader proposal remains for affected trustees to face a minimum tax of 30% on relevant trust income from 1 July 2028.

The draft also provides alternative pathways for some existing discretionary trusts.

One option would allow an eligible trust to elect to make fixed distributions to pre-nominated beneficiaries.

The exposure draft also contains restructuring relief intended to help affected taxpayers move away from discretionary structures.

The proposed rollover relief would be available for three years from 1 July 2027.

These alternatives are separate from the testamentary trust exclusion.

Why "Genuine Testamentary Purposes" Matters

The key phrase in the exclusion is "genuine testamentary purposes."

That wording will be important because it determines which structures qualify for the carve-out.

A trust created by a will is not necessarily enough on its own to settle every question under the proposed regime.

The final law and associated integrity provisions will need to determine the circumstances in which income or assets are sufficiently connected with a genuine testamentary arrangement.

This is particularly relevant where assets enter a trust from sources other than the deceased estate or where arrangements are changed after the trust begins operating.

The exposure draft therefore provides the broad exclusion, but implementation details remain important.

The Exemption Does Not Create a General Estate Tax

The proposed discretionary trust reform is a minimum income-tax measure rather than a tax on inheritances themselves.

Australia does not currently impose a general federal inheritance or estate duty merely because assets pass from a deceased person to beneficiaries.

The proposed regime instead concerns how income of certain discretionary trusts is taxed after the relevant structure exists.

For testamentary trusts, the draft exclusion means qualifying income associated with genuine testamentary purposes would remain outside the proposed minimum tax.

Capital Gains Rules Are a Separate Issue

The minimum tax on discretionary trusts should also be distinguished from separate changes affecting capital gains.

Different commencement dates and transitional arrangements can apply to the broader tax reform package.

As a result, a testamentary trust that is excluded from one proposed measure may still need to consider how other tax rules apply to particular assets, distributions or capital gains.

The tax outcome therefore depends on the nature of the income, the trust structure and the final legislation governing each reform.

Why Estate Planning Flexibility Matters

One reason testamentary trusts are commonly structured as discretionary trusts is flexibility.

A trustee may need to respond to circumstances that could not have been predicted when the will was written.

Beneficiaries may be minors, have different financial needs or require assistance at different stages of life.

A discretionary structure can allow the trustee to change distributions over time without rewriting the deceased person's estate plan.

The proposed testamentary exclusion preserves that flexibility by avoiding a requirement to convert genuine testamentary arrangements into fixed trusts solely to remain outside the minimum tax.

The Proposal Is Still Not Law

The 30% minimum tax remains at the exposure-draft stage.

Treasury released the draft legislation on 3 September 2026, with consultation closing on 18 September.

That means the broad policy position is clearer, but the final legislation may still differ from the consultation draft.

The proposed commencement date remains 1 July 2028.

Until legislation passes Parliament and receives Royal Assent, existing trust taxation rules continue to apply.

What to Watch

The main issue to watch is the final drafting of the testamentary trust exclusion.

In particular, the treatment of income and assets connected with "genuine testamentary purposes" will determine how broad the exemption ultimately proves to be.

The final integrity provisions will also matter because they will establish the boundaries between ordinary estate planning and arrangements that do not qualify for the exclusion.

Families with existing wills containing testamentary trust provisions may therefore want to distinguish between the current law and the proposed regime rather than assuming the exposure draft is final.

The treatment of ordinary family trusts, restructuring relief and the fixed-distribution election will also remain relevant as the legislation progresses.