Butler said the announcement is “qualified” and the Government is “playing around with words”.
On Thursday morning, Prime Minister Anthony Albanese announced the government would be exempting “income from all types of discretionary testamentary trusts from the minimum tax, provided they are established for genuine testamentary purposes.”
“The exclusion will be limited to income from assets of the deceased estate. For discretionary testamentary trusts established on or after 1 July 2028, the exclusion will only apply to trusts that can only benefit individuals and income tax exempt entities,” Albanese said.
“We have been clear that there is no tax on inheritances or deceased estates but we are taking this step to put this beyond doubt.”
Butler said he is pleased the government listened to some of the feedback from this week’s Senate inquiry but the wording used by the Prime Minister is somewhat qualified.
“They’ve actually considered [some of the feedback], otherwise they would have made everyone go and change all their wills they’ve made over the years, but even then, their announcement is qualified,” he said.
“You see what they say in respect of the death tax, and they should not be avoiding that. These things are death taxes when it really comes down to it. They should be honest with their wording, as it originally proposed to be a 30 per cent tax on discretionary testamentary trusts which they have now decided to scrap.
“However, they don’t want to recognise it as a death tax on a deceased estate because technically speaking it’s a tax on a testamentary trust, which evolves from a deceased estate. Okay, fair enough. We’ll play around with words, but most people consider that a testamentary trust is part of a person’s deceased estate. The Government does not wish to admit it was a tax on a deceased estate but that is a cute argument.”
Butler continued that the qualification at the end of the announcement on discretionary trusts still provides the Government with “an out”.
“The announcement said ‘we will exempt income from all types of discretionary testamentary trusts from the minimum tax, provided they are established for genuine testamentary purposes’. Who is going to decide if it was established for genuine testamentary purposes?” he said.
“Does this mean that people who prepare testamentary trusts to protect the family assets passing to the children who may be vulnerable, challenged by some physical or mental impairment, have a drug or gambling habit or who do not have the skills or ability to manage their inheritance won’t qualify?
“What about families that wish to protect their hard earned assets passing to children and the children then separate from their spouse? The Family Law Act 1979 (Cth) applies even if the couple are not married but generally have been in a relationship for more than 2 years and can also apply in shorter than two years if there is child to the relationship. Moreover, what if the child is a professional or in business and needs asset protection?”
In the announcement, the Prime Minister also said that in “response to targeted consultation following the Budget, the Government will exempt income from all types of discretionary testamentary trusts from the minimum tax provided they are established for genuine testamentary purposes”.
“Will the range of reasons outlined above why families prepare wills with discretionary testamentary trusts for ordinary family estate and succession planning reasons qualify for ‘genuine testamentary purposes’?” Butler said.
“Families, whether wealthy or with modest means and assets, are attracted to discretionary testamentary trust wills for these types of reasons and may not be driven so much for tax reasons.”
The Prime Minister’s announcement continued: “The exclusion will be limited to income from assets of the deceased estate. For discretionary testamentary trusts established on or after 1 July 2028, the exclusion will only apply to trusts that can only benefit individuals and income tax exempt entities.”
However, Butler said this suggests there are restrictions that will apply.
“They are saying it’s only from assets from the deceased estate, but what if you inherit shares and then sell a non-performing share to reinvest in a better investment?
“Further, there’s a bloodline version [of a discretionary testamentary trust], and there’s a non-bloodline version. The bloodline version is pretty much within the family bloodline but may include charities, whereas a non-bloodline one can benefit other eligible family trusts, other family companies and possibly charities.
“So, a lot of people will still have to review and revise their wills because of this announcement. A lot of people’s testamentary trusts will probably not be within the strict scope of what the PM is saying. However, there is still a great deal of uncertainty until we see the detailed legislation and it is passed as law. In the meantime, peoples’ future estate planning is placed under a great deal of uncertainty. Moreoever, revising wills and related documents can give rise to many thousands of dollars in legal costs”
He continued that it appears that the changes will only cover an asset at the date of death and doesn’t appear to cover assets that may have been turned over such as shares.
Drew Meredith, Director at Wattle Partner, said the “changes are huge for retirees and for the impending transfer of wealth”.
“The initial budget proposals brought into question what has been sound financial, retirement and estate planning advice for decades. These reversals are a huge positive for retirees and those seeking to retiree in the decade to come,” he said.
“The reversal of tax changes on testamentary trusts is significant, ensuring a significant cost isn’t incurred in redrafting wills. Secondly, the change to the small business turnover threshold is an admission to those most impacted by the budget, small business owners that employ so many Australians.
“This neatly tightens the budget further towards the property sector, instead of punishing those building wealth through entrepreneurship.”
There’s lots of ways how they can swing the wording to what it actually means or what the interpretation of certain phrases are. No credibility here. They will just change their position again.
So the trust distribution proposed legislation will be subject to consultation and hopefully Treasury has a better grasp on the way the law works now and the consequences of their new drafting incorporating the PMs sound bites.
Unfortunately, Tsy seems to have an urge to kill off the bucket company so I am not hopeful we will see well designed law.
In any event, if a client is frail aged or unwell it is probably good practice to get a codicil written to cover the potential for silly word exclusions. Unfortunately the States gave us a precedent for this type of silly wording when the laws governing duties were changed vis a vis potential foreign beneficiaries.
There should be some kind of representation rule for Treasury officials that design law. A quota of private practice experienced reps could help with the design principles needed for sound law.