Written by Nicole Treacey and Julie Dalling.
Whilst the release of the budget did not contain any proposed measures which would directly impact the area of estate planning and succession law, it does have some measures which may have an indirect impact on how people structure their affairs.
Home Guarantee Scheme
The government has undertaken to extend its Home Guarantee scheme. This scheme allows successful applicants to purchase property with as little as a 5% deposit. This could potentially place parents in the unfortunate position of having to assist their adult children service loans that they may not necessarily be able to completely afford. The problem is that the parents, in doing what they consider is in their children’s best interest, do not always understand the issues that this may create for their estate when they pass away. For example, by providing regular financial assistance to adult children during their life, they may inadvertently create an ability for that child to seek further provision from their estate on their death.
Any parent should consider taking appropriate legal and financial advice before offering financial assistance to their adult children.
Pension Draw Downs
The government has also indicated that it will extend the minimum superannuation draw-down rates, which were reduced throughout the pandemic. Retirees will not be required to draw-down as much from their super as they are under the standard rules. The amount a person has in super can often impact the estate plan, as a person’s net wealth is relative to their overall estate plan.
It is also worth noting that while it might seem attractive to a retiree to keep as much as possible in the superannuation environment, if they do not have a dependent to leave those benefits (if they were leaving it to non-dependent adult children for example), those proceeds may end up being taxed. This means that a higher balance might not always provide the best long-term tax outcomes.
Testamentary Discretionary Trusts
As a quick refresher, a TDT is a trust that you establish in your Will for the benefit of your family or other loved ones. TDTs are advantageous in Wills because they provide asset protection benefits and potential tax-minimisation opportunities.
The budget did not give any indication that the government intended to amend the laws with respect to taxation of inheritances or Testamentary Discretionary Trusts (TDTs). The budget did however introduce two indirect changes that will positively impact TDTs.
Increase in the LMITO
The increase in the Low and Middle Income Tax Offset (by $420, bringing the maximum LMITO to $1,500) means that distributions within TDTs to beneficiaries who fall within that income tax bracket will receive an added boost. This is particularly effective for children under 18 who are beneficiaries of the TDT. These changes mean that the trustee of a TDT (the controller) can assign trust income to minor beneficiaries (such as young children/grandchildren) to be taxed at adult rates (with an effective tax-free threshold including LMITO of $25,437 per year, up from the previous $23,226 per year), as opposed to the tax rates for minors receiving trust income in a family trust (namely a trust not in the Will) which has a tax-free threshold of only $416 per year. However, it is noted that LMITO is planned to end on 30 June 2022.
Electronic lodgement
The government is planning to digitalise trust and beneficiary income reporting and processing, by facilitating the lodgement of electronic trust income tax returns. Trust income reporting and assessment is not currently automated to the same extent as personal and company tax returns. From 1 July 2024 when this measure is to commence (pending confirmation of software providers’ ability to deliver), trustees will be able to lodge tax returns themselves electronically. This option will reduce compliance burdens on trustees, reduce processing times, increase pre-filling and automate ATO assurance processes, making TDTs easier for trustees to self-manage if appropriate.
For more information on the effectiveness of TDTs and examples of how the tax concessions work, please see our factsheets here.