Australia has no death duties. We say this often, sometimes with pride, sometimes as a point of distinction from the United States or United Kingdom. But the Australian tax system has been doing some of the same work for years, just under different names and across different provisions. The 2026 federal budget proposed an additional layer.
None of these measures is a single tax levied at death. Each is defensible in isolation. Together, they reduce what passes between generations.
The original paper cut: death benefits tax
Most Australians assume superannuation passes to their family free of tax. To spouses and young children, it largely does. For anyone else, including adult children who are financially independent, it does not.
When a superannuation member dies and their benefit passes to an adult child who is not financially dependent on them, death benefit tax applies. The taxable component of the superannuation balance is taxed at 15% plus the Medicare levy, so up to 17% in total. It is not called a death duty, but in practical terms it can operate like one.
Life insurance held inside superannuation is caught by the same rules, with one important difference. Because premiums are paid from pre-tax contributions, the taxable component can be taxed at 30% plus the Medicare levy when paid to a non-dependant. A policy taken out to protect the family can become a significant taxable event when it pays out.
The tax is withheld before the benefit is paid. Most families never see it itemised. It simply reduces what arrives. Many discover it for the first time when they are administering an estate.
This has been the law for years. It is not a budget measure. It is simply the original paper cut.
Testamentary trusts
Responsible estate planning for families with assets of even modest substance will usually include a testamentary trust. The primary reason is asset protection. The second is income splitting.
A testamentary trust holds inherited assets in a structure that may protect them from family law claims, creditors, and the consequences of financial immaturity. An inheritance received personally is exposed. A beneficiary going through a relationship breakdown, running a business, or not yet ready to manage significant wealth is in a far better position if the inheritance sits in a trust than if it sits in their hands.
Rather than income generated from investing inherited assets being taxed at the beneficiary's marginal rate, a testamentary trust allows the trustee to distribute that income each year across a range of beneficiaries according to their circumstances. A family with a mix of high- and low-income earners can direct income to those on lower rates. This makes most sense where a beneficiary cannot generate their own income: a minor, a child still in education, a beneficiary with a disability or vulnerability. These are not contrived low-income recipients. They are the people a deceased parent would have been providing for anyway.
A testamentary trust also does something a family trust established during a person's lifetime cannot. Income distributed to a minor beneficiary from a testamentary trust is taxed at ordinary adult marginal rates, with around $22,000 per child per year effectively available tax-free. The same distribution from a family trust attracts penalty tax rates of up to 47%.
The policy logic behind treating these two structures differently is sound. A trust created during a person's lifetime exists, in most cases, because of the tax advantage. If you are alive, you can assess your family's circumstances and provide for them directly. If you are dead, you cannot. You need a trustee to exercise that judgment in your place.
The discretion is not a tax play. It is a substitute for the judgment of a parent, grandparent, or spouse who is no longer alive.
That is why testamentary discretionary trusts have always been treated differently. The budget proposal does not draw that distinction. That is where the problem lies.
Who the 30% minimum actually affects
The measure is framed as targeting income splitting. In practice, it functions as a tax on low-income earners.
The beneficiaries adversely affected are not the wealthy. A beneficiary already on a marginal rate above 30% is largely unaffected. The change bites only where a beneficiary's tax rate is lower than 30%: a grandchild at university, a child who is not yet working, a beneficiary with a modest income, a spouse who works part-time. These are the people the current rules are designed to help. They are also the people the proposed rules will hurt most.
A high-income earner receiving a distribution from a testamentary trust pays more than 30% anyway. The minimum has no effect on them. The beneficiary who loses the most under this proposal is the one with the least income.
What we know and what we don't
There are carve-outs. Trusts already in existence where the will maker has died are expected to retain protected status under the current rules. The indications are that the existing concession for minor beneficiaries will not be preserved in full. The proposed exemption is expected to be limited to vulnerable minor beneficiaries. One might reasonably ask what a non-vulnerable minor looks like. Every child under eighteen is, by definition, a minor precisely because the law has determined they are not yet equipped to manage their own affairs. The ordinary minor beneficiary, a grandchild at university, a child who is not yet working, will be caught by the 30% minimum. The picture has changed considerably.
What we do know is that the changes are not yet law, the start date is 1 July 2028, and there is legislative distance still to travel. This is not the first time a measure of this kind has been proposed. A similar reform was announced under the Ralph Review around 20 years ago and was ultimately abandoned.
What is and is not caught
Not every trust structure is affected equally. A discretionary trust is one where the trustee decides each year who receives income and in what proportions. That flexibility is precisely what the 30% minimum targets.
The government has carved fixed trusts out of the proposed minimum. The implication is that a fixed trust offers a workable alternative. It does not.
A fixed entitlement is visible and quantifiable. In a family law dispute, a spouse's family lawyer can identify and pursue it. A creditor can reach it. The trustee cannot redirect income to wherever it is most needed in a given year, because the entitlements are predetermined.
A fixed trust asks you to predict, at the time you draft your will, what your beneficiaries will need and in what proportions. The discretion in a testamentary trust exists precisely because you cannot predict the future. A trustee can see what is in front of them. A fixed entitlement cannot. If a beneficiary develops a serious problem, with debt, with substances, with a relationship that is extracting money from them, a discretionary trustee can respond. They can hold back. They can redirect. They can protect the inheritance from the very circumstances the testator would have wanted to protect it from, had they known.
A fixed trust removes all of that. The entitlements pay out regardless. The flexibility that makes a testamentary trust worth having is precisely what a fixed structure removes. The government's carve-out is not a concession. It is an offer to trade the protections that matter most for a tax outcome that may be marginal.
So what should you do?
The proposed changes do not make testamentary trusts redundant. They make the tax analysis more complicated, and they reduce some of the benefit that has historically made these structures attractive. But they do not touch the reason most families use them.
An inheritance received personally is exposed. Exposed to a beneficiary's relationship breakdown, to their creditors, to the consequences of financial immaturity, to the complexity of what happens if they die before you do. A properly drafted testamentary trust addresses all of these things. It can protect an inheritance from a family law claim in a way a personally held asset cannot. It can hold assets out of reach of a creditor while the beneficiary is in a high-risk occupation or running a business. It can give a trustee the authority to manage an inheritance for a young beneficiary until they are genuinely ready, rather than placing a significant sum in the hands of an eighteen-year-old with no conditions attached. And if a child predeceases you, it can continue to provide for your grandchildren in a way a basic will cannot.
None of these protections depend on a tax concession. None of them change on 1 July 2028. They are the reason many families will establish testamentary trusts regardless of how the tax treatment evolves.
And those benefits do not flow to high income earners. They flow to beneficiaries on low incomes: the minor, the student, the vulnerable adult, the spouse who stepped back from work to raise a family. People the testator would have been supporting anyway. People who, without that support, may need to rely on the state instead.
That is precisely why the exemption for minor beneficiaries should apply to all minor beneficiaries, not only those who meet a vulnerability threshold. The beneficiaries caught by the proposed 30% minimum are not the high-income earners this measure is designed to target. They are the people on the lowest incomes. The case for a broader exemption is straightforward. The people who would benefit from it are the people this policy was never meant to hurt.
A testamentary trust that is not in your will cannot be established after you die. Include the option now and let your executor and beneficiaries assess the landscape at the time. The optionality is worth the investment.
Division 296
Division 296 imposes an additional 15% tax on superannuation earnings attributable to balances above $3 million, with a further 10% applying above $10 million.
Many people direct their superannuation to beneficiaries via a death benefit nomination. This means the superannuation passes directly to whoever is named in that nomination, outside the will and outside the estate entirely. The will deals with everything else. These two documents can point to different people. The superannuation goes to one set of beneficiaries. The estate goes to another.
Where Division 296 liabilities have accumulated during the member's lifetime, those liabilities can fall on the estate rather than on the superannuation. So the people who inherit the estate, and none of the super, can find themselves with a tax bill generated by a superannuation balance they never received. They are paying the price of someone else's inheritance.
This is not a theoretical risk. It is a function of how the law is currently drafted, and it catches families whose estate planning was done before Division 296 existed. If your superannuation nominations and your will have not been reviewed together, in light of this measure, they should be.
The CGT discount and what it means for your estate plan
From 1 July 2027, the 50% CGT discount that has been part of the Australian tax system since 1999 will be replaced by cost base indexation, with a 30% minimum tax on the net gain. This applies to individuals, trusts and partnerships. Gains accrued before 1 July 2027 retain the discount. Only gains arising after that date fall under the new regime.
This catches pre-CGT assets too. Families holding assets acquired before September 1985, some of which were never expected to attract CGT at all, need to factor this in.
The practical consequence is that some people may start selling now, while the 50% discount is still available. And that is where the estate planning risk enters.
The change in the CGT landscape may prompt some parents to bring forward inheritance. Selling an asset now, while the discount applies, and giving the proceeds to a child who needs help into the property market may be a perfectly sensible strategy. The child buys a home and starts accumulating wealth in it CGT-free. But if the will does not reflect that gift as an advance on that child's inheritance, the estate will be distributed as if it never happened.
A well-drafted will can include an equalisation provision that captures gifts made during your lifetime, and can be drafted to remain evergreen so it does not need updating every time you make one. Any change to your underlying asset base is a prompt to review your estate plan. Where that change involves gifts to children, equalisation is not optional.
What this means in practice
The pace of reform has accelerated. The non-dependant death benefits tax was the first paper cut. Division 296 is another. The proposed changes to testamentary trust distributions and the CGT discount are another still.
Waiting for certainty is not a strategy. The legislative detail will settle when it settles. In the meantime, superannuation nominations made before Division 296 existed may be pointing in the wrong direction. Gifts being made now to take advantage of the CGT discount may not be reflected in a will drafted years ago. A testamentary trust not included in your will today cannot be added after you die.
Each of these measures rewards those who act before the consequences arrive and catches those who wait. An estate plan reviewed now, with all of these moving parts on the table, is worth considerably more than one reviewed after the damage is done.
Taken together, these measures do the same work families associate with death duties: they reduce what passes between generations. They do it incrementally, through the tax system, in ways that are easy to miss until they are not. The time to have the conversation is now.
Rachael Rofe is an estate planning lawyer and philanthropic giving expert, and the founder of Rofe + Counsel. She helps families and their advisers structure wealth transfer across life, death and legacy.