The 2026 budget announced on 12th May 2026 is expected to significantly impact taxpayers. So, what could this mean for your estate planning?
Discretionary trust minimum tax
A 30% minimum tax on discretionary trust income is being introduced from 1 July 2028.
Under the reforms, trustees will be taxed at 30% on the trust’s taxable income. Beneficiaries still need to list trust income in their tax returns, but they will receive non-refundable credits for the tax paid by the trustee. This is not applicable to corporate beneficiaries.
Details regarding excluded categories will depend on the drafting of the legislation. However, at this stage, the minimum tax is not applicable to fixed testamentary trusts, charitable trusts, special disability trusts, deceased estates and complying superannuation funds.
Primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies and income from assets held by discretionary testamentary trusts in existence at the date of the budget announcement on 12 May 2026 are also to be excluded at this stage.
Impacts of the discretionary trust minimum tax
As tax credits are non-refundable, there will be negative impacts for any beneficiary who has a marginal tax rates below 30%, as they will effectively overpay tax as the trustee’s 30% tax rate exceeds the beneficiary’s marginal tax rate. Due to the non-refundability, these beneficiaries cannot reclaim the difference.
Discretionary testamentary trusts established after the federal budget announcement are to be caught by the new minimum tax requirements.
This reduced tax efficiency is a factor to consider when dealing with your estate planning. If you were hoping to establish a trust upon your death for the possible tax streaming benefits, a discussion with your solicitor about alternative arrangements will be necessary, once there is more certainty.
We do not know how these new changes are to impact deceased estates where a will has been made directing the establishment of a testamentary trust and the testator has died but the trust not yet constituted, as the estate was still in the probate or administrative phase at the time of the budget announcement.
Details are not finalised, and the legislation is yet to be passed. As such, the full impact of these reforms cannot be assessed with certainty.
Capital Gains Tax (CGT)
From 1 July 2027, the 50% CGT discount will no longer apply to gains realised on disposals from this date. Instead, we will see a cost base indexation for assets held for more than 12 months. This will be paired with a minimum 30% tax on realised capital gains. The main residence exemption is not affected, however, pre-CGT assets acquired before 19 September 1985 are now caught but only in respect of capital gains arising after 1 July 2027 being taxable.
Impacts of CGT changes
Currently, assets held for more than 12 months are subject to the 50% capital gains tax discount so that only 50% of gains made on the property are subject to CGT and tax is paid on the gain at your marginal income tax rate.
The reforms mean that after 1 July 2027 the cost base of the asset is adjusted by CPI inflation and above-inflation gain is taxed at the 30% minimum tax rate.
When someone dies, CGT is not triggered and is generally only payable when an estate asset carrying inbuilt capital gains and transferred to a beneficiary is later disposed by the beneficiary. This CGT rollover has not been impacted by the budget.
Assets with inbuilt capital gains later disposed by the recipient beneficiary trigger a capital gains event which will be subject to the new minimum 30% CGT for gains made after 1 July 2027. For pre-CGT assets acquired before 19 September 1985, an exemption for gains accrued before 1 July 2027 will still apply. Post-CGT assets acquired after 19 September 1985 will continue to be taxed as they were up until 1 July 2027, at which point any capital gains after this date will be subject to the new cost base indexation model and 30% minimum CGT.
From an estate planning perspective, the implications of this could be significant. For those holding long-term assets, it will need to be considered how CGT will apply before and upon death.
Rollover relief for businesses operating within discretionary trusts
From 1 July 2027, a three-year rollover relief will be implemented allowing small businesses and others to restructure from discretionary trusts into fixed trusts and companies. Further details are to be released.
What do these changes mean for you?
We currently have limited detail about the operation of these tax reforms. As more information is released, the impact on your estate planning will emerge, allowing us to be better positioned to give advice about updates and changes to your estate planning.
We do know that we are about to start operating in a very different estate planning environment. Policy points to fewer tax advantages for discretionary trust structures, and this is something to be seriously considered as you begin your estate planning, although a significant number of clients use discretionary trusts for asset protection and this is not affected by the budget. The full extent of the changes we are to face will only become clear once the legislation is finalised.