The Albanese government has been accused of burying a stealthy new “death tax” in the budget, dealing grieving families a fresh blow to their inheritances through what one expert calls a “thousand paper cuts.”

This week’s federal budget was already controversial — not least because Anthony Albanese and Treasurer Jim Chalmers broke their promise during the 2025 election campaign of not touching negative gearing or the capital gains tax (CGT) discount.

On budget night, Mr Chalmers walked back that commitment, abolishing negative gearing on established homes and removing the CGT discount (replacing it with an inflation-linked model); not just for investment properties, but for all assets including shares, start-ups and farms.

The broken promise has led Mr Albanese and Mr Chalmers to be repeatedly grilled on the question of a death tax, with both men denying that they will introduce the measure in future.

Treasurer Jim Chalmers broke his promise of not touching negative gearing or the capital gains tax (CGT) discount. Picture: NewsWire/Martin Ollman
But wealth transfer lawyer Rachael Rofe says Tuesday’s budget has already put an effective death tax on Aussie families — the latest in a string of new fees on the transfer of wealth.

The most common form of estate planning trust, the Testamentary Discretionary Trust, will now be hit by a minimum 30 per cent tax rate.

Ms Rofe described the provision to news.com.au as yet “another clip on the ticket as wealth moves to the next generation”.

She said Testamentary Discretionary Trusts were in 90 per cent of the wills she drafted and the change would affect thousands of Aussies — not just wealthy individuals, but anyone looking to offer their loved ones asset protection and tax effectiveness after death.

“In Australia we do not have death duties like they do say in the United States or the UK, but we definitely have a series of other provisions that effectively amount to death duties,” the lawyer said.

“It’s just not one big death duty tax. It’s a series of other things like death benefits tax, on your superannuation that passes to non-dependants. I mean, that’s called death benefits tax — if that’s not a death duty I don’t know what it is.”

Ms Rofe described the provision to news.com.au as yet “another clip on the ticket as wealth moves to the next generation”. Picture: Supplied
She mentioned the Division 296 tax liability — the extra 15 per cent tax on super balances above $3 million introduced into law earlier this year — which can result in a final tax bill being paid from a deceased person’s estate after death.

“And then now we have this tax on income that’s been generated on an inheritance,” she continued.

“What I feel is, this is just death duties by a thousand paper cuts. Yes, you can say it’s not a death duty, but the impact and the effect of it is precisely the same.

“When I saw this in the budget, it confirmed my sense that we are moving in the direction of more taxes on the transfer of wealth, both in lifetime and on death.

“I don’t think this is going to be the end of measures like this, with the great intergenerational wealth transfer ahead of us, and more wealth moving than ever before.”

Why include a Discretionary Testamentary Trust in your will?

The two main reasons people include Testamentary Discretionary Trusts in their wills are tax efficiency (income splitting and use of lower tax rates) and asset protection (shielding inherited wealth from relationship breakdowns, bankruptcy, and creditors).

If you inherit assets directly in your own name, all future income and capital gains from those assets are taxed at your personal marginal tax rate.

So if you already earn a high salary, extra income from inherited shares or property could be taxed at the highest rate of 47 per cent.

But if the assets are held in a Testamentary Discretionary Trust, the trustee can distribute income across multiple beneficiaries, such as a lower-income spouse, a parent or grandparent on the pension, or even minors, allowing each person to use their own tax-free threshold and lower tax brackets.

Testamentary Discretionary Trusts can massively reduce a family’s overall tax bill. Picture: NewsWire/Nicholas Eagar
That can massively reduce the family’s overall tax bill, compared with one high-income individual receiving all the income personally.

Mr Chalmers has effectively scrapped that loophole in this week’s budget, however.

A minimum 30 per cent tax rate will now apply to Testamentary Discretionary Trusts commenced after July 1, 2028, meaning beneficiaries with lower marginal rates will pay a lot more tax.

Some details remain vague; Ms Rofe said the federal government had yet to clarify whether the provision would affect child beneficiaries.

In Australia, minors receiving distributions from a normal discretionary family trust set up during someone’s lifetime are taxed at punitive rates of 45-66 per cent to discourage income splitting.

But if the income comes from a Discretionary Testamentary Trust created under a will after death, minors are taxed as if they were adults, meaning they can access the standard tax-free threshold (currently $18,200) and then pay normal marginal tax rates above that.

The trusts are therefore a much more tax-efficient way of distributing income to children.

“We’re still not sure how these new provisions are going to interact with that,” Ms Rofe said. “Are they going to also introduce a minimum 30 per cent tax on distributions to minors? We don’t know.”

She said despite Tuesday’s budget, the protective function of Testamentary Discretionary Trusts would remain important for many families.

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“It helps protect a person’s inheritance if they go through a relationship breakdown or if they are going through a bankruptcy or if they want to protect it from creditors,” Ms Rofe said.

“So I think while tax savings is ultimately the goal for a lot of people, a significant majority are just as concerned about protecting their inheritance from their children’s spouses, and that protection still remains, notwithstanding these proposed changes announced in the budget.”