Has the Budget Quietly Introduced a Death Tax?

Australia has never had a death tax.

We've long prided ourselves on that, and many Australians have structured their estates carefully, knowing their wealth could pass to the next generation without the government taking a cut simply because they died.

But buried in Treasurer Jim Chalmers' 2026-27 Budget are changes that estate planning lawyers and financial advisers are now calling exactly that - a death tax in disguise.

It wasn't announced with fanfare.

There was no press conference explaining what it means for ordinary families who've spent decades building wealth through property and shares.

But the implications are significant, and if you have a will, a family trust, or any intention of passing wealth to your children or grandchildren, you need to understand what's changed.

First, let me explain what a testamentary trust actually is

When someone with assets prepares a will (testator), their lawyer will often recommend setting up what's called a Testamentary Discretionary Trust.

These trusts don't come into existence during your lifetime. They're written into your will and only activate when you die.

Estate planners have traditionally recommended them for four important reasons.

They protect inherited assets from a beneficiary's creditors if that person ever faces bankruptcy or financial difficulty.

They shield assets from family law claims - in other words, if your child goes through a messy divorce, the assets held in a testamentary trust are generally better protected than assets received as a direct inheritance.

And they've historically allowed for smart income distribution among beneficiaries, including children, who could access their own tax-free threshold against income earned within the trust.

This means that each of your children would have the ability to share the income from the investment of the Trust capital with the other beneficiaries of his or her Trust, thus minimising the income tax on that income.

This is where the fourth advantage lies. Normally a child under 18 is heavily taxed for unearned income over $416. Under a testamentary trust the tax rate is that of an adult not the punitive 66% plus Medicare levy on the first dollar after $416.

In particular, because the Trust arises under the Will of a deceased person, infant beneficiaries would be treated as separate taxpayers in relation to the income earned from that Trust.

That's been a meaningful and entirely legal benefit for decades - a way of ensuring that wealth passed down through a will is managed and taxed efficiently, protecting both the assets and the people receiving them.

What the Budget actually changes

From 1 July 2028, trustees of discretionary trusts will be subject to a 30% minimum tax on the trust's taxable income.

The government's stated rationale is fairness - ensuring that income earned through a discretionary trust is taxed at the same rate as income earned by a wage earner on a comparable amount.

On the surface, the Budget papers said testamentary trusts would be excluded. And to some extent, that's true - but the detail matters enormously here.

The minimum tax will not apply to certain trusts and categories of income, including fixed trusts and widely held trusts, complying superannuation funds, charitable trusts, special disability trusts, deceased estates, and testamentary trusts in existence on 12 May 2026.

Now read that last part carefully….testamentary trusts in existence on 12 May 2026 - Budget night - are carved out.

It is important to realise that “in existence” means the person (testator) has died and the testamentary trust has come into effect not you have a will with a testamentary trust but have not died yet.

But what about discretionary testamentary trusts created through wills written after that date? Or more to the point before the testator dies.

Wills should be reconsidered, given that discretionary testamentary trusts are not excluded from the changes where they were not in existence as at Budget night. Fixed trusts under the proposed changes would not have the minimum 30% tax applied but may lose other testamentary trust benefits.

So if you write or update a will after 7:30 pm 12 May 2026 and include a testamentary discretionary trust, the income generated within that trust will face the 30% minimum tax from 1 July 2028.

The government hasn't called it a death tax.

But when a trust only comes into existence at death, then that trust will now face a minimum 30% tax on its income simply because the will was not in existence before Budget night, it's hard to argue it's anything else.

Why the legal community is alarmed

Estate planning expert Rachel Rofe told The Australian:

 "We had no warning of this, and I had hoped there might be a carve-out for this area as there had been the last time it was mentioned in the Shorten election campaign of 2016 - but it's clearly not there. The government can say that technically we are not taxing assets in estates, but it is a tax to be introduced on income generated on those assets... This is a death duty by any other name."

I think she's right. When a mechanism exists specifically to pass wealth at the point of death, and that mechanism will now trigger a 30% minimum tax, the distinction between "taxing the assets" and "taxing the trust created at death" becomes pretty academic for the families on the receiving end.

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The broader concern in the legal and advice community is that this change came with no consultation, no warning, and no industry input before the Budget was handed down.

These things usually go through some form of exposure draft or pre-announcement process. This didn't.

There are other pointers to the introduction of an inheritance tax, including the loss of the pre CGT exemption, Division 296 taxing super balances at higher than ordinary rates, and taxing super on the death of a member when paid out to adult children. This is a slow and gradual chipping away.

What it means in practice

Under the existing rules, a person who passes away and leaves assets in a testamentary trust can have income distributed among their adult children and grandchildren, each accessing their own tax-free thresholds and lower marginal rates.

A family of four beneficiaries could receive up to $200,000 in trust income and pay significantly less tax overall than a single individual receiving the same amount.

The measure is expected to increase government receipts by $4.5 billion over the five years from 2025-26.

That tells you something about how widely used these structures are, and how significantly the changes will affect Australian families who've done nothing other than plan carefully.

For individual beneficiaries on lower tax rates - broadly those whose taxable income is less than $45,000 before the distribution - the non-refundability of the credit means a higher tax is paid overall.

This is because the tax paid by the trustee of 30% will exceed the income tax that would otherwise be paid by the beneficiary. There are no refunds of tax if the taxpayer is at a lower tax rate.

That's a particularly important point. The people most disadvantaged by this change aren't wealthy families with complex structures and armies of advisers.

In many cases, they're children or grandchildren with modest incomes who stood to benefit most from the current tax treatment of testamentary trusts.

What you should do right now

If you are already a beneficiary of a will containing a testamentary discretionary trust that was in existence before 12 May 2026, the income from assets held in that trust is currently carved out of the new rules as the testator or person writing the will has already occurred.

You're not immediately affected - though I'd still recommend reviewing your situation with your adviser as the legislation develops.

The transition period is limited and we do not know when we will have full clarity on how these rules will apply, or when draft legislation and guidance will be forthcoming.

This matters because the rules aren't legislated yet - they still have to pass Parliament - and there's potential for modification through Senate negotiations with the crossbench.

If you're in the process of writing or updating your will, the most important thing you can do right now is get proper estate planning advice before you finalise anything.

The decision about whether to include a testamentary discretionary trust, a fixed testamentary trust, or some other structure will have very different tax consequences depending on exactly what the final legislation looks like.

Expanded rollover relief will be available for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust. Note that the State Governments have not yet agreed to not charging stamp duty on a change.

That's worth noting for those with existing family trusts who are weighing their options.

My take on all of this

I've been advising clients for decades, and I've seen plenty of government attempts to quietly shift the tax burden without explicitly saying so.

This one is notable because it targets a structure specifically designed for wealth transfer at death.

The broader Budget was already significant - changes to CGT, negative gearing, and now this.

Taken together, the direction is clear: the government sees wealth accumulated through property, shares, and investment structures as a growing revenue opportunity.

That's a legitimate policy position for them to hold, but investors need to understand what it means for their long-term plans.

My philosophy has always been to build wealth strategically and protect it carefully - not just accumulating assets but structuring them so they can be passed on effectively.

These Budget changes make the structuring conversation more important than ever, not less.

The right response isn't panic.

It's to review your position carefully with the right advisers - ones who understand both the investment and the estate planning dimensions of your situation - and to make decisions with full information rather than reacting emotionally to the headlines.

If you'd like help thinking through how these changes might affect your situation and what your options are, I'd encourage you to reach out to the team at Metropole. Just click here to lock in a chat with one of our wealth strategists

We're well placed to help you navigate what's shaping up to be a genuinely complex period for wealth management in Australia.