Jim Chalmers’ Budget trust changes a ‘death tax’ by stealth

A surprise “death tax” contained in the fine print of Tuesday night’s Budget papers could see income generated by discretionary testamentary trusts — a commonly used estate planning tool — subject to a minimum 30 per cent tax rate.

The changes — which Labor claims will create a “fairer tax system” for workers — will come into effect July 1, 2028.

Labor claims the reform will ensure those who derived their income from assets held in trusts will have tax rates more line with the majority of Aussie workers who earn their living from wages.

But the Coalition has argued it would unfairly penalise families passing down assets in the trusts who rely on them as a primary tool for inheritance management.

Opposition leader Angus Taylor labelled it a “hidden tax” aimed to target 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,” Mr Taylor.

“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”.

The Treasurer said deceased estates, fixed trusts, and existing discretionary testamentary trusts were all exempt from the changes — but didn’t clarify the inclusion of newly established trusts.

A fixed trust is where the person who made the Will has already decided the split to beneficiaries, while a discretionary testamentary trust gives the trustee flexibility to alter their split to beneficiaries.

“I want to make it really clear that we are not changing the arrangements for inheritance taxes,” Dr Chalmers said.

“The government was very clear, and the documents on budget night were very clear that deceased estates fixed trusts, existing discretionary testamentary trusts, they’re all exempt from the changes that we made on Tuesday night,” he said.

“People can continue to set up a fixed testamentary trust into the future.

“I know that people will run all kinds of scare campaigns about this. We expect that people are trying to focus on things that aren’t in the Budget on Tuesday night.”

In a Budget statement published on Tuesday, Labor claimed it wouldn’t apply to charitable and special disability trusts, or complying superannuation funds, deceased estates, primary production income, and certain income relating to vulnerable minors.

“There are legitimate reasons to use trusts, such as succession planning and asset protection, but the current settings are becoming unsustainable with the number of discretionary trusts more than doubling over the past 20 years,” it stated.

Labor claims high wealth individuals and families had been able to achieve an average tax rate four percentage points lower through trusts compared to those who don’t.

Mr Taylor accused Labor of being “addicted to spending” and insisted their Budget was riddled with “toxic taxes”.

“This is a government that, before the last election, said it wasn’t going to impose any of these taxes, and we keep finding new ones,” he said.

“A government addicted to spending will keep finding new taxes to impose on Australians. When a Labor government runs out of its money, it comes after yours.

“We know now there’s another hidden tax there. Who knows what else we find in the coming days and weeks.”