A buried provision inside this week's federal Budget has reintroduced what critics are now calling a backdoor death tax through Australia's most popular estate-planning vehicle, with testamentary discretionary trusts pulled under the same 30 per cent minimum tax rate that already applies to ordinary family trusts.
The change was flagged on The Australian's daily wealth wrap, where the paper's wealth editor described the move as a sleeper provision that blindsided even seasoned estate planners.
"Do we have a death tax or an inheritance tax in Australia? Officially, no. In reality, increasingly so," he told viewers. "There is another tax that none of us saw in the budget initially, and that's a death duty."
Testamentary discretionary trusts are set up under wills to channel inheritance to family beneficiaries. For decades they have enjoyed marginal-rate treatment to protect minors and provide flexibility for surviving spouses. From the moment the new measure takes effect, those trusts will be locked into the same 30 per cent floor as everyday family trusts.
"In the budget this week, to many people's surprise, particularly inside the estate planning sector, testamentary discretionary trusts, the most popular form of trust relating to wills and estates, which distribute income, will come under the new family trust tax minimum rate. They will have to pay 30 per cent from the time that new tax comes in. That's a big change. It is, by any other word, a death tax, and it's not the first."
The "not the first" line points back to Division 296, the new super tax on balances above $3 million, which already carries timing rules that bite at the moment of death. Stacked on top is the 17 per cent levy that adult children pay on the taxable component of any super they inherit, a charge most beneficiaries discover only when the cheque arrives.
"Most people are still unaware that if you have super, when most people, most of the time, if they are inheriting that super, adult children, if they inherit that super, they will face an inheritance tax of 17 per cent on the super they receive."
"More and more, we are finding that as the great wealth transfer comes down the line in the next few years, an amount of money will transfer between the generations like we have never seen. And if you think the government aren't standing by ready to clip the ticket on that, you might be wrong."
For families currently using testamentary trusts to channel inheritance income to grandchildren or to surviving partners on lower marginal rates, the calculus has changed sharply. A trust that previously distributed $100,000 across three minor beneficiaries at the adult marginal rate could, under the new 30 per cent floor, surrender roughly $30,000 a year to tax before a single beneficiary sees a dollar.
The shift lands the same week that Equity Mates branded Australia "the worst place in the world to start a business" over the Budget's 30 per cent minimum capital gains rate on founders, and Macro Business's Leith van Onselen warned of a biggest-in-40-years housing correction tied to negative gearing changes. The testamentary trust angle becomes the third leg of a Budget that has loaded tax surprises onto the wealth, business and inheritance pipeline simultaneously.
Estate planners have been quick to point out that the measure does not technically create a death tax line item in the federal tax code. Instead, it reaches the same destination by reclassifying the income generated by inherited assets after they enter a will-trust structure. As The Australian put it on air, the policy is a death tax "by any other word."
Whether the provision survives Senate negotiations or gets carved out before legislation passes, the political ground has clearly shifted. With Division 296 already pencilled in for the new financial year and the testamentary trust rate flagged in the same Budget papers, Australia's tax treatment of inheritance, long defended as an exception within the OECD, is being quietly rewritten clause by clause.