Will the earnings inside my trust still be taxed at 47 per cent?

I am interested in testamentary trusts and understand that, under the proposed changes, income distributed from a discretionary testamentary trust will be subject to a minimum tax rate of 30 per cent, regardless of the beneficiary’s personal tax rate.

What is unclear to me is how income retained within the trust will be treated. My understanding is that, under the current rules, undistributed trust income is generally taxed at the top marginal rate plus the Medicare levy. Will retained income in a testamentary trust continue to be taxed this way under the proposed changes, or are different rules expected to apply?

The short answer is yes. Income retained in a trust is generally taxed at the top marginal rate, currently 47 per cent including the Medicare levy. That applies to both family trusts and testamentary trusts, the latter being trusts created under a will.

Estate planning solicitor Rachael Rofe, who has met with Treasury on this issue, says the proposed 30 per cent minimum tax applies only to income distributed to beneficiaries, not income retained in the trust. Retained income would continue to be taxed at 47 per cent.

If the proposed changes proceed and income is distributed to an individual beneficiary, the trustee would pay tax at 30 per cent and the beneficiary would receive a credit for the tax already paid. If their personal tax rate is higher than 30 per cent, they would pay the difference. If it is lower, there would be no refund.

That is the curious part. Although the measure has been described as targeting wealthy Australians, the additional tax burden falls mainly on low-income earners whose marginal tax rate is below 30 per cent. Company beneficiaries are potentially worse off again, as they would receive no credit for the 30 per cent tax already paid by the trustee.

It’s early days yet, as the legislation has not yet been released. Regardless of any proposed tax changes, testamentary trusts remain an important estate planning tool for protecting inheritances from relationship breakdown, bankruptcy and creditors.

You have advised readers who intend to keep assets beyond June 30, 2027, to obtain a professional valuation around that date. I’ve already entered a reminder in my Google Calendar, but I have two questions.

First, what does the ATO regard as a professional valuation? Would a detailed valuation from a real estate agent be acceptable, or would I need to engage a licensed valuer? Second, how close to June 30 should the valuation be obtained? Is there an acceptable timeframe before or after that date?

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