Tara (00:50):
Hi, it's Tara here and I am jumping in with a special episode because we got a media release from the federal government on the 18th of June about the tax treatment of testamentary trust.
(01:09):
So I have dropped everything to record this episode. I'm recording it the day after. I'm actually got to squeeze it in before I go to my son's sports carnival. So I'm going to keep the pace snappy, but I've been seeing lots of comments and questions in our group. I had a Instagram or social media post that is getting a lot of questions and I just wanted to do a brain dump and share my thoughts on it. So let's begin. Testamentary Trust are back baby. Oh my goodness. It's been like four weeks and two days or something since we first had an announcement that testamentary discretionary trusts would be subject to a minimum 30% tax without any refundable credits from the federal budget announcement. And that was intended to apply to all testamentary trusts and discretionary trusts. If you want to go back and learn about that rollercoaster, check out episode 85.
(02:13):
Now we heard in the announcement there was a press conference and then a media release on the 18th of June that all testamentary discretionary trusts will be exempt. So they were already exempting deceased estates and fixed testamentary trusts and they are now exempting testamentary discretionary trusts from that minimum 30% tax as well, which is incredible news. I'm overjoyed. A great win for Australians. I've got a brain dump here. I've got some notes I'm going to look through, but look, it's never been a better time to be an estate planning lawyer. So much change. Who said estate planning is boring? It is just changing week by week at this point. I also think this whole exercise is indicative that we are not ever going to see a death tax, at least in the short term in Australia. Labour have proven that trying to introduce something like that is political.
(03:16):
So aside, they lasted four weeks and crumbled under the pressure and this was not even a true death tax. It was sort of a backdoor or proxy death tax, but it just obviously they didn't want it bad enough to have to keep fighting and just the optics of it was so bad. I also think it's incredible recognition of the policy that they are adopting that testamentary discretionary trusts are unique. So they shouldn't be thrown in the same bucket as family trusts. They can only be established, of course, because a person has died. You only get one chance. You can only put the assets that you owned at the date of death into them. And we've always had this recognition, especially with the accepted trust income treatment. So it's great to see the government is seeing sense and continuing that policy recognition and seeing a lot of comments on social media.
(04:14):
I mean, social medias, you get all the whole spectrum there and there's still people who are very pessimistic from a political perspective. Personally, I don't want to get into the politics of it. I do think it is a really positive sign in the estate planning world, at least, that the government is letting go of including testamentary discretionary trusts in their 30% minimum tax. I do just want to be clear some people were thinking that this extended to all discretionary trusts like family trusts, trading trusts, investment trusts. It's just the testamentary discretionary trust, so a trust set up in a will. And look, I just think the policy of trying to make big changes to tax inheritances more. It's latent with complex value issues. Everything is very tricky when it's a taxing event associated with death. And to be honest, Testamentary discretionary trust is such small fry.
(05:18):
There's only less than 11,000 active testamentary discretionary trusts where people have actually died and they're running in place at the moment. So I think I'm really positive that they've just let go of it. So hopefully they'll be sort of to the side of all of the tax reform moving forward. I just want to say I'm overjoyed. I don't know if it's coming through, but I'm still almost in a little bit of shock that we had this crazy rollercoaster. But I do just want to say thank you to everybody in the TT Precedents Club and the art of estate planning. And even if you're listening and you're not in those groups, if you've done something to lobby your member of parliament and raise awareness with the general public if you've spoken to the media, I just want to say thank you because I am blown away that we were able to make this change and in such a short amount of time.
(06:21):
I don't know if we actually can ... I don't want to take credit for us contributing to this decision, but I mean, I would like to hope that we played a small part in it. I had so many people emailing me and tell me that they had sent the proforma letter that I wrote for everybody off to their member of parliament because we are nationwide where I live, it's just liberal and nationals everywhere. But because we're nationwide, we had Anthony Albanese, Tanya Pilbersek, Jim Chalmers, our local members of our TT Precedents Club members. So they all sent off their letters and made the campaign. I know that people are trying to get meetings with David Pocock's team and the treasurer's team to try to make the point that it is having an unintended consequence and the policy is actually doing the opposite of what they're trying to achieve.
(07:22):
To be frank, I sort of thought the best we could maybe hope for is that they would exclude distributions of income to children of the testators who are minors. So for them to have actually just carved out testamentary trust from the whole new policy, I think that's really reassuring. So anyway, just thank you to anybody who has sent off a letter, made a social media post, talked about it with the media, so grateful and I'm just blown away by how our estate planning community has rallied behind this and able to affect change. Personally, I could have done without the rollercoaster, but I think it's also been a great ... If I can reflect on what's happened over the last month, it has been a great incentive to force us all to just really examine the asset protection and other non-tax benefits of testamentary discretionary trusts.
(08:23):
I think it has caused me to really go deep and test some of the assumptions and biases that I have in terms of why are we always recommending testamentary discretionary trusts? Let's revisit that. And it's been a great exercise because even if there was no income tax benefits, if it was either a net or a net neutral tax outcome, or even perhaps having to pay a tax premium for the asset protection, a lot of the times we still landed on the conclusion that the testamentary discretionary trust is worth it for the asset protection alone. So that has been one little silver lining to this crazy rollercoaster that we've been on. And fascinatingly, I'm hearing reports from the TT Precedents Club members that the amount of inquiries and clients choosing testamentary trust has actually increased in the last month before the media release, just because there has been so much noise and attention in the media about testamentary discretionary trust.
(09:29):
So clients are still really resonating with the asset protection benefits over a basic will regardless of the tax. And that has been a good test because I love the tax treatment. I personally think they have always been, and from now on, they continue to be a tax environment that is incomparable. We just cannot replicate that tax treatment in any way because a person had to die to get this. You can't set it up during a person's lifetime to get the same thing, but a lot of the general public don't think from a tax perspective. Tax is very, "Ooh, I don't know how it works. I just have to pay. It just gets taken out of my paycheck and I try not to look at it. " And that's fine, totally fine. But I think for them, the motivator to get people to take action, they're not driven by tax savings.
(10:24):
They're driven by protecting their legacy, protecting their minor children, keeping it in the bloodline. And we've really seen that with the client response when we thought that the testamentary trust income treatment could be at risk. So that has been a really ... Yeah, I just think it's never been a better time to be an estate planning lawyer who has testamentary trust capability. Also, I don't know what will change and if we'll just sort of go back, but a lot of people, we didn't know how good we had it until the tax was at risk. I bang on and on about the tax benefits. But to be honest, their eyes start glazing over and it's not the sexiest appeal, but we really realised how good it was when it became at risk. So I just want to clarify what I'm talking about. Firstly, I actually recommend you all go back and listen to this if you're not knowing this inside out, but episode 45 of the podcast explains how the tax benefits work.
(11:30):
But basically the very high level nutshell is that all minor beneficiaries of a testamentary trust can receive up to $22,000 tax-free income from the inheritance each year and that is for multiple generations. I've got a testamentary trust in my will, my minor children will have that until they become adults and then it will just actually continue because the way it works is that mine is a taxed adults rates instead of paying penalty minor rates that you get from a family trust. So even if they aren't actually earning very much until they're like 25 because they're at uni, then they still get all that tax-free income and that is generation. So generation on generation. So my children's children will be able to get it when they're born and their grandchildren and so on. And in Queensland, the testamentary trust can go for 125 years. So how many generations of minors will be eligible to receive that tax-free income and you cannot get that with a family trust even before the 30% minimum tax minors couldn't receive more than $416.
(12:51):
So that's incredible. You also get the tax streaming so a surviving spouse can choose whether they want to use their marginal tax rate, benefit their parents who might be doing babysitting or helping out around the home, benefit the children, and navigate and sort of optimise everyone in the family group's tax rate so that low income tax earners can receive a higher distribution and it'll be paid ultimately at a lower tax rate. So if you don't really understand how any of that works, if the words accepted trust income treatment, just draw a blank for you, can I really encourage you to join my online course, Testamentary Trust, the Essential Guide for Australian Lawyers? I do a big deep dive into how this all works. Obviously it covers everything about testamentary trust. It is the essential guide, but we also go deep on the tax because there's nothing like tax changes or tweaks to make you realise that you need to understand how this works at a very detailed fundamental level.
(14:03):
And yes, you can sort of just quote off, "Oh, the 22,000 tax-free," but for you to really feel confident about the impact, how we might change our strategy, how to talk about it with clients, how to make sure you don't do anything that inadvertently jeopardises the tax treatment, you've got to understand how it really works at a mechanical level. And I'll be talking about this in about five seconds, but I don't actually think they're going to change too much of the mechanics now. So if you haven't got the course, go buy it, you get lifetime access, you won't regret it. It will really just round out any of those knowledge gaps for testamentary trust. So let's get to the details of the media release. I'm going to pull that up on my screen now. We don't have any legislation again. We are just going off a few paragraphs in a media release.
(14:56):
I'll put the media release in the show notes so you can read it, but they've said, and I should say it's most of the media release is actually about capital gains tax small business concessions for small businesses. So the testamentary trusts have just been tacked onto that. I'm not going to touch on the small business stuff. This is an estate planning testamentary trust podcast, so we're just going to focus in on that. So they have said, I'll read it out. 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. The exclusion will be limited to income from assets of the deceased estate. For discretionary testamentary trust established on or after one July 2028, the exclusion will only apply to trusts that can only benefit individuals and income tax exempt entities.
(15:57):
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. So a big part of this is just the heat around inheritance tax was just not worth it to them when it came to testamentary trusts. So hallelujah. Now people are getting hung up on a few parts of this statement. Firstly, they're saying established for genuine testamentary purposes. Also, the income will be limited to income from assets of the deceased estate. Okay. We already have those integrity mechanisms in place. They have been in place for years. I think a big part of this is just political spin and saving face, genuine testamentary purposes. Of course, every testamentary trust is for genuine testamentary purposes. You can only create one under a will as a result of a person dying. There is already an integrity measure that the only assets which could generate accepted trust income are the assets the deceased owned when they died that were transferred to the trust under the will.
(17:14):
We already have that. So people are going, "What does that mean? Are they going to bring in these extra tests?" I don't actually think so because they already reformed these tests. I'm trying to think back. I feel like it was around 2020 or 2021. They already stepped up the integrity rules. So I'm going to look at some of the slides from my course, testamentary trustee essential guide. I'm not going to go over all of that because that's like an hour lesson, but in 102AG of the ITA 1936, sub three says, "All income which is eligible for accepted trust income treatment must be derived from arms, lengths, dealings. Sub four, the income cannot be derived if the purpose of the agreement was to secure accepted trust income treatment either directly or indirectly. Sub eight, minus assess proportionately on the share of accepted trust income and non-accepted trust income." So that's going to really mess up your accepted trust income treatment to minors if you intermingle assets from non-estate sources in the trust.
(18:28):
So we've already had those and then in about 2020, I'm just winging that here, 2021 maybe they introduced section 102AG sub 2A to capital A, capital A. What a mouthful, right? But anyway, if it's in the court, I'm literally looking at the legislation in the course. So join the course. This episode is not intended to upskill you on these integrity provisions, but just to let you know that they're there. The course is where you have to learn that. So they are basically saying in 102AG 2A that only income derived from property that was transferred to the testamentary trust from the estate of the deceased person as a result of the will is eligible for accepted trust income treatment. And then they say reaccumulations and reinvestments of that income are okay. So say you have the trust owns a property and then it sells that property and uses the sale proceeds to buy shares.
(19:32):
The income from the shares will still be eligible to generate accepted trust income treatment because it is a reinvestment and they can trace it back through to an asset that the deceased owned that was transferred under the will to the testamentary trust. But you can't just go and say like, "Oh, I'm going to actually transfer a separate investment property that one of the beneficiaries owns into the testamentary trust that will put your entire accepted trust income treatment at risk." Incidentally, I was having this conversation on a Facebook group with accountants and advisors about whether unpaid present entitlements are going to put accepted trust income treatment at risk. And there's actually a number of private rulings confirming that it's fine. If the income distributions are retained in the trust and then used to invest in assets that generate income, then that's okay as well. You'll still be able to get accepted trust income treatment.
(20:33):
So we already have these very strict integrity measures which reflect the genuine testamentary purposes comment and also the limited to income from assets of the deceased estate comment. So I personally don't think they're going to change 102AG. They're just going to keep on keeping on. Now the next requirement is that for discretionary testamentary trust established on or after one July 2028, the exclusion will only apply to trusts that can only benefit individuals and income tax exempt entities. So that is a new requirement. At the moment, a lot of trusts including the art of estate planning testamentary trusts do include a broad range of tertiary beneficiaries that include related trusts and companies as well as the income tax exempt entities. So we may in fact have to narrow that down to not include those trusts and companies. And to be frank, I can't see that having any issue.
(21:40):
I think a lot of the use case, especially when we're talking about ordinary families using these, they are not using corporate beneficiaries. Maybe they were, but corporate beneficiaries are probably just over and that's fine if that's where that lands. It is what it is. We're still getting ... The big win is the tax-free income to minors. I don't think people are really doing a lot of back-to-back trust distributions. They are inherently complicated anyway because you can't distribute to a trust which has a later vesting date. So I really don't see that being a big problem. We will probably just have to amend the deed. Am I amending my art of estate planning precedents now? No, I'm not going to change anything until I see the legislation. We have got an enormous history of unenacted budget measures. I don't know. If it gets implemented, great. Fine, not great necessarily.
(22:41):
Fine, we'll deal with it. It could also just fall by the wayside as being pretty low priority. So we'll se. And in terms of excluding beneficiaries from trusts, we've been through this. Remember we went through this whole thing around 2020 with the removal of the deceased estate and will exemption under the Foreign Acquisition and Takeovers Act for FIRB, remember? And also all the foreign person stamp duty and land tax surcharges. So it's not new amending and narrowing a beneficiary class in a will and I suspect we will just deal with that the exact same way. If we look at how the legislation came in for the FIRB issue, they took a very sensible approach of grandfathering all of the wills before that date. So basically it was about when the testator made the will, not when the testator died. So that's a very simple thing to either advocate and campaign for, for clarity.
(23:49):
If you made your will after one July, 2028, you've got to have narrower beneficiaries. If it was made before, you can have the full range. So let's hope they do that. If we see the legislation and it's not sensible, I think again, we can very easily mobilise and advocate for that. But to be honest, I'm not stressed about this at all. I think it will be super easy to navigate. I think it will have a very small impact on people and yeah, it'll be totally fine. I'm just thinking, what else do I want to say on that? Yeah, so if you're doing a will for clients now, I don't think I'd change anything. If they don't care, sure, but I don't know that I'd necessarily sign them up to a narrower class of beneficiaries. We all know it's a lot easier to exclude beneficiaries than it is to add in beneficiaries, especially when they're like a class of tertiary that don't have any default entitlements typically read the deed.
(24:46):
It depends. But I just think don't do anything until the legislation is released. This is something that I'm pretty confident will be entirely manageable. Also, I've heard a few people worried about this requirement where you can no longer use a corporate beneficiary is going to force distributions to come out of the trust. And I just want to remind you, testamentary discretionary trusts do currently have much more concessional treatment on accumulation of income. So under section 99A, typically accumulated income where no beneficiary is made presently entitled will be taxed at the top marginal rate. But under 99A2, sub two, there is an exemption where the trust resulted from a will and the commissioner is on the opinion that it would be unreasonable for section 99A to apply. So we have always got that. That's been there for a really long time. So I don't think that this is actually going to force us to not have the accumulation power anymore.
(25:55):
And yeah, really, honestly, every single government statement has to have some level of spin of trying to backtrack without being embarrassing. So I think that they've just sort of highlighted these as a way to try to just make it really clear that there's still integrity measures in place. It's not a free for all with testamentary trust, but I will not be surprised if we don't see any new legislation relating to accepted trust income treatment. All that will happen is my prediction. I'm happy to be wrong on this. I'm just having a guess, but my prediction is that the minimum 30% tax will just refer to into Vivos trust and everything will stay as it is for the testamentary discretionary trusts. Interestingly, actually, and I do just want to say maybe there will be an exclusion in that legislation because I've just been focusing on the income to minors, but this is also for adults.
(26:52):
So adults with special needs, low income adults, they're indicating that they are all just going to be taxed at the marginal rates. So get the tax-free threshold and the lower rates again as well. So maybe there will be a carve-out and basically saying if it's set up under a will, noth applies here, but I don't think they're going to rejig and change the rules we're relying on for testamentary discretionary trusts. So what should you do after this? Firstly, I think you should be shouting it from the rooftops. Get on a video face to camera, talk about it, talk about what great news it is, send out a newsletter to your clients. I think you are going to see your inquiries about testamentary trusts increasing. So now is the perfect time to increase your testamentary trust capability. Testamentary trusts are getting on the map. All publicity is good publicity and we've been on the rollercoaster.
(27:51):
We saw that with the increase in inquiries where even though the testamentary trusts were maybe losing their amazing tax treatment, people were actually asking more about them because we were emphasising the asset protection benefits. So now they are just stronger than ever. They're looking even more attractive compared to family trusts that you ... They were already incredible compared to family trust. Family trusts have gotten weaker and testamentary trusts have come out on top looking super strong. So obviously if you've already got the art of estate planning precedents, just make sure that everything is set up to deal with a higher volume. I would really encourage you to get the essential guide course. It really will just boost your confidence, make sure that any knowledge gaps are filled. And as you can see, it's really important that you really do understand what you're doing behind the documentation and the course is perfect for that.
(28:53):
If you do double in wills and you want to increase your capability for testamentary trust and be able to service those inquiries, invest in the art of estate planning precedence. We have everything to get you confident and up and running with starting to deliver testamentary trusts. From the beginning to the end, we've got the whole system for you to plug and play and then also sign up for the essential guide. It will teach you everything you need and I think just be prepared for a new wave of testamentary trust popularity. So overall, look, I could have done without the rollercoaster, but I am absolutely thrilled. I'm so proud of our community for rallying together and being able to lobby and hopefully we played a small part in this change in policy. I'm really proud for us sticking up for the importance of testamentary trust. It's been incredible that they're getting all of this attention and hopefully I'm here to Have more Australians use testamentary trust in their wills because I just believe so strongly in them and I do that by supporting lawyers to offer them with confidence and accuracy and have all the tools they need to be able to do that.
(30:16):
So I think at the end of the day there were some highs, there were some lows, but it is really positive and I'm thrilled to have to be able to bring you this great news. So look, stay tuned as we see more developments as the legislation comes out, if we hear anything else, of course I will update you. We are talking about this a lot in the TT Precedents Club group and the membership as well. So yeah, come join us if you want to keep your finger on the pulse and yeah, I'll be in touch and I look forward to talking to you next week. Thanks for tuning in.today. We pay all respects to elders past, present, and emerging, and celebrate the diversity of Aboriginal and Torres Strait Islander peoples and their ongoing cultures and connections to the lands and waters of Australia.
