My wife and I have a discretionary family trust whose only income is fully franked dividends from Australian shares. The trust distributes that income equally between us, and we include both the dividends and the franking credits in our personal tax returns.
The Federal Budget proposes a flat 30 per cent tax on discretionary trust income, subject to the legislation passing Parliament. If these changes become law, how will fully franked dividends be treated? Will the franking credits first offset the trust’s 30 per cent tax, or will the distributions we receive still carry franking credits that we can claim in our own tax returns?
Mark Molesworth, tax partner at BDO, says that at present we only have the budget announcement to work from, so you should review your situation once the detailed legislation becomes available.
Based on the announcements, it appears that the franking credits attached to dividends received by the trust will be used to help pay the trust’s minimum 30 per cent tax on its income. When the trust distributes income to you, that distribution will carry non-refundable credits representing the tax already paid by the trust.
In other words, you and your wife will probably still receive credits, but they will no longer be refundable franking credits. Instead, they will be non-refundable trustee tax credits.
This may not have a major impact on you because you say you have other income in your personal names on which you pay tax, and the non-refundable credits can be used to offset that liability. However, if you currently receive refunds of excess franking credits through the trust, those refunds may cease from the 2028-29 financial year, when the new system is due to commence.
Once the proposed legislation is released we will be in a much better position to assess what changes, if any, may be required to taxpayers’ affairs.
My wife and I own shares in several ASX-listed companies and would like to keep them for the long term for both capital growth and dividend income, which helps supplement our age pension. Like many Australians, I am confused about the proposed capital gains tax changes. If we sell before the new rules begin, could the capital gain create a large tax bill? If we hold the shares and sell them later, how will the gains be taxed?
Any shares you sell before June 30, 2027, will remain under the current capital gains tax rules, including the 50 per cent discount for assets held longer than 12 months. Shares sold after that date will be subject to a much more complicated system.
In effect, the capital gain will be split into two parts. The gain that accrued up to June 30, 2027, will continue to receive the existing treatment, while the gain after that date will be calculated using an indexed cost base and may be subject to the new 30 per cent minimum tax.
The proposed rules are particularly harsh on self-funded retirees, but the government has shown no sign of changing course.
However, if you receive any amount of age pension in the financial year in which the shares are sold, you will be exempt from the minimum tax.
Depending on how long you have owned the shares, the additional tax may not be significant. The bigger issue is likely to be the extra record-keeping and accounting costs because every parcel of shares will require separate calculations.
Self-funded retirees should discuss their options with their accountant well before June 30, 2027. For some, it may make sense to realise capital gains before that date and then reinvest in ETFs, where the ongoing record-keeping is generally much simpler.
The proposed rules are particularly harsh on self-funded retirees, but despite widespread criticism, the government has shown no sign of changing course.
The government has now confirmed its proposed 30 per cent trust tax will not apply to testamentary trusts. How are these trusts taxed compared with an ordinary discretionary family trust set up during your lifetime?
This is good news for many families because it ends months of uncertainty. The key is to understand the difference between the two types of trust. A family trust is established during your lifetime and is still scheduled to face the new 30 per cent minimum tax on trust income from 2028.
A testamentary trust, on the other hand, is created under your will and comes into existence only after you die. The government has confirmed these trusts will not be caught by the new tax, provided they form a genuine part of your estate planning.
That does not mean the income is tax-free. The normal tax rules continue to apply, with income generally taxed to the beneficiary who receives it, and that is where a testamentary trust can be especially valuable.
If an ordinary family trust distributes income to a child under 18, penalty tax rates apply and quickly reach the top marginal rate. A testamentary trust is different. Income derived from estate assets can be taxed as though the child were an adult, giving them the benefit of the full tax-free threshold.
In practical terms, each child with no other income can receive about $22,000 a year tax-free. That money can help pay for school fees, clothing and everyday living costs. For a family with three young children, that is around $66,000 a year flowing to the next generation.
This is not a loophole, but a deliberate concession designed to help people provide for their family after they are gone. There can also be a difference where income is retained in the trust instead of being distributed.
Many family trusts pay tax on retained income at the top marginal rate, whereas in some circumstances a testamentary trust is taxed at ordinary individual marginal rates instead.
The testamentary trust concession applies only to assets that came from the estate. You cannot add outside assets later and expect the same treatment. The government is still finalising exactly what qualifies as genuine, but the exemption is expected to apply to trusts benefiting individuals and charities rather than companies or other trusts.
Once the legislation is finalised, it is worth checking that your will still qualifies. As estate planning solicitor Rachael Rofe says, the decision gives families certainty to keep using a tried and tested way of looking after the people they leave behind.
If your will contains a testamentary trust, or you are considering one, it is well worth discussing it with an experienced estate planning lawyer.
How will the proposed capital gains tax changes announced in the Budget affect my investment property when I sell it? I bought the property on September 16, 1981, before CGT was introduced. If I sell it before June 30, 2027, will I have to pay any tax on the capital gain?
As it is a pre-CGT asset, it will be tax-free if you sell it before June 30, 2027. If you keep it after that date, its cost base will become its valuation on June 30, 2027.
Noel Whittaker is author of Retirement Made Simple and other books on personal finance. Questions to: noel@noelwhittaker.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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Noel Whittaker, AM, is the author of Making Money Made Simple and numerous other books on personal finance.Connect via X or email.
