What the government’s backflip on the 30 per cent minimum tax means for your inheritance
The Albanian government will slap some inherited foundations with a tax of at least 30 percent, although it backtracked on its controversial proposal to hit every new will-based discretionary foundation with a “death tax.”
Labor has significantly scaled back its highly criticized original proposal, claiming there would be no doubt about excluding inheritance from new taxes, while clauses in the revised version would leave certain estate arrangements and beneficiaries stranded with the tax.
In last month’s budget, the government announced a policy of imposing a minimum 30 percent tax on discretionary foundations. In addition to fixed trusts, discretionary trusts account for approximately 840,000 of the 1 million trusts in the country. A subtype, testamentary trusts, come into force only after the death of the trustee.
Unlike fixed trusts, discretionary trusts are viewed as more advantageous because they allow will writers to preserve assets for future generations if the beneficiary is compromised by circumstances such as bankruptcy, dependency, or property seeking during divorce.
On Thursday, Prime Minister Anthony Albanese and Chancellor of the Exchequer Jim Chalmers said they would withdraw their original proposal to exclude “bona fide” trusts from the tax and announced a consultation document that would ensure “integrity” in the system.
The government’s interpretation of what constitutes a “true” discretionary testamentary trust will limit the types of beneficiaries who receive income from the trust and prevent assets from being added to trusts once activated.
The beneficiaries who will avoid the new tax on discretionary testamentary trusts are individuals and tax-exempt organizations such as charities. This is to stop the use of so-called “bucket companies”, where trust income is received at the corporate tax rate rather than the personal income tax rate.
New assets or funds placed in the discretionary testamentary trust after the death of the trustee will likely not be exempt from the 30 percent tax. This would prevent individuals from setting up trusts that could later act as tax blind spots for their beneficiaries’ assets.
It is understood that if new assets are added to a trust’s principal, income from existing assets will be exempt, but the finer details of this arrangement will not be revealed until the consultation document is published.
The consultation document on the 30 per cent minimum tax is expected to be published next month. Income from discretionary testamentary trusts is currently taxed as personal income.
This study of trusts will be carried out after the more controversial aspects of the budget are agreed, namely changes to negative gearing and capital gains tax relief.
Shadow treasurer Tim Wilson disputed the idea that these changes would be subject to legitimate consultation, saying: “The last time the government submitted their new tax for consultation, it only took two days, they didn’t even read all the submissions.
“The Prime Minister has repeatedly denied in parliament that there is a new death tax in his budget. His backflip is a complete admission that this is a death tax,” Wilson said.
Upon the release of the budget, Nationals Senator Bridget McKenzie described the measure as a “death tax” and predicted that hundreds of thousands of Australians may have discretionary testamentary trusts that have not yet been activated.
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Nick Newling is the federal politics correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
