Since last week’s Federal Budget, talk has been growing around the Government introducing a ‘death tax’ through changes to trusts.
Under the proposed changes, discretionary trusts would face a minimum 30% tax on trust income.
The changes would apply to new discretionary trusts created through wills after someone dies, but not existing trusts or fixed testamentary trusts. Around 10,500 Australians have these trusts.
The Opposition says including them makes the policy a ‘death tax’.
So, what are they?
Background
Let’s start with a refresh on trusts.
Put simply, a trust is a legal structure where money or assets are held on behalf of someone else.
Beneficiaries are the people or companies entitled to income from the trust, and they pay tax on their share of that income.
Changes included in the Budget mean distributions from discretionary (or family) trusts would be taxed at a minimum rate of 30%, rather than at each beneficiary’s personal income tax rate.
So why is it being labelled a ‘death tax’?
The term was first published by The Australian last week due to the inclusion of testamentary trusts.
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Testamentary trusts are used to distribute a person’s assets after they die and can remain in place for years, including across generations.
According to ATO data from 2022-23, there were around 10,500 testamentary trusts in Australia, representing about 0.1% of taxpayers.
The changes are grandfathered, meaning they will not apply to these existing trusts.
Responses
The Coalition has launched a petition against the changes, claiming they were “hidden in the budget papers”.
They called the policy a “30% inheritance tax... targeting popular family trust structures used by everyday Australians to save, invest, and pass on assets to their children.”
Independent MP Monique Ryan rejected the claim, saying these changes “are not a death tax” and describing the Coalition’s petition as a “scare campaign.”
Will it change?
The Budget changes still need to pass Parliament before becoming law.
This means the proposed minimum tax rate on discretionary trusts has not yet been legislated.
The Sydney Morning Herald reported the Government is considering reversing the policy for testamentary trusts.
The Prime Minister’s Office did not confirm the reports, telling TDA the Budget measures would be introduced as legislation.
