The Government Backflip on Discretionary Testamentary Trusts

Last week the Prime Minister and Treasurer announced they would not go ahead with the proposed 30% tax on Discretionary Testamentary Trusts (TT).

The original proposal was going to leave TTs already in existence unchanged, but all new TTs going forward would have had the minimum 30% tax applied. TTs often form an central part of individuals estate planning, and are often used to protect vulnerable beneficiaries, rather than purely a tax play. So it is good to see the Federal Government has seen sense.

However, unsurprisingly, they have now introduced a new term 'genuine testamentary purposes'. In order for the minimum 30% tax to not apply, the ATO will need to be satisfied the TT is being only used for 'genuine testamentary purposes'.

So, the Government has backed away from its original unpopular measure, but has introduced a new term that still leaves room for interpretation. The next step will be watching how the ATO defines this in the real world.

Update – July 2026 :

Treasury has released an updated paper, Capital Gains Tax and Discretionary Trusts Reform. In it, Treasury confirms that income from all types of discretionary testamentary trusts will be exempt from the new 30% minimum tax, provided they are established for 'genuine testamentary purposes'.

In practice, this means:

• The exempt income must come from assets of the deceased estate (income from assets added after Budget night, 7.30 pm on 12 May 2026, that are unrelated to the estate will be subject to the minimum tax); and

• For discretionary testamentary trusts established on or after 1 July 2028, the trust must only benefit individuals and income tax exempt entities to qualify for the exemption.

  
  

  Source: Treasury, Capital Gains Tax and Discretionary Trusts Reform – Small Business Explainer