The 2026 Federal Budget: Implications Of Proposed Tax Changes To Testamentary Discretionary Trusts

The 2026 Federal Budget has introduced significant changes to how discretionary trusts, including testamentary discretionary trusts (TDTs), will be taxed. If passed, these changes have far-reaching implications for estate planning strategies that many families use to protect and pass on wealth.

Key changes to testamentary discretionary trusts

Under the proposed reforms, all testamentary discretionary trusts established after Budget night will be subject to a minimum 30% tax on trust income from 1 July 2028. The tax will be paid by the trustee, with non-corporate beneficiaries receiving non-refundable tax credits for the tax paid by the trustee.

While this avoids double taxation, it ensures that at least 30% tax is paid on trust income overall.

One of the significant impacts of these proposed changes is that they are a departure from the existing rules which allow minor beneficiaries to pay tax on trust income from TDTs at adult marginal rates (including the adult tax-free threshold), rather than penalty rates.

Importantly, the new rules will apply to all TDTs established after Budget night, regardless of whether the deceased passed away before the announcement. This means that estates still under administration or subject to dispute, where the TDT has not yet been established, will be caught by the new tax regime.

This lack of a transitional period has raised questions of fairness, particularly where a person can no longer change their will due to incapacity or death.

The government has said that certain types of trust income will be excluded from the minimum tax. This includes:

• primary production income of farms
• income relating to vulnerable minors
• amounts subject to non-resident withholding tax, and
• income from assets of testamentary trusts existing at the time of the announcement.

However, some details are still uncertain, including exactly what counts as income relating to vulnerable minors and how some other trusts, such as child maintenance trusts, will be treated.

Implications for estate planning

The proposed changes significantly alter the landscape for estate planning, particularly for those who have relied on TDTs as a cornerstone of their strategy.

Historically, TDTs have been valued for both their tax efficiency and their ability to protect family wealth from risks such as relationship breakdowns, creditor claims and the erosion of intergenerational assets.

While the tax advantages of TDTs may be reduced, their primary purpose, protecting family wealth, remains unchanged. We recommend reviewing your estate plan with your advisor to make sure it still provides the desired level of protection and flexibility you want for your beneficiaries.

The absence of a transitional period for TDTs established after Budget night creates immediate challenges for individuals with unadministered estates or ongoing will disputes. Executors and beneficiaries in these situations may face unexpected tax liabilities, which may reduce the amount ultimately available to beneficiaries.

Key takeaways

The 2026 Federal Budget’s proposed changes to the taxation of discretionary trusts, including TDTs, represent a significant shift in Australia’s tax landscape.

While the government claims these reforms are intended to create a fairer and more sustainable tax system, they also introduce complexities and challenges for estate planning.

It is important to note the proposed changes announced on Budget night have not yet become law. They still need to be debated and passed by Parliament. Even so, because the proposed changes could have a significant effect on estate planning, now is a good time to review existing arrangements and seek advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.