The retiree client the trust tax forgot

The problem is simple: there is no threshold. The trustee pays 30 per cent on all of the trust’s taxable income, and individual beneficiaries receive a non-refundable offset. The Explanatory Memorandum’s own example applies the tax to a trust with just $30,000 of income. For a beneficiary whose own average tax rate is well under 30 per cent, the part of the offset they can’t use is simply lost.

The NTAA has calculated that a beneficiary needs a taxable income of about $229,320 before they can use the full offset. Above that level, the minimum tax changes very little. Below it, unused offset becomes extra tax. In Parliament on 26 October, Tony Pasin MP described a retired farming couple living on $90,000 of lease income through a family trust. Their accountants estimate their tax rising from about $8,000 to $27,000. That is not a high-wealth outcome. It is a modest retired couple paying more than three times as much. Add an adult child at university to a family like that, and the story is the same.

Retirees also have no safety net. A lower after-tax income does not open the door to the Age Pension, because trust assets still count under the means test. We would simply be poorer, after planning our whole lives not to rely on the pension.

For practitioners, the timing is the other worry. Clients are being asked to choose a path before the details are settled. If a trust’s election to fix entitlements ends, all of its net income in that year is taxed at 47 per cent. The rollover runs for three years from 1 July 2027, but it is not available once a trust has made the election. Several matters are left to ministerial instruments. And stamp duty depends on each State: Victoria’s government has promised a three-year duty moratorium for restructures if re-elected, and NSW has made a conditional pledge on the election. It feels like being told: make up your mind, and we’ll make up the rules later.

One point worth passing on to retiree clients: the Explanatory Memorandum says the rollover covers trusts that “hold passive investments and do not carry on a business”. Family investment trusts are not shut out.

I am not asking for special treatment for retirees, and I accept that trusts need reform. I am asking for three changes:

• An exempt amount for the first $150,000 of a trust’s net income, counted across all of a family’s trusts so it can’t be multiplied, and indexed every year so bracket creep doesn’t erode it.
• Unused offsets refunded or carried forward, not lost.
• Treasury to publish the number of affected trusts, beneficiaries and dollars by income band and age, so the Senate can see who actually pays.

Thresholds are not a radical idea. The Tax and Transfer Policy Institute, which supports the bill, points in its submission to the Senate inquiry to Denmark as a model, where savings income is taxed at a lower rate up to a threshold.

Accountants see these clients every day. If you have retiree clients in this position, tell your local member and the Senate before it votes this month. Self-funded retirees saved so we would never be a burden on anyone. We want to be part of the solution, not collateral damage.

The anonymous author is a 70-year-old self-funded retiree from Melbourne and the founder of Fair Trust Reform.