The federal government has clarified its proposed treatment of testamentary trusts under plans to tax discretionary trusts by restricting the assets that can be included under the former and who can be a beneficiary of those vehicles.
The proposals are part of a consultation paper released by Treasury following budget announcements and stated the 30 per cent minimum tax would apply to discretionary trusts but not to fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.
The paper also fleshed out an announcement made on 18 June that income from testamentary trusts would be exempt if they are established for genuine testamentary purposes.
It stated these purposes would include “that income will need to come from assets of the deceased estate, with income from assets injected after budget night, 7.30pm on 12 May 2026, unrelated to the deceased estate subject to the minimum tax”.
A further purpose is “that the trust can only benefit individuals and income tax-exempt entities where the trust is established on or after 1 July 2028”, the paper noted.
In considering the taxation of discretionary trusts, the paper pointed out the current tax framework defines them by exclusion, that is, as any trust that is not a fixed trust, but this will be reviewed as part of the development of the minimum tax.
“The concept of a fixed trust, grounded on equitable principles and trust law jurisprudence, relies on beneficiaries having ‘vested and indefeasible’ interests. That is, guaranteed entitlements that cannot be taken away,” it said.
“Since the 2026/27 budget announcement, some stakeholders have provided feedback that relying on the existing definition of fixed trusts may result in the scope of discretionary trusts for minimum tax purposes being broader than intended.
“Feedback is sought on appropriate treatment of cases such as modern commercial trusts, where trustees typically retain powers to change entitlements, add beneficiaries or amend trust deeds, whether or not those powers are exercised.”
The government also stated it will provide rollover relief where businesses choose to restructure out of a discretionary trust to a company or fixed trust and that no capital gains and income tax consequences would apply, with this relief to be available for three years from 1 July 2027.
The paper is available on the Treasury consultation website and submissions close on 31 July.
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason