Labor accused of death tax by stealth with new Budget taxes on family trusts for estate planning

Australians who leave their assets in a trust for estate planning purposes or own an investment property bought before 1985 face a death tax by stealth under little-known proposals hidden in the Budget papers.

Inheritance tax was abolished nationally in 1979 and in every State since 1982 while a capital gains tax was introduced in 1985 at the Federal level for homes that are rented out.

But a proposal from Treasurer Jim Chalmers to impose a minimum 30 per cent tax on family trusts from July 1, 2028, could effectively amount to a death duty, tax accountants and lawyers say.

“You might not call that a death duty but certainty the effect of it is one,” estate planning solicitor and law firm founder Rachael Rofe told The Nightly.

“This is just one of a new range of measures that’s been introduced on the income generated on inheritance.”

To ensure assets are distributed only to intended loved ones, discretionary testamentary trusts are often used to safeguard a beneficiary of an estate from having a gold-digging, estranged spouse challenge them in court over a will.

“It protects against the floozy who might come along and try and steal the money,” Ms Rofe said.

Assets in discretionary testamentary trusts, established before Budget night on Tuesday, would be exempt, along with fixed testamentary trusts where amounts distributed to beneficiaries can’t be altered.

But assets added to a discretionary testamentary trust since Tuesday night could potentially incur a 30 per cent tax, along with assets put into a new trust, where an executor of an estate has discretion over how assets like a house or shares are divided up when someone dies.

“The really key thing here that the Government has probably overlooked is the asset protection - a lot of people offering these trusts are not super wealthy, they’re people who care about protecting their beneficiaries and their inheritance and unfortunately, they’re going to be stung by this as well,” Ms Rofe said.

Tax accountant Ben Johnston, the director of Johnston Advisory, said the beneficiaries of an estate were now facing a huge tax bill when someone died under Labor’s proposals.

“It becomes a death duty by stealth because basically someone passes away, their funds go into this testamentary trust and they get distributed from the testamentary trust down to the nominated beneficiaries,” he told The Nightly.

“Most of that, depending on the type of income, goes out to them as tax free because it passes through that structure in a way that currently doesn’t pay tax.

“But now, under the proposals that may come into play, there is an element of it that will mean when the beneficiaries of those testamentary trusts are allocated the money from that trust, they can be taxed at the 30 per cent rate of tax.”

H&R Block director of tax communications Mark Chapman said carve-outs for fixed testamentary trusts would still make many people rethink having discretionary testamentary trusts for estate planning.

“Around one million Australians currently use discretionary trust structures, many of them for family wealth and estate planning purposes, so even with carve-outs proposed for existing discretionary testamentary trusts, this reform is likely to trigger a major rethink around how intergenerational assets are structured and passed on,” he said.

“Importantly, the Budget papers suggest income from assets already sitting inside existing discretionary testamentary trusts may remain protected from the new 30 per cent minimum tax, but families should be very careful not to assume that protection automatically extends to future assets, restructures or newly created arrangements once the legislation is drafted.”

Another proposal to abolish the 50 per cent capital gains tax discount from July 2027 could also see a CGT applied for the first time to investment properties bought before September 1985, when the capital gains tax debuted.

Labor is proposing to replace this CGT concession, introduced in 1999, with a minimum 30 per cent tax on capital gains.

Mr Johnston warned this could also amount to a death duty by taxing capital gains made after the middle of next year on a property bought more than 41 years ago, before the CGT was introduced for rental properties but not the family home.

“Any gain made after that becomes taxable where previously it was non-taxable,” he said.

“The reason it’s getting referred to as a death tax is because it’s affecting people that are like 65 and above that, at the back end of their life, that might have bought their property and shares in their 20s and 30s prior to 1985.

“They were ordinarily going to pass away and leave their money to their kids and grandkids tax free — now that proportion of their estate is going to be taxed.”

Opposition leader Angus Taylor labelled the proposed impost on family trusts as a “hidden tax” that targeted hard working Aussies wanting to look after their loved ones.

“There is another tax that none of us saw in the Budget initially, and that’s a death duty,” he said.

“It is very clear now that Labor is going after what I’ve known as discretionary testamentary trust. This is a death duty on Australians.”

Dr Chalmers, however, hit back at the criticism as a “scare campaign” at a press conference in Canberra on Friday morning, saying that the taxation settings “haven’t changed”.

But Labor’s proposal to introduce a 30 per cent minimum tax on discretionary trusts also risks introducing double taxation, because it would take away franking credits or tax refunds on share dividends to compensate for company tax already paid by a listed corporation.

This would also contradict the point of dividend imputation — introduced by Bob Hawke’s Labor government in 1987 — to avoid this double taxation.

“Because corporate beneficiaries receive no credit for trustee tax paid, there is a real risk of effective double taxation,” Mr Chapman said.

“This is a significant concern and will be a key issue in the consultation process.”

At the 2019 election, former Labor leader Bill Shorten angered voters with a plan to take away franking credits from those who received share dividends but didn’t pay income tax, like retirees.

In Government, Labor’s plan for a new 30 per cent tax on discretionary trusts is designed to raise $4.47 billion in the 2029-30 financial year.

That is significantly higher than the $2.28 billion for the same financial year from scrapping the 50 per cent capital gains tax discount and restricting negative gearing tax breaks, for landlords making a rental loss, to brand new properties.