By Darin Tyson-Chan, Editor, selfmanagedsuper
The 2026 federal budget was handed down last month and all superannuation stakeholders I have spoken to since were relieved the industry had no direct measures applied to it. And rightly so seeing all of the angst the Division 296 tax policy has created over the past three-and-a-half years.
But this budget was a bit of a weird one from a superannuation perspective. As I mentioned above, there were no direct measures relevant to the industry, but the trickle-down effect of one headline policy in particular will be something we will all have to watch in the coming months.
However, whenever I’m asked whether I want the good news or bad news first, I always like to start with the good news and there was some for super in the budget.
Anyone following the post-budget commentary will know three main measures have dominated discussion. They are the changes to the negative gearing rules, the capital gains tax (CGT) provisions and the taxing of discretionary trusts.
So the really good news is the change to the 50 per cent discount allowable against an asset held for 12 months will not apply to superannuation funds. That really is such a relief for taxpayers as it confirms the position of super funds as the most tax-effective savings vehicle available to Australians.
Further, the carve-out has potentially provided a clearer direction for people who are grappling with the Division 296 tax because in all likelihood they will be considered to be ‘in scope’ when the new impost is implemented on 1 July.
Why so? With super funds retaining the ability to apply the 50 per cent CGT discount it increases their tax effectiveness when compared to holding investments outside of the retirement savings framework. Analysis would still have to be performed to compare the pros and cons of investing inside or outside of super, but on face value you would imagine the scales have been tipped in favour of investing within the super environment when contemplating which direction to take from a Division 296 tax point of view.
On the flipside though, the decision the government has made to impose a minimum 30 per cent tax on discretionary trusts has the possibility of having a massive impact on the superannuation sector.
Again on the surface this doesn’t look like a big deal, but from a superannuation perspective the measure needs to be examined with estate planning in mind. To this end, trusts do play an integral role for many Australians when looking to effectively allocate death benefits in a responsible manner.
In this context it is testamentary trusts that are used initially as part of an estate planning strategy. A decision to employ one is usually made when the member in question is a little worried a substantial amount of inheritance money will be needlessly frittered away by the recipient. As such, they employ the added access safety net of a trust.
That’s all well and good, but this is where one particular budget announcement bites here. The testamentary trust is ‘transitioned’, if that is the right description, to a discretionary trust to facilitate the distribution of the death benefits.
Up until now this practice has been fine as tax has then been levied on the beneficiary at their marginal tax rate when they get the money into their bank account.
However, from 1 July 2028, a 30 per cent minimum tax will be applied at the trust level before any distributions are even made. In addition, the new impost will not prevent the individual from paying tax on this channel of income, but there are some rules to mitigate this element of the measure.
Here, if the individual’s personal marginal tax rate is already higher than 30 per cent, they will have to pay additional tax on the trust distribution. If the person’s marginal rate is lower than 30 per cent, they won’t receive a refund for the excess tax.
Already discussions are taking place as to whether testamentary trusts can be used in conjunction with fixed rather than discretionary trusts from 1 July 2028 onwards. Sounds okay, but there is a very important downside to this approach.
Fixed trusts apply a fixed entitlement to the income and capital of the structure and so offer no discretion to trustees to vary allocations. More importantly, discretionary trusts separate legal ownership from personal ownership of assets. It means trust beneficiaries will have that level of protection if they find themselves in a position of financial difficulty where creditors are knocking at the door for the repayment of debts that have been incurred. This is protection fixed trusts do not offer.
So it may be in future years individuals formulating a superannuation estate plan will have to make a choice between tax effectiveness stemming from a fixed trust and asset protection provided by a discretionary trust.
Currently, we do not have a lot detail as to how the new taxing of trusts will work and whether the indirect impact on testamentary trusts will be addressed so we will just have to be patient to see how this all eventually plays out.
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