The Albanese government will still slap some inherited trusts with a minimum 30 per cent tax, despite backpedalling on their contentious proposal to hit every new will-based discretionary trust with a “death tax”.
As Labor significantly scales back its highly criticised original proposal, claiming there will be no doubt about the exclusion of inheritance from new taxes, clauses in the revised version would see certain asset arrangements and beneficiaries slugged with the levy.
In last month’s budget, the government announced a policy of applying a 30 per cent minimum tax on discretionary trusts. Alongside fixed trusts, discretionary trusts make up about 840,000 of the nation’s 1 million trusts. A subtype – testamentary trusts – come into effect only after the trustee’s death.
Unlike fixed trusts, discretionary trusts are seen as more favourable because they allow will writers to protect assets for future generations if a beneficiary is compromised by circumstances such as bankruptcy, addiction, or a spouse seeking assets in a divorce.
On Thursday, Prime Minister Anthony Albanese and Treasurer Jim Chalmers said they would wind back their original proposal, excluding “genuine” trusts from the tax, and announced a consultation paper that would ensure “integrity” in the system.
The government’s interpretation of what constitutes a “genuine” discretionary testamentary trust will limit the types of beneficiaries accessing income from the trust, and curb the addition of assets to trusts after their activation.
The beneficiaries who will dodge the new tax on discretionary testamentary trusts are individuals and tax-exempt entities such as charities. This is intended to stop the use of so-called “bucket companies”, in which the proceeds of trusts are levied at the corporate tax rate rather than the personal income tax rate.
New assets or funds placed into a discretionary testamentary trust after the trustee’s passing will likely not be exempt from the 30 per cent tax. This would stop individuals from setting up trusts which could later serve as tax blind-spots for their beneficiaries’ assets.
Should new assets be added to the principal of a trust it is understood income from existing assets would remain exempt, but the finer detail of this carve-out won’t be released until the consultation paper is published.
The consultation paper is expected to be published next month on the 30 per cent minimum tax. Proceeds from discretionary testamentary trusts are currently taxed as personal income.
This work on trusts will be done after the passage of more contentious aspects of the budget, namely changes to negative gearing and the capital gains tax discount.
Shadow treasurer Tim Wilson baulked at the idea these changes would be subject to legitimate consultation, saying: “The last time the government put their new taxes up for consultation, it only went for two days they didn’t even read all of the submissions.
“The prime minister denied multiple times in parliament that his budget had a new death tax in it. His backflip is a complete admission that it was a death tax,” Wilson said.
Upon the budget’s announcement, Nationals senator Bridget McKenzie was quick to label the measure a “death tax”, and speculated that hundreds of thousands of Australians might have discretionary testamentary trusts that were yet to become active.
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Nick Newling is a federal politics reporter for The Sydney Morning Herald and The Age.Connect via X or email.
