Budget 2026: 30% Tax on Super Death Benefits and New Trust Curbs

Advisers and wealth managers face a dual challenge: the Budget’s proposed clampdown on testamentary trust income splitting, combined with existing 15–30% taxes on superannuation death benefits for non-dependents, will significantly erode inheritances for ordinary families. This demands a strategic rethink of retirement and estate plans.

The Australian Government’s 2026 Budget proposes a suite of measures that, while not labeled as a traditional death tax, collectively impose a heavier levy on inheritances and bequests. At the center of the debate are changes to the taxation of testamentary trusts—a longstanding estate planning tool used by ordinary families to protect assets and minimize tax. Currently, a testamentary trust created under a will allows a trustee to distribute income earned on inherited assets to beneficiaries in lower tax brackets, such as children or non-working spouses. This income splitting often results in substantially lower overall tax liabilities. The Budget reportedly aims to curb this practice, likely by taxing trust income at higher marginal rates or restricting access to concessional treatment, effectively raising the tax take on deceased estates.

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Under current rules, a superannuation death benefit paid to a ‘non-dependent’ (e.g., an independent adult child) faces a tax of up to 15% on the taxable component, rising to 30% on any life insurance proceeds held within the fund.

Australia has never had headline death duties, having abolished federal estate taxes in 1979. However, the system has long found ways to tax transfers at death, most notably through superannuation. Under current rules, a superannuation death benefit paid to a ‘non-dependent’ (e.g., an independent adult child) faces a tax of up to 15% on the taxable component, rising to 30% on any life insurance proceeds held within the fund. These taxes are deducted before payment, so grieving families often face an unexpected reduction in what they receive. The Budget’s proposed changes to testamentary trusts add another layer, tightening a key avenue for legitimate tax management.

The immediate impact falls on middle Australia. Testamentary trusts are not the preserve of the wealthy; they are commonly recommended by financial planners and solicitors as a safeguard against a beneficiary’s divorce, bankruptcy, poor financial decisions, or simply immaturity. By removing or limiting the income-splitting benefit, the changes erode a practical, non-controversial feature that has underpinned estate planning for decades. For families with small businesses, farms, or investment properties, the additional tax cost could be significant, forcing many to reconsider how they structure their wills.

Industry context is critical. Australia’s aging population and high level of household wealth locked in real estate and superannuation make death-related taxes a tempting revenue source for a government facing fiscal pressures. Observers note parallels with jurisdictions like the UK, which maintains a 40% inheritance tax but provides numerous reliefs, often leading to a similar backdoor effect. The 2026 move is consistent with a long-term trend: indirect death taxes creep into the system through superannuation, capital gains tax rules on death, and now testamentary trusts. Each step is incremental, but collectively they begin to resemble the inheritance tax regimes Australia explicitly rejected.

For legal professionals, the changes demand urgent client communication. Existing wills containing testamentary trusts may need to be reviewed or replaced, depending on the final legislation. The uncertainty around ‘grandfathering’ provisions—whether trusts established before the change will be protected—will be a key area to watch. Estate planning lawyers will likely see a spike in demand as families seek to understand their options and consider alternative structures, such as inter vivos family trusts, though these carry their own costs and tax implications.

From a financial planning lens, the dual whammy of super death benefit taxes and trust changes creates a more complex landscape for wealth transfer. Advisors will need to run new scenarios showing the net after-tax inheritance under different beneficiary designations. Strategies like withdrawing super before death, prepaying funeral and estate costs, or gifting during lifetime may gain traction. However, these carry Centrelink and care-fee implications, adding another layer of complexity.