Superannuation changes and their impact on Estate Planning
From 1 July 2017, many changes to superannuation laws as envisaged by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 will come into effect. In overview, the key changes include:
- concessional cap (limiting how much you can put into your superannuation): reduced to $25,000 per annum
- non-concessional cap: reduced to $100,000 per annum (with a restriction on making any further non-concessional contributions if your superannuation balance exceeds $1.6m – subject to future indexation)
- income threshold (where contributions are subject to additional tax for high income earners): reduced from $300,000 to $250,000
- transition to retirement pensions: fund income for TTR pensions to be taxed at 15%
- maximum balance that can be transferred to pension phase: $1.6m limit (subject to indexation)
- CGT relief available for assets in pension phase: restricted by the new $1.6m threshold
- 10% test for deductibility of personal contributions: removed
- anti-detriment deductions: removed
With the majority of these changes reducing the taxation benefits found within the superannuation environment, interest has increased in testamentary trusts (and in particular, testamentary discretionary trusts) as a vehicle to preserve family wealth for future generations.
Testamentary trusts are established in Wills and come into existence when the will maker dies. As well as providing opportunities for asset protection, testamentary discretionary trusts are known for their tax advantages. The taxation of trusts is governed mostly by Division 6 Part III Income Tax Assessment Act 1936 (ITAA 1936) and Chapters 3-1 and 3-3 Income Tax Assessment Act 1997 (ITAA 1997).
Testamentary discretionary trusts provide considerable flexibility to minimise tax by reason of:
- the ability to make distributions to minors taking advantage of the full adult taxpayer tax-free threshold (minors receiving a distribution of net income from a testamentary trust enjoy the same tax free threshold as adult resident taxpayers, namely $18,200);
- the ability to determine which persons among a class of beneficiaries should receive a distribution and the amount of that distribution with a focus on beneficiaries on the lowest marginal tax rates; and
- the ability to determine which persons among a class of beneficiaries should receive a distribution and the amount of that distribution where a CGT asset of the discretionary testamentary trust is sold (as opposed to being appointed to a beneficiary of the trust), again with a focus on beneficiaries on the lowest marginal tax rates.
These long standing strengths of testamentary discretionary trusts reinforce their importance in family wealth preservation, especially in a changing superannuation environment.
Josephine Heesh, Partner
Michael Crowe, Associate