The 2026/27 budget brought some of the more substantial proposed capital gains tax and income tax changes that I’ve seen in my career. I think for the most part it’s too early to start providing advice and making recommendations.
We need more details around how the non-refundable tax credits will be applied for trust beneficiaries and how far some of the exclusions relating to primary production, vulnerable minors and existing testamentary trusts will extend. That being said, I needed to work the proposals through for my understanding and here are my thoughts so far.
Setting up a new discretionary trust or mid-restructure
Where I think it’s going to have the most relevance right now is for anyone on the cusp of establishing a new trust (or trust structure) and those mid-restructure. If this applies to you, then I think it’s a matter of determining whether it’s better for you to sit on your hands until 1 July 2027 or put a holding structure in place now.
The Federal Government have confirmed that rollover relief will be available from 1 July 2027 to 30 June 2030 to assist small businesses and others that wish to restructure out of a discretionary trust into other arrangements (e.g. company). In the past “rollover relief” has generally meant a tax concession when a structure changes that allows a capital gain, or other taxing point to be deferred, without immediate tax consequences.
Therefore, it may be worthwhile to go ahead with your plans to setup a discretionary trust now, taking advantage of the benefits of that structure for the 2026 and 2027 tax years, and plan on a 2027/2028 restructure using the proposed rollover relief.
Discretionary trusts, in this new world
When considering if a discretionary trust is the right structure to you it’s generally a balancing act between competing desires. In an ideal world there would be a structure that delivered a low tax rate, high asset protection, high succession planning flexibility, low financing barriers and low governance obligations. Until the recent tax reforms a discretionary trust ticked most of these boxes.
Following the tax reforms I’d argue a discretionary trust still ticks most people’s key structure requirements. Yes, from 1 July 2028 you’ll be paying a 5% premium to operate in the discretionary world of trusts rather than the 25% payable by base rate companies (companies with turnover <$50M & that meet the <80% passive income thresholds). But beyond the increased tax rate, a discretionary trust will continue to provide the following benefits:
- If you take that further and consider a family with 2 adults earning $230,000 of taxable income every year (individual 1 $80,000 plus individual 2 $150,000) you could estimate income tax payable:
- if they remain as individuals, paying $79,500 tax ($80,000 @ 30% + $150,000 @ 37%); vs
- if earnt by a discretionary trust, paying $69,000 ($115,000 each @ 30%), saving $10,500; vs
- if earnt by a company (base rate), paying $57,500 ($230,000 @ 25%), saving further $11,500.
So you can see a higher tax rate is not the only consideration when looking at whether to structure as a discretionary trust. It’s a conversation that should include your accountant, solicitor and financial advisers or partners and tax rate is just one element of that conversation.
Testamentary Trusts
When advising on gifting inheritances with the protection of a testamentary trust I’ve always considered the tax effect to be an added bonus, rather than the only reason to use this kind of estate planning tool.
Generally I recommend using testamentary trusts for all the benefits listed above including asset protection, flexibility, privacy and greater access to some capital gains tax discounts.
While following the budget changes we will need to consider whether establishing a trust unnecessarily penalises a beneficiary by paying more tax than alternative structures, I think it will often still be worth providing the beneficiaries with the choice to use a testamentary trust versus having no choice.
It’s not currently possible to setup a discretionary testamentary trust after death. You can set up a limited fixed trust, but even this is not straightforward or often effective. To offer your loved ones the best options at the time, I will often still be recommending gifting inheritances to testamentary trusts, despite the increased tax rate.
Income splitting to minors, testamentary trusts
Following the recent tax reforms we don’t know how allocating income from testamentary trusts to children will be treated. Under the current tax rules, testamentary trusts have special status, historically the government has recognised that someone has had to die in order for the testamentary trust to exist, which means that they have allowed tax free amounts of around $22,000 per child per year to be released from the testamentary trust.
Right now, we do not know if this will continue. The budget papers indicate that income to “vulnerable minor” beneficiaries from trusts will be exempt from the new rules, but we don’t have clarity on whether that means they will protect the existing arrangements, make new arrangements, or narrow the eligibility.
If they do respect the existing arrangements for income to minors, then this will make testamentary trusts an even more attractive tax structure compared to companies and discretionary trusts.
Our Locations
At Life Law Solutions, our family law team is here to guide you through parenting matters with care and clarity. If you’re considering applying to change a Parenting Order, we encourage you to speak with one of our experienced family lawyers.
You can find us at the following locations:
Wherever you are, we’re committed to helping you navigate the complexities of Family Law and make informed decisions in your child’s best interests.
- flexibility each year to choose which of the beneficiaries will and won’t benefit from the trust, and the trustee will still be able to ‘stream’ income amongst multiple beneficiaries for tax planning;
- incredible asset protection for family law disputes, vulnerable beneficiaries, protecting minor children from financial immaturity, and people in high risk occupations or business;
- governed by legislation and each trust’s deed, however no reporting obligations to authorities like the Australian Securities & Investments Commission (ASIC) meaning greater privacy;
- easily understood by banks and financial institutions, advisers and investment participants;
- liability of the trust limited to the assets of the trust, with limited liability for trustees and no liability for beneficiaries; and
- access to 50% capital gains tax discount until 1 July 2028 and cost-base indexation thereafter.
What does a 5% increase in tax look like practically? Well very simplistically on income of $100,000 that’s equal to $5,000. So basically there’s a $5,000 premium on every $100,000 earnt in a discretionary trust to provide the trustee with the option to split income between chosen beneficiaries, retaining flexibility and asset protection.
- If you take that further and consider a family with 2 adults earning $230,000 of taxable income every year (individual 1 $80,000 plus individual 2 $150,000) you could estimate income tax payable:
- if they remain as individuals, paying $79,500 tax ($80,000 @ 30% + $150,000 @ 37%); vs
- if earnt by a discretionary trust, paying $69,000 ($115,000 each @ 30%), saving $10,500; vs
- if earnt by a company (base rate), paying $57,500 ($230,000 @ 25%), saving further $11,500.
So you can see a higher tax rate is not the only consideration when looking at whether to structure as a discretionary trust. It’s a conversation that should include your accountant, solicitor and financial advisers or partners and tax rate is just one element of that conversation.
Testamentary Trusts
When advising on gifting inheritances with the protection of a testamentary trust I’ve always considered the tax effect to be an added bonus, rather than the only reason to use this kind of estate planning tool.
Generally I recommend using testamentary trusts for all the benefits listed above including asset protection, flexibility, privacy and greater access to some capital gains tax discounts.
While following the budget changes we will need to consider whether establishing a trust unnecessarily penalises a beneficiary by paying more tax than alternative structures, I think it will often still be worth providing the beneficiaries with the choice to use a testamentary trust versus having no choice.
It’s not currently possible to setup a discretionary testamentary trust after death. You can set up a limited fixed trust, but even this is not straightforward or often effective. To offer your loved ones the best options at the time, I will often still be recommending gifting inheritances to testamentary trusts, despite the increased tax rate.
Income splitting to minors, testamentary trusts
Following the recent tax reforms we don’t know how allocating income from testamentary trusts to children will be treated. Under the current tax rules, testamentary trusts have special status, historically the government has recognised that someone has had to die in order for the testamentary trust to exist, which means that they have allowed tax free amounts of around $22,000 per child per year to be released from the testamentary trust.
Right now, we do not know if this will continue. The budget papers indicate that income to “vulnerable minor” beneficiaries from trusts will be exempt from the new rules, but we don’t have clarity on whether that means they will protect the existing arrangements, make new arrangements, or narrow the eligibility.
If they do respect the existing arrangements for income to minors, then this will make testamentary trusts an even more attractive tax structure compared to companies and discretionary trusts.
Our Locations
At Life Law Solutions, our family law team is here to guide you through parenting matters with care and clarity. If you’re considering applying to change a Parenting Order, we encourage you to speak with one of our experienced family lawyers.
You can find us at the following locations:
Wherever you are, we’re committed to helping you navigate the complexities of Family Law and make informed decisions in your child’s best interests.
