2026 budget changes trigger triple taxation exposure for trust assets on death

At the centre of concern is the federal government’s 2018 budget measure targeting testamentary discretionary trusts (TDTs), widely used in estate planning to provide flexibility and tax efficiency for intergenerational wealth transfers.

While framed as a tightening of concessions, advisers argue the measure has had a deeper and largely underappreciated impact, particularly for surviving spouses and family groups relying on traditional estate planning strategies.

A quiet but powerful change

The 2018 budget announced that concessional tax rates for minors receiving income from TDTs would be restricted. Specifically, those rates would apply only where the income is derived from assets that originated from the deceased estate, or from proceeds or reinvestments of those assets.

At face value, the measure appeared targeted. However, when legislation was introduced, it took effect retrospectively from 1 July 2019, a move that has drawn ongoing criticism from practitioners for its lack of clear policy justification.

The practical consequence is that many long-standing strategies involving the injection of new assets into testamentary trusts, often a cornerstone of flexible family tax planning, have been neutralised.

Spousal planning under pressure

Perhaps the most significant impact has been on traditional “second-to-die” strategies.

Historically, it has been common for a surviving spouse to direct assets into a TDT under their will, allowing income to be streamed tax-effectively to children and grandchildren.

Under the revised rules, however, this approach can result in the loss of concessional tax treatment for minors where the assets were not originally derived from the first deceased estate. This effectively imposes an additional layer of tax, reshaping outcomes that had long been considered settled.

In some cases, the effect is akin to a “quasi death duty”; not through an explicit tax on the estate itself, but through the erosion of expected tax outcomes across generations.

Structural tensions with family trust rules

Compounding the issues given the 2026 budget changes however is the interaction with Australia’s separate family trust election (FTE) regime, an area already known for its complexity.

Where a trust seeks to access benefits such as franking credits, it will often need to make an FTE and nominate a “test individual”. Crucially, at least according to the Tax Office, that individual must be alive at the time of the election.

This creates a structural tension for TDTs, which by definition only come into existence upon death.

The misalignment in FTE settings or family group definitions can expose trusts to Family Trust Distribution Tax (FTDT), currently imposed at the top marginal rate.

The risk is not theoretical. High-profile disputes, including one involving a prominent South Australian family (founders of Thomas Foods International), have highlighted how technical FTE missteps can trigger FTDT liabilities exceeding $13 million.

Broad exposure across families

Although such cases attract attention due to their scale, advisers emphasise that the underlying issues are far more widespread.

Ultimately, any family using discretionary trusts, and particularly testamentary discretionary trusts, is potentially affected.

The challenge lies in the cumulative effect of multiple rules: the limitation on concessional treatment for minors, the constraints on asset flows between estates and trusts, and the strict boundaries imposed by family trust elections.

Risk of effective double or triple taxation

The combined effect of these measures may also produce outcomes resembling double or even triple taxation in certain scenarios.

For example, strategies that previously relied on distributing income to a corporate beneficiary, often referred to as a “bucket company”, can now interact unfavourably with the revised rules, reducing or eliminating the anticipated tax efficiency.

The result, advisers say, is a landscape in which previously orthodox planning techniques may no longer achieve their intended outcomes - and in some cases, may trigger unintended tax liabilities.

It may be that, if the proposed changes are implemented as announced, the last remaining planning opportunity with that promoted by author Douglas Adams, namely “spending a year dead for tax purposes”, will be lost.

Matthew Burgess is the director of View Legal.