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Individuals with existing testamentary trust wills will need to act decisively to ensure that their distributions are not subject to the minimum 30% tax on discretionary trusts announced by the Commonwealth.
The draft legislation provides that ‘genuine’ testamentary trusts are excluded from the minimum tax. However, there is a catch. The exemption is only available where beneficiaries under the trusts are individuals, special exempt entities (such as registered charities) or special disability trusts. Most testamentary trust wills currently drafted would not meet these criteria.
It is common for most testamentary trusts to permit distributions to related entities such as companies and family trusts. As a result, it is likely that the majority of testamentary trusts contained in current wills will have the unintended consequence of attracting the 30% minimum tax.
The new legislation is set to come into effect on 1 July 2028. However, if a person with a will drafted before 1 July 2028 dies after that date, the new changes will apply.
To escape the tax, we recommend that clients re-visit their wills now. Alternatively, a ‘wait and see’ approach can be adopted but this comes with risk. If a person dies or loses capacity before changing their will, the testamentary trust cannot be changed.
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