Is Australia Introducing a "Death Tax"?

Is the Budget the death of Testamentary Trusts?

Australia’s 2026 Federal Budget has ignited a fierce national debate over a number of matters. One of the key aspects includes what is being called by some as a “death tax”, which is centred on major changes to the taxation of discretionary trusts, especially those used in Wills and estate planning.

From 1 July 2028, the government plans to introduce a minimum 30% tax rate on income distributed from discretionary trusts, including discretionary Testamentary Trusts created through a Will. These trusts have long been used to manage inheritances, protect vulnerable beneficiaries, and distribute income tax‑effectively.

What is a Testamentary Trust?

A Testamentary Trust is a trust created through a person's Will that comes into effect after they pass away.

These trusts are commonly used to:

✔ Protect inherited assets from bankruptcy or creditors

✔ Provide safeguards in the event of relationship breakdowns

✔ Assist vulnerable beneficiaries

✔ Allow families greater flexibility in managing inherited wealth

For many Australians, Testamentary Trusts are less about tax savings and more about protecting family assets for future generations.

The Changes

Fixed Testamentary Trusts and existing discretionary Testamentary Trusts are exempt, but newly created discretionary Testamentary Trusts will fall under the new rule.

Income generated from inherited assets in discretionary Testamentary Trusts will be taxed at 30%, regardless of the beneficiary’s personal tax rate.

Many families use these trusts for asset protection, not tax avoidance. Critics warn the change will hit people trying to safeguard inheritances from divorce, bankruptcy, or financial vulnerability.

The change only affects income distributed from discretionary trusts, not the inheritance itself.

Labor argues the reform is about fairness, ensuring trust‑derived income is taxed more like wages and preventing high‑income individuals from using trusts to minimise tax.

The proposal has triggered widespread concern among families and advisers, who warn that

• Many wills rely on discretionary Testamentary Trusts for asset protection and flexibility.
• The new rules could significantly increase the tax burden on inherited wealth.
• Thousands of Australians may need to review their wills and estate plans before 2028.

The 2026 Budget does not introduce a formal inheritance tax, but it does impose a new 30% minimum tax on income from discretionary

Testamentary Trusts, prompting claims of a “death tax.” Whether viewed as a fairness measure or a hidden inheritance levy, the change represents one of the most significant shifts in Australia’s estate‑planning landscape in decades.

It is important that you review your Will and Estate Planning documents, particularly if you have a Testamentary Trust in your existing Will, or were considering including that structure in your Will in the future.