Treasury’s latest exposure draft landed on 4th August, and gives genuine testamentary trusts and deceased estates an important exemption from the proposed 30% minimum tax on capital gains.
That is the good news.
The less good news is that two of the most obvious problems, namely what happens when assets move on death or on divorce, have been identified, discussed, and left for another day.
In tax policy, this is known as progress.
The death and divorce problem Treasury is trying to solve
The first tranche of the CGT reforms applies from 1 July 2027. It replaces the general 50% CGT discount for individuals and trusts with cost-base indexation, and introduces a 30% minimum tax on capital gains.
For assets already owned at 1 July 2027, the law divides the gain into two periods: the gain accruing before that date, and the gain accruing after it. It does this through a deemed sale and reacquisition. The gain or loss arising at that point is deferred until a later realisation event.
That is reasonably elegant, until the asset moves without being sold. In estate planning, that happens often.
Death and divorce: not fixed yet
Treasury expressly acknowledges the difficulty where an asset is transferred between separating spouses under the relationship-breakdown rollover, or from a deceased estate to a beneficiary.
Neither transaction is a genuine economic realisation. The separating spouse has not cashed out, and the executor distributing an estate asset has not sold it. But as drafted, the rules treat each transfer as a realisation event. The deferred gain crystallises and CGT falls due on the notional gain, even though no money has changed hands. Treasury agrees that these transfers should not trigger the deferred gain.
Agreeing with the problem and legislating the solution remain two separate stages of government. The Explanatory Memorandum says further complexity arises because the asset, and presumably the deferred gain attached to it, moves to another taxpayer. The necessary amendments will be dealt with in a future tranche.
The same death and divorce problem runs through both reforms in this bill, and only one of them has been fixed. In the negative gearing rules, the tranche lets a surviving spouse, a surviving co-owner or a family-law transferee inherit the owner’s status, and with it the negative gearing exemption. That problem is solved. In the capital gains rules, the same drafters left it for another day. That problem has only a promise.
So on capital gains, death and divorce have a favourable policy statement, but not yet an operative rule. The fix already exists in the same bill for negative gearing, so it should not be far behind for capital gains.
For now, an adviser cannot confidently say how the deferred gain will follow the asset, who will ultimately be taxed on it, or what happens if there is more than one rollover before the asset is sold.
The clear win for testamentary trusts
The draft provides that qualifying capital gains attributed to an individual beneficiary of a testamentary trust, deceased estate or special disability trust will be excluded from the beneficiary’s minimum-tax capital gains amount.
In plain terms, the gain will not automatically be pushed up to the new 30% minimum rate.
For testamentary trusts, the exemption is connected to the existing section 102AG rules. Broadly, the gain must come from property transferred from the deceased estate, or from investments, reinvestments, accumulations or profits derived from that estate property.
This is not a general exemption for anything placed inside a trust created by a will. The gain must be connected to the deceased estate. That is sensible. It protects ordinary testamentary trusts without turning them into tax-free storage for unrelated family assets. The draft also contains integrity rules aimed at arrangements designed to move property through an estate mainly to obtain the exemption.
Who sells the asset, and when
For the purposes of understanding the exemption, it is important to distinguish between two roles. The executor administers the deceased estate. The trustee administers the testamentary trust once the assets are held in it. A beneficiary of the will takes what the will provides. A beneficiary of the trust takes what the trustee distributes. Different people, at a different stage.
The draft covers both deceased estates and testamentary trusts, so the exemption is available at each stage. If the executor sells an asset inside the estate and attributes the gain to a beneficiary of the will, the gain is exempt from the 30% minimum floor. If the trustee sells an asset inside the trust and attributes the gain to a beneficiary of the trust, the result is the same.
The floor applies only when the individual sells the asset in their own name, after it has left the estate or the trust. The exemption belongs to the gain realised inside the structure. It does not follow the asset to the beneficiary. A later sale in the individual’s own name is fully exposed.
The same question therefore arises at both stages, for two different people.
The executor should understand what the beneficiary is likely to do with the asset. If the beneficiary is likely to sell it, and the asset carries a taxable gain, the executor should consider selling it inside the estate, where it is not subject to the 30% minimum, and distributing the net proceeds. That can produce a better result than distributing the asset in specie to a beneficiary who then sells it and meets the 30% minimum. Distributing the asset itself carries little tax at that point, because the beneficiary takes on the deceased’s cost base, but the beneficiary then meets the floor on a later sale.
The trustee faces the same choice for a beneficiary of the trust, but distributing the asset out of the trust is more costly. It can be a CGT event in its own right, and duty may arise depending on the state and the terms of the trust. Where the beneficiary wants cash, selling inside the trust and distributing the proceeds is usually the better course.
None of this means every asset should be sold inside the estate or the trust. Where the beneficiary wants to keep the asset, they should receive it, and there are sound reasons to distribute in specie: ownership, control, foreign residency, or the terms of the will. But the timing is now a tax decision, and it rests with whoever holds the asset: the executor at the estate stage, the trustee at the trust stage.
Before an asset is distributed, the question is who should sell it, and when. The answer carries a material tax cost.
It also makes the case for flexible drafting. The trustee should have the power to sell, appropriate, distribute assets in specie and stream capital gains, so the trustee is not confined to one course when the time comes.
Two trust tax regimes, because one was apparently not enough
There is also a risk of confusion between this reform and the separate proposed 30% minimum tax on discretionary trust income.
This draft deals with the minimum tax on capital gains from 1 July 2027. The separate discretionary-trust proposal deals with trust income from 1 July 2028.
Both contain proposed protections for genuine testamentary trusts, but the tests are not the same. The CGT exemption in this draft focuses on whether the gain is derived from deceased-estate property. It does not contain the separate proposed rule restricting the beneficiaries of certain future testamentary trusts to individuals and tax-exempt entities.
Advisers may therefore apply two different versions of “genuine testamentary trust” to the same structure: one for income, another for capital gains.
Nobody said tax reform had to be user-friendly.
The deceased’s paperwork may live forever
The draft also introduces continuity rules for inherited assets. For relevant purposes, an executor or beneficiary receiving a post-CGT asset will generally be treated as having acquired it when the deceased acquired it. Similar rules apply to the deceased’s interest passing to a surviving joint tenant.
This is necessary to divide gains accruing before and after 1 July 2027, and to calculate indexation. It also means the asset’s history survives the owner.
Executors may need original purchase records, evidence of capital improvements, details of prior rollovers, historical ownership information, and in some cases residency records. A date-of-death valuation may no longer tell the whole story.
The practical estate-planning advice is unglamorous but important: keep the records. The tax cost of an asset may now depend on documents created decades before the beneficiary sells it.
Where this leaves us
This tranche is a win for testamentary trusts. It recognises that estate-derived capital gains should not automatically face a 30% floor merely because they arise through a testamentary structure.
But it also makes trust administration more consequential. Selling an asset inside the estate or the trust may produce a different outcome from distributing it before sale. And the law dealing with transfers on death and divorce remains unfinished.
None of this is law yet. The exposure draft is open for consultation until 31 August 2026, which is the moment to press Treasury on the death and divorce gap, rather than wait for the next tranche.
For now: testamentary trusts have secured the CGT exemption. Death and divorce have secured an acknowledgement and the promise of another tranche.
Rachael Rofe is an estate planning and wealth transfer lawyer who works across giving in every form it takes: to community, to family, across life and on death. Her focus sits where tax, asset protection and values meet. She also reads exposure tax reform legislation like this one so you don’t have to.