Last week's federal budget delivered the most significant structural changes to the taxation of private wealth since the introduction of the CGT regime itself. For practitioners and individuals engaged in wills, estates, and succession planning, three interconnected reforms demand immediate attention: a new 30% minimum tax on discretionary trust income, a fundamental overhaul of capital gains tax, and associated changes that ripple into testamentary trust structuring and estate planning more broadly.

The discretionary trust minimum tax

The centrepiece of the budget’s private wealth measures is a 30% minimum tax on the taxable income of discretionary trusts, effective from 1 July 2028. This tax will operate at the trustee level, with individual beneficiaries receiving non-refundable credits for the tax paid (corporate beneficiaries will not receive any credit for tax paid by the trust).

The practical effect is that the long-standing income-splitting advantage of discretionary trusts — distributing income to lower-marginal-rate family members — is substantially curtailed and the distribution to ‘bucket companies’ will no longer be viable. No grandfathering applies: existing discretionary trust structures will also be captured from 1 July 2028.

For those with established family trusts, this is a material change to the economic proposition of their existing structure. The non-refundability of credits is particularly punishing for beneficiaries whose marginal rate sits below 30% — those whose taxable income is less than $45,000 before the distribution will effectively pay more tax overall, since the trustee’s 30% payment will exceed what that beneficiary would otherwise have owed.

What is and isn’t caught

The Government has indicated a number of excluded categories, which are important for estate practitioners, however the final scope will depend on the drafting of the legislation. The minimum tax will not apply to fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates, and charitable trusts. Specific categories of income are also excluded, including primary production income, certain income relating to vulnerable minors, amounts subject to non-resident withholding tax, and testamentary discretionary trust income from assets that were held as at the date of the federal budget announcement — but the detail is not yet settled and should be treated with caution until legislation is released.

That last point is important, but presently uncertain. It is not yet clear whether, and to what extent, discretionary testamentary trusts will be excluded from, or subject to, the minimum tax regime, nor whether any transitional protection will attach by reference to wills executed or estate plans in place as at budget night. Practitioners should therefore avoid assuming a blanket carve‑out or grandfathering for testamentary trusts until the exposure draft legislation and explanatory materials are available. However, wills should be reconsidered, given that discretionary testamentary trusts established after budget night are intended to be caught by the rules. Wills should be reconsidered because the policy direction suggests reduced tax advantages for discretionary trust structures going forward, and because the treatment of testamentary discretionary trusts may change depending on the final design. This is a genuine inflection point: clients who have not yet executed wills containing discretionary testamentary trust provisions, or whose wills are due for review, face a meaningfully different planning landscape for trusts established from here forward. They may face a meaningfully different planning landscape, but the extent of that change cannot be confirmed until the legislation is settled.

The Capital Gains Tax (CGT) overhaul and its estate planning consequences

The budget also replaces the 50% CGT discount with a cost base indexation model, alongside a minimum 30% tax on realised capital gains from 1 July 2027, applying prospectively to gains accruing after that date. The main residence exemption is unaffected, and there is no expected change to the CGT discount for superannuation funds.

For estates and succession planning, the consequences are several. Asset-heavy estates — particularly those with long-held investment portfolios, commercial property, or business interests — will need to reassess the CGT implications of death and post-death dealings with estate assets. The interaction between the new minimum CGT rate and the existing rollover and market value substitution rules on death will require careful analysis as legislative detail emerges.

Pre-CGT assets will continue to be exempt in relation to gains accrued before 1 July 2027, with indexation and the 30% minimum tax applicable to gains accruing after that date. For those holding pre-CGT assets — a cohort often heavily represented in estates of older Australians — the budget removes what many had treated as a permanent exemption on future accretion. That assumption needs to be revisited in advice and in wills.

Superannuation, testamentary trusts, and the interplay

Superannuation is largely spared direct impact, but the indirect consequences for estate planning are real. It is not uncommon for superannuation benefits to pass to a testamentary trust, and as testamentary trusts may be impacted by the proposed discretionary trust reforms, estate planning arrangements involving superannuation balances may need to be reconsidered.

The traditional approach of directing superannuation death benefits to a testamentary discretionary trust for income-splitting and tax efficiency remains available for assets held by discretionary testamentary trusts before budget night — but newly established trusts will face the minimum tax. Directing superannuation death benefits to a testamentary trust remains a commonly used strategy, but the extent to which discretionary testamentary trusts will attract the minimum tax (and whether any transitional treatment will apply) is not yet clear. For those whose wills contemplate large superannuation balances flowing into discretionary testamentary structures, this requires immediate review.

The rollover relief window

For small businesses and others operating within discretionary trusts who wish to restructure into a fixed trust or company, rollover relief will be available from 1 July 2027, ensuring no income tax or CGT consequences from that transition. The window runs for three years. The transition period is limited and we do not yet know when full legislative detail and ATO guidance will be available. For succession planning clients whose business or investment structures are trust-based, this is not a decision to defer. The restructuring analysis — including which structure best serves both current tax efficiency and eventual estate administration — needs to begin now.

Practical implications

The budget does not eliminate trusts from the succession planning toolkit, but it does change their economics significantly. Deceased estates remain expressly excluded. Fixed testamentary trusts continue to offer an effective structure for estate planning.

The carve-out for the income of existing discretionary testamentary trust assets preserves some arrangements already in place. Some exclusions and transitional arrangements have been flagged in public materials, but the position for testamentary trusts (particularly discretionary testamentary trusts) is not yet sufficiently clear to state that existing arrangements are preserved as a class. But the advantages of new discretionary testamentary trusts will be materially reduced, and the income-splitting rationale for inter vivos discretionary trusts in family wealth structures needs to be stress-tested against the new 30% floor. The advantages of discretionary trust structures may be reduced, and the income‑splitting rationale for inter vivos discretionary trusts should be stress‑tested once the final rules are known.

For anyone with an existing will, a family trust, or a significant estate, this budget warrants a proactive conversation with both their lawyer and their accountant. The key design details are still subject to consultation, but the direction of travel is clear. The window to act — whether restructuring a trust, reviewing a will, or crystallising gains — is shorter than it may appear.

This article is general commentary only and does not constitute legal or tax advice. Specific advice should be sought in relation to individual circumstances.