Under the current system, income earned in a testamentary trust has been subject to tax at graduated rates and planning using testamentary trusts has commonly focused on the potential tax benefits for beneficiaries resulting from this tax treatment. In effect, the system made it possible to split income between a testamentary trust and its beneficiaries.
The February 2014 Federal Budget has largely eliminated this planning by announcing various new tax measures including, most importantly, the introduction of a flat top rate tax applicable to testamentary trust income.