What the trust tax changes mean for your inheritance

Real Money, a free weekly newsletter giving expert tips on how to save, invest and make the most of your money, is sent every Sunday. You’re reading an excerpt – sign up to get the whole newsletter in your inbox.

It’s been a big couple of weeks for money fans as discussion about the federal budget continues to bubble along. As Money writer Paul Benson pointed out this week, for the vast majority of us, these changes will mean very little − you can still save into super and your main residence is still exempt from CGT.

But those who are affected are kicking up a stink, if “kicking up a stink” means posting low-effort AI-generated memes and complaining they might have to pay a bit extra in tax.

If you’re not a business owner, this likely won’t concern you. But there is one section of the budget changes that could affect a decent number of people, and that’s when it comes to inheritance.

Often, people will structure their inheritance through trusts – commonly testamentary or discretionary trusts – to dictate how and when their money can be spent, or certain assets accessed.

What’s the problem?

As I discussed last month, these trusts are becoming more popular as older Australians with wealth look for ways it can be distributed in accordance to their wishes.

However, Labor’s recently announced tax changes are set to impose a 30 per cent minimum tax on trusts from July 1, 2028, including testamentary discretionary trusts, popular for inheritance planning.

These changes have already been labelled a “death tax” by the opposition, giving some of us flashbacks to the 2019 federal election, a claim Labor has disputed though they have indicated they may seek to amend the laws. And I, personally, have had a number of emails from you all asking what might happen.

What you can do about it

So what are the changes affecting these trusts? And what should you do about it?

• What’s changing: As mentioned, from July 1, 2028, there will be a new 30 per cent minimum tax rate on all trusts, including discretionary and testamentary discretionary, paid by the trustee as it is the trustee who controls distributions. Similarly to other trust structures, income distributed via these trusts under current rules can be passed on at very low tax rates, as it can be spread to family members who have lower marginal tax rates. The new 30 per cent flat rate will change that. Nicholas Parker from Coote Family lawyers says the mooted changes would be a major change for how trusts are used in inheritance planning, saying they currently offer some unique benefits. “Testamentary trusts until now had an additional benefit that was unavailable to family trusts, being that the trustee could distribute income to minor beneficiaries at adult marginal tax rates,” he says. “Distributing income to a minor beneficiary meant that the first $18,200 of income (including capital gain) is tax-free.” However, what makes this different from the Coalition’s dreaded “death tax” is that assets within these trusts are only taxed when they are distributed, so the simple act of dying does not incur any tax. The new laws will also not affect any testamentary discretionary trusts that were existing at the time the new tax was announced on May 12.
• What should you do instead? Crucially, none of these rules have been passed into law yet, and Labor could well change them before they are. But if the 30 per cent baseline tax stays, these types of trusts will lose one of their best incentives, says Emma Blay, special counsel at Barry Nilsson. She believes many trust holders will have to pay the extra tax if they want to retain the other advantages provided by the structure, but she also suggests some could consider moving to a fixed trust, which are exempt from the new laws. “However, these trusts do almost nothing to assist in succession planning. They offer beneficiaries no asset protection against legal claims, such as a family court dispute following a marriage breakdown or bankruptcy,” she says. “What we are left with in a fixed trust is inflexibility, no means to minimise tax and no protection.” Blay also cautions against restructuring existing trusts to better prepare for the new tax, as this could have adverse tax, CGT and stamp duty implications. Parker says testamentary trusts should still be considered in estate planning, despite the higher taxes, as they provide flexibility to move with changing circumstances.
• What about the CGT changes? Labor will also change capital gains tax from the current 50 per cent discount model to an inflation-adjusted model, with a 30 per cent minimum tax as a baseline. Hayder Shkara, director of Melbourne Family Lawyers, says these changes will be less impactful for inheritance planning as inheriting an asset does not trigger CGT. “For example, if a daughter inherits her father’s investment property, there is usually no immediate CGT bill when the property passes to her,” he says. “But if she keeps it for several years and later sells it for a profit, CGT may apply to that later sale.” Shkara says in the case of homes, the main residence exemption can often apply. The length of time the assets are held before they’re sold will be the main consideration, he says, as the previous 50 per cent discount will still apply until July 1 next year.
• A note on negative gearing: Currently, any properties that are negatively geared will be able to continue to be once the laws change on July 1. However, what is less clear is what will happen to negatively geared properties passed down through estates, with Shkara saying it will rely on what’s in the final legislation. “If a property was acquired by the deceased before the budget announcement, there is an argument that the grandfathering should continue until the property is sold,” he says. “But if the law treats the beneficiary as having ‘acquired’ the property when they inherit it, then the inheritance could potentially bring the property into the new regime, i.e. no negative gearing.”

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.