Why Your Will Matters More Than Ever

A Will stands as the cornerstone of any effective estate plan. This legally binding document outlines how your assets, your ‘estate,’ will be distributed after your death. Beyond merely dividing property, a thoughtfully drafted Will provides critical directives and peace of mind.

It allows you to designate an Executor, the trusted individual or entity responsible for carrying out your wishes and managing your estate’s administration. You decide who will benefit from your hard-earned assets – from real estate and investments to cherished personal items – by naming beneficiaries. For those with minor children or dependants needing ongoing support, a Will enables the establishment of trusts. Crucially, you can nominate a guardian for your minor children, ensuring their care aligns with your values should both parents pass away. A clear Will also significantly reduces the potential for family disputes and legal challenges. This prevents unnecessary emotional and financial strain during an already difficult time.

What Happens If You Die Without a Will in Victoria?

Dying without a valid Will means you’ve died ‘intestate.’ In such cases, the Victorian legal system, specifically the Administration and Probate Act 1958 (Vic), dictates how your assets are distributed. This formula is rigid, potentially leading to outcomes far removed from your true desires.

As of July 2026, the Victorian rules of intestacy generally provide for distribution as follows:

• Partner and Children (with that partner): Your partner receives the entire estate.
• Partner and Children (from a previous relationship): This scenario involves a ‘statutory legacy.’ Your partner is entitled to all personal chattels, a fixed initial amount, and half of the remaining estate. The other half is divided among your children from the previous relationship. For deaths occurring between 1 July 2026 and 30 June 2027, this statutory legacy amount is $591,390.00.
• No Partner, but Children: Your estate is divided equally among your children.
• No Partner and No Children: The estate passes to your parents, then siblings, and so on, following a predetermined hierarchy.

This inflexible system often fails to account for modern family structures, estranged relatives, or charitable intentions. Relying on intestacy rules can result in unintended beneficiaries, prolonged legal processes, and increased costs for your loved ones.

How Powers of Attorney Safeguard Your Future While You’re Alive

Estate planning extends beyond your death, addressing situations where you might lose the capacity to manage your own affairs. In Victoria, an Enduring Power of Attorney (EPOA) serves as the critical document for this.

Governed by the Powers of Attorney Act 2014 (Vic), an EPOA allows you to appoint one or more people, known as your ‘attorneys,’ to make decisions on your behalf. It’s ‘enduring’ because its authority continues even if you lose decision-making capacity due to illness, accident, or age.

An EPOA can cover:

• Financial Matters: This includes managing bank accounts, paying bills, buying or selling property, and handling investments.
• Personal Matters: Decisions about your living arrangements (e.g., whether you live at home or in aged care), who you associate with, and other lifestyle choices fall into this category.

You specify when your attorney’s power begins. For financial matters, it can be immediate or contingent upon losing capacity. For personal matters, the power only commences once you’re unable to make decisions yourself.

Choosing an attorney is a profound act of trust. This individual will hold significant control over your life. Therefore, they must be trustworthy, financially responsible, willing, and capable of fulfilling the role. You can appoint multiple attorneys, specifying whether they must act jointly (all agree) or severally (each can act independently). Professionals like solicitors or trustee companies are also viable options, particularly for complex financial affairs.

The Powers of Attorney Regulations 2025 (Vic), which commenced on August 10, 2025, brought updated prescribed forms and witnessing requirements. While the core legislation remains, using the latest forms is essential for validity. These regulations also include provisions for electronic and remote witnessing for certain aspects, though for Advance Care Directives, witnessing must still be done in person.

Your Medical Wishes: Medical Treatment Decision Makers and Advance Care Directives

Your voice in medical decisions, even if you can’t speak for yourself, is a fundamental right in Victoria. The Medical Treatment Planning and Decisions Act 2016 (Vic) is the key legislation ensuring your values and preferences are respected.

This Act provides for two primary documents:

1. Appointing a Medical Treatment Decision Maker: This allows you to legally appoint a specific person to make medical treatment decisions for you if you lose capacity. This individual can consent to or refuse treatment, guided by what they believe your wishes would be. Your chosen decision-maker should be someone with whom you’ve openly discussed your values, and who you trust to advocate on your behalf.
2. Advance Care Directive (ACD): An ACD formally records your preferences for future medical treatment. It can contain an ‘Instructional Directive,’ a legally binding statement about treatments you consent to or refuse. It can also include a ‘Values Directive,’ outlining your broader values to guide your Medical Treatment Decision Maker. For example, you might state you would refuse life-sustaining treatment if in a terminal phase with no prospect of recovery. This clarity provides comfort to your family and medical team, alleviating the burden of difficult choices.

The framework established by the Medical Treatment Planning and Decisions Act 2016 creates clear obligations for health practitioners and ensures medical decision-making aligns with an individual’s preferences.

Federal Policy Shifts: Capital Gains Tax and Trusts

Recent federal budget changes, with effective dates in July 2026 and 2027, represent significant structural reforms to the taxation of private wealth in Australia, directly impacting estate planning.

Capital Gains Tax (CGT) Overhaul: From July 2027

From 1 July 2027, the long-standing 50% CGT discount for assets held over 12 months is set to be replaced with a cost base indexation model. Additionally, a 30% minimum tax will apply to realised capital gains. These changes will affect a wide range of assets, including inherited investment properties, shares, and business interests.

For assets acquired before 1985 (pre-CGT assets), the current exemption will be limited. Gains accrued before 1 July 2027 will remain exempt, but those accruing after this date will be subject to the new indexation and minimum tax rules. This is a material change for many long-held estates. The main residence exemption for one’s primary home is generally unaffected, especially if sold within two years of death.

Navigating the “Right to Occupy” and CGT for Inherited Homes

A critical development impacting inherited property and CGT is the Australian Taxation Office’s (ATO) Draft Taxation Determination TD 2026/D1, released in January 2026. This draft determination tightens the criteria for accessing the main residence exemption for inherited properties, specifically concerning the “right to occupy.”

Previously, a beneficiary living in a deceased’s home, even with a trustee’s discretion, was often assumed to maintain the main residence exemption. However, TD 2026/D1 now requires an express, unambiguous right to occupy the dwelling to be stated directly in the deceased’s Will for a named individual. Informal arrangements or broad discretionary powers granted to trustees (even in testamentary trusts) are unlikely to satisfy this requirement. Failing to meet this explicit wording could lead to significant Capital Gains Tax liabilities for beneficiaries, potentially costing estates hundreds of thousands of dollars. Estate planners must review existing Wills and testamentary trust structures to ensure they comply with this stricter interpretation, particularly before the 1 July 2026 tax-change window for many aspects.

Discretionary Trusts and the New 30% Minimum Tax

From 1 July 2028, a significant shift will occur for discretionary trusts. A 30% minimum tax will apply to the taxable income of these trusts at the trustee level. While individual beneficiaries will receive non-refundable credits for tax paid, those on lower marginal tax rates (below 30%) may effectively pay more tax, as excess credits will be lost. This significantly curtails the traditional income-splitting advantage of discretionary trusts.

Crucially for estate planning, this minimum tax will also apply to discretionary testamentary trusts created after 12 May 2026. This impacts the tax benefits previously enjoyed by beneficiaries like children or low-income earners within these structures. Existing discretionary testamentary trusts (in existence as of 12 May 2026) may have some protection, with income from assets already held within them remaining exempt from the new minimum tax rules. Deceased estates themselves and fixed trusts are currently excluded from this measure.

These changes highlight the importance of reviewing existing trust structures and considering their ongoing efficacy as estate planning tools. While trusts remain valuable for asset protection and control, their tax-driven flexibility is undeniably altered.

Updated Costs for Administering an Estate in Victoria

Administering an estate, particularly when probate is required, involves certain costs. It’s crucial to understand these, as they can impact the net value distributed to beneficiaries.

Probate Filing Fees (Updated for July 2026)

A Grant of Probate, issued by the Supreme Court of Victoria, formally validates a Will and authorises the Executor to act. Asset holders, like banks and Land Use Victoria, typically require this grant for significant assets, especially real estate.

Effective 1 July 2026, the Supreme Court of Victoria’s filing fees for probate applications have been updated. These fees are calculated on a sliding scale based on the gross value of the deceased’s Victorian estate. For instance:

• Estates valued at less than $250,000: Fee waived.
• Estates $250,000 or more, but less than $500,000: $544.00.
• Estates $500,000 or more, but less than $1,000,000: $1,088.00.
• Estates $1,000,000 or more, but less than $2,000,000: $2,538.70.
• For estates worth $7 million or more, the fee can now reach up to $17,770.80, a substantial increase compared to previous years.

The cost for advertising the intention to apply for Probate in Victoria has also increased to $38.00 as of 1 July 2026. This notice must run for 14 days on the Supreme Court of Victoria website. These court fees are separate from any legal fees charged by a solicitor to assist with the probate application.

Will Deposit Fees

From 1 July 2026, the prescribed fee for depositing a Will with the registrar under the Administration and Probate Act 1958 is 1.6 fee units. The fee for the delivery of a deposited Will by the registrar is 2.7 fee units. The value of a fee unit for the financial year commencing 1 July 2025 is $16.81, and fees are adjusted annually. However, no fee is payable if the deposit is due to a legal practitioner’s death or cessation of practice in Victoria.

Digital Assets in Modern Estate Planning

In our increasingly digital world, a significant portion of our lives, from sentimental photos to financial investments, exists online. These ‘digital assets’ are a new frontier in estate planning. Addressing them is essential. While the Wills Act 1997 (Vic) doesn’t explicitly define digital assets, they are generally considered property that can be included in a Will.

Digital assets can encompass:

• Financial Value: Cryptocurrencies, online bank accounts, share trading platforms, online payment systems (e.g., PayPal), and business assets like websites and domain names.
• Sentimental Value: Cloud-stored photos, emails, social media accounts, and online gaming profiles.

The challenge arises because accessing these assets after death can be complex due to privacy laws and platform terms of service. Without explicit instructions, executors may struggle to locate, access, manage, or close these accounts.

Therefore, a modern estate plan for July 2026 should:

• Create an Inventory: Document all digital assets, including user names and passwords, storing this information securely.
• Grant Explicit Authority: Your Will should include specific clauses authorising your Executor to access, manage, and distribute your digital assets. This should explicitly provide them the means to bypass terms of service and engage technical experts if needed.
• Address Powers of Attorney: An EPOA should also include specific clauses authorising your attorney to handle your digital accounts if you become incapacitated.

This proactive approach helps mitigate risks like identity theft, ensures your wishes are followed, and eases the burden on your loved ones.

Superannuation Death Benefits

Superannuation often represents one of an individual’s largest assets, yet it’s treated differently from other assets. While generally not governed directly by your Will (unless specifically directed via a binding death benefit nomination), changes to superannuation legislation can significantly impact the overall wealth transferred to beneficiaries.

From 1 July 2026, new rules are taking effect regarding the taxation of superannuation balances. An additional tax will apply to earnings attributable to total superannuation balances exceeding A$3 million. While the core principle of superannuation death benefits (tax-free for dependents, potentially taxed for non-dependents like adult children) remains, the evolving superannuation landscape impacts the overall value of this asset for estate planning purposes. Understanding these changes and their potential effect on your superannuation is a vital part of comprehensive estate planning.

Ensure Your Plan Remains Current

The dynamic nature of legislation, particularly evident in the federal and state budget changes impacting July 2026, means estate planning is not a one-off task. A Will and associated documents drafted even a few years ago might not fully capture your current wishes or apply the most effective legal and tax strategies. Changes in personal circumstances – marriage, divorce, births, deaths, or significant changes in assets – also necessitate a review.

Engaging with a specialist estate planning lawyer in Melbourne ensures your documents are valid, effective, and tailored to your circumstances, reflecting the legal position as of July 2026. This proactive approach is the most profound gift you can offer your family, providing clarity and security for the future. Act now to review your estate plan and safeguard your legacy.

Sources

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The post Crafting Your Legacy: A Detailed Look at Last Wills & Testaments appeared first on Capital Five Partners.

For consultants, IT specialists, engineers, and other professionals providing specialised skills, understanding these rules is not just a matter of compliance—it’s fundamental to wealth management and financial security. Misinterpreting the PSI regime can lead to unexpected tax liabilities, penalties, and the unwinding of carefully planned financial strategies.

This article provides a comprehensive overview of the PSI rules, the tests used to determine their application, and the potential options for restructuring your business affairs to ensure you remain on the right side of the law.

What Exactly is Personal Services Income?

The ATO defines PSI as income that is mainly a “reward for an individual’s personal efforts or skills.” In simple terms, if more than 50% of the income received for a specific contract is for your labour, knowledge, or expertise—as opposed to the supply of materials, equipment, or products—then that income is considered PSI.

This regime is prevalent in industries where the primary value delivered is intellectual and personal, including:

• Information Technology and Software Development
• Engineering and Management Consulting
• Medical and Allied Health Professionals
• Financial Services and Marketing
• Media and Creative Professionals

The core principle behind the PSI rules is to prevent individuals who are, for all intents and purposes, acting like employees from accessing the lower corporate tax rate or splitting income with family members to reduce their overall tax burden. The legislation, found in Part 2-42 of the Income Tax Assessment Act 1997, effectively looks through the company or trust structure and attributes the income directly to the individual who performed the service.

Navigating the PSI Tests: A Step-by-Step Guide

If your business earns PSI, you must determine if the PSI rules apply to you. This is done by working through a series of tests. If you pass a test, your entity is considered a Personal Services Business (PSB), and the PSI rules do not apply for that income year. This means you can operate as a normal business, retaining profits in the company and claiming a broader range of business deductions.

Step 1: The Results Test

The Results Test is the primary and most definitive test for establishing a PSB. It is designed to identify businesses that are contracted to produce a specific outcome for a set price, rather than just being paid for their time. To pass the Results Test for at least 75% of your PSI in an income year, you must satisfy all three of the following conditions:

1. Paid to Produce a Specific Result: The contract specifies an outcome you must deliver. Payment is contingent on achieving this result, not merely for the hours you work.
2. Provide Your Own Tools and Equipment: You are required to supply the primary tools or equipment necessary to complete the work. This must be more than just a laptop if more substantial equipment is essential to the job.
3. Liable for Rectification: You are responsible for correcting any defects in your work at your own expense and without further payment.

Example: An IT consultant in Melbourne is engaged to develop and implement a new CRM system for a client for a fixed fee of $80,000. Her contract states the project deliverables, and she uses her own specialised software and diagnostic tools. A warranty clause requires her to fix any bugs found within six months of deployment at no extra cost. She passes the Results Test.

Conversely, if the same consultant was paid $1,500 per day to “provide IT support” using the client’s systems and under their direction, she would likely fail the Results Test.

Step 2: The 80/20 Rule

If you do not pass the Results Test, you must assess the 80/20 Rule. This rule asks: does 80% or more of your PSI in an income year come from a single client and their associates?

If the answer is yes, the PSI rules will automatically apply. You cannot proceed to the other tests unless you obtain a specific determination from the ATO allowing you to be treated as a PSB.

If the answer is no (i.e., your income is derived from multiple, unrelated sources, with no single client accounting for 80% or more), you can proceed to the final set of tests.

Step 3: The Remaining Tests

If you have less than 80% of your income from one client, you only need to pass one of the following three tests to qualify as a PSB.

A) The Unrelated Clients Test
You pass this test if you receive PSI from two or more clients who are not related to each other or to you, and you have publicly advertised your services. “Publicly advertising” means making your services known to a section of the public (not just a single client) through methods like:
* A public-facing website
* An active LinkedIn profile with service offerings
* Advertising in trade journals or online directories

B) The Employment Test
You pass this test if you either:
* Employ one or more other individuals to perform at least 20% of the market value of the principal work, or
* Have one or more apprentices for at least half of the income year.

The work performed by employees must be the core, “principal” work that generates the PSI, not just administrative or support tasks.

C) The Business Premises Test
To pass this test, you must, at all times during the year, own or lease business premises that are:
* Physically separate from your private residence.
* Physically separate from your clients’ premises.
* Used for your PSI-generating activities more than 50% of the time.

A home office, even a dedicated one, will not satisfy this test. It requires a genuine, external commercial space, such as a leased office in the Melbourne CBD or a dedicated workshop.

The Consequences of Being Caught by the PSI Rules

If you earn PSI and do not qualify as a PSB, the consequences are significant:

1. Attribution of Income: The net PSI is attributed to the individual who performed the services and taxed at their marginal tax rates, regardless of whether the money was left in the company.
2. Limited Deductions: The range of deductions your company can claim against the PSI is severely limited to what an employee could typically claim. This means deductions for the following are generally denied:
   • Payments to a spouse or other associate for non-principal work (e.g., bookkeeping).
   • Rent, mortgage interest, and other occupancy expenses for a home office.
   • Superannuation contributions for associates.
3. PAYG & Superannuation: Your company will likely have obligations to withhold tax (PAYG) from payments made to you and pay the Superannuation Guarantee on the attributed PSI.

Proactive Structuring and Legal Advice

Navigating the PSI regime requires careful, proactive planning. Waiting for an ATO audit is a high-risk strategy. For professionals in Melbourne operating through a corporate structure, consider the following:

• Contract Review: Ensure your client contracts are drafted to reflect a results-based relationship wherever possible. Emphasise deliverables, liability for defects, and your provision of equipment.
• Diversify Your Client Base: Actively market your services to avoid tripping the 80/20 rule. A broad client base is one of the strongest indicators of an independent business.
• Consider Genuine Employment: If your workflow allows, hiring another skilled professional to perform a substantive part of the principal work can help you meet the Employment Test.

The PSI rules are notoriously complex, and their application depends entirely on your individual circumstances. Getting it wrong can have a severe financial impact. Seeking expert legal and financial advice is not a cost—it’s an investment in the security and longevity of your professional practice.

Our team of wealth management and tax law specialists in Melbourne has extensive experience in advising contractors and consultants on the PSI regime. We can assist with reviewing your current arrangements, advising on restructuring, and ensuring your business is built on a compliant and tax-effective foundation. Contact us today for a confidential discussion.
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The Legislative Overhaul: A Shift in Investment Foundations

Historically, negative gearing has allowed property investors to offset net rental losses against other forms of income, such as salary and wages, thereby reducing their overall taxable income. Similarly, the 50% CGT discount has significantly reduced the tax payable on capital gains for assets held for more than 12 months. The new legislation fundamentally alters these long-standing provisions, with changes set to commence on July 1, 2027.

Key Implications for Real Estate Investors

The recent legislative changes present several critical implications for Australian real estate investors:

1. Negative Gearing Limited to New Residential Builds

From July 1, 2027, the ability to negatively gear residential properties will be strictly limited to new builds. This means that investors purchasing established residential properties after a specific cut-off date will no longer be able to claim rental losses against their other assessable income. This policy aims to redirect investment towards increasing housing supply.

2. Grandfathering Provisions for Existing Investments

A significant relief for current property owners is the implementation of grandfathering provisions. Properties held at 7:30 pm AEST on May 12, 2026 (Budget night), including those under contract awaiting settlement at that time, will retain their negative gearing entitlements under the existing rules until they are sold. This ensures that arrangements for taxpayers who have made investment decisions based on the previous framework will not change for those specific assets.

3. New Treatment of Rental Losses for Established Properties

For established residential properties purchased after 7:30 pm AEST on May 12, 2026, investors will find their ability to offset rental losses significantly curtailed from July 1, 2027. These losses can only be deducted from other residential rental income (including from other rental properties) or against a capital gain arising from the sale of a rental property. Any excess losses can be carried forward to offset residential property income in future years. This marks a fundamental shift from offsetting against personal income like salary and wages.

4. Replacement of the 50% Capital Gains Tax Discount

The long-standing 50% CGT discount for individuals, trusts, and partnerships will be replaced with a system of cost base indexation and a 30% minimum tax rate on capital gains. This means that only “real” capital gains, adjusted for inflation, will be subject to tax. The new rules apply to gains accruing after July 1, 2027.

5. Capital Gains Tax Grandfathering and Accrued Gains

Similar to negative gearing, there are transitional arrangements for CGT. The 50% discount will still apply to gains accrued before July 1, 2027. This means investors will need to be able to identify and separate gains made before and after this date for tax purposes. For new builds, investors will have the option to choose between the new and old CGT arrangements from July 1, 2027.

6. Increased Focus on New Housing Supply

The legislative changes explicitly aim to encourage investment in new housing. By limiting negative gearing to new builds, the government is incentivising investors to contribute to increasing the overall housing stock, which is intended to improve affordability for first-home buyers and ease rental market pressures.

7. Potential Shift in Investment Strategy Towards Positive Gearing

With the significant reduction in negative gearing benefits for established properties, investors may increasingly favour properties that are positively geared (where rental income exceeds expenses) or those with strong prospects for capital growth, even without immediate tax deductions. The profitability of an investment will rely more heavily on rental yields and genuine capital appreciation rather than tax-driven benefits.

8. Impact on Self-Managed Super Funds (SMSFs)

A key amendment secured during the parliamentary passage of the bill involves Self-Managed Super Funds (SMSFs). The legislation bans the use of Limited Recourse Borrowing Arrangements (LRBAs) for residential property by SMSFs. While existing LRBAs will not be affected, this removes a common mechanism used by SMSFs to leverage into residential real estate and brings SMSF borrowing rules for residential property in line with other super funds.

9. Strategic Review for Properties Purchased Between May 2026 and June 2027

Investors who purchased established residential properties between 7:30 pm AEST on May 12, 2026, and June 30, 2027, face a unique transitional period. These properties can be negatively geared during this interim period but will lose this benefit from July 1, 2027. This necessitates a careful review of the financial viability and long-term strategy for such investments.

10. Exemptions and Carve-outs

It is important to note that commercial property and other asset classes, such as shares, remain unaffected by the negative gearing changes. Furthermore, specific exemptions to the negative gearing changes will be available for private investors who support government housing programs, such as the provision of affordable housing. There have also been carve-outs and increased thresholds for small businesses, startups, and testamentary trusts regarding CGT, reflecting the government’s intention to support these sectors.

Looking Ahead: Adapt and Strategise

These reforms represent a significant recalibration of property investment incentives in Australia. While the government anticipates positive outcomes in housing supply and affordability, investors must adapt their approaches. The shift away from broad negative gearing benefits for established properties, coupled with changes to CGT, underscores a move towards a more fundamental investment rationale where profitability is driven by genuine returns rather than primarily tax advantages.

For Australian real estate investors, the immediate priority should be a thorough assessment of existing portfolios and future investment plans in light of these new rules. Consulting with financial advisors, accountants, and legal professionals is crucial to understand the specific implications for individual circumstances and to develop robust, compliant, and profitable strategies in this new regulatory environment. The landscape has changed, and successful investing will require informed decisions and proactive planning.

Sources

1. williambuck.com
2. treasury.gov.au
3. knightgroup.com.au
4. ato.gov.au
5. budget.gov.au
6. pm.gov.au
7. financialstandard.com.au
8. brokernews.com.au
9. smartpropertyinvestment.com.au
10. thedailyaus.com.au

The post Negative Gearing Changes: Must-Knows for Australian Real Estate Investors appeared first on Capital Five Partners.

This article explores the compelling tax benefits of incorporating a testamentary trust into your estate plan, offering practical insights for those seeking to secure their legacy in the most effective manner possible.

Testamentary Trusts: A Cornerstone of Modern Estate Planning in Melbourne

A testamentary trust is not a separate legal entity created during one’s lifetime; rather, it is a trust established within a will that comes into existence upon the will-maker’s (testator’s) death. Instead of assets passing directly to beneficiaries—a process fraught with potential risks and tax inefficiencies—they are instead transferred into the trust. A trustee, appointed by the testator in the will, manages these assets on behalf of the beneficiaries.

For residents of Melbourne, a city with a dynamic and often complex economic environment, this structure offers a tailored solution. It allows for the managed release of inheritances, protecting assets from creditors, legal claims, or the matrimonial property disputes of beneficiaries. However, the most significant and immediate advantages are often found in the realm of taxation.

The Unmatched Tax Advantage: Income Distributions to Minors

One of the most compelling reasons to establish a testamentary trust in Australia is the preferential tax treatment afforded to income distributions made to minor beneficiaries (children under 18).

Under normal circumstances, income earned by a minor, such as from a family trust established during a person’s lifetime (an inter vivos trust), is subject to punitive tax rates. The current rules, designed to prevent adults from diverting income to their children to avoid tax, see any annual income over a very low threshold ($416) taxed at the highest marginal rate (currently 45%).

However, income distributed to a minor from a testamentary trust is treated as “excepted trust income” under Division 6AA of the Income Tax Assessment Act 1936. This means it is taxed at normal adult marginal rates, just as if the minor were an adult taxpayer.

This distinction is profound. It allows each minor beneficiary to receive up to the full tax-free threshold—currently $18,200 per annum—entirely tax-free. Income beyond this threshold is then taxed at progressive adult rates, which are significantly lower than the penalty rates applied to non-excepted income.

Practical Implication: Consider a scenario where a portion of your estate is generating $40,000 of annual income. If this were left to your two young children directly or through a standard family trust, the vast majority of that income would be lost to tax at the highest rate. Through a testamentary trust, that same $40,000 could be distributed equally ($20,000 to each child), resulting in a minimal tax liability, as the bulk of the income falls within their individual tax-free thresholds. This preserves the capital and allows it to be used for the children’s education, maintenance, and general benefit as intended.

It is important to note a key compliance point: these concessional tax rates apply only to income generated from the assets of the deceased’s estate. Legislative changes were introduced to prevent parties from injecting unrelated assets into a testamentary trust to take advantage of this tax treatment for minors.

Strategic Income Splitting for Enhanced Family Wealth

The tax benefits of a testamentary trust extend beyond just minors. The discretionary nature of most testamentary trusts provides the trustee with the flexibility to stream income and capital gains among a wide range of potential beneficiaries in the most tax-effective way each financial year.

Beneficiaries of a discretionary testamentary trust can include the testator’s spouse, children (of all ages), grandchildren, and even other family members or entities. Each year, the trustee can assess the financial circumstances of each beneficiary and distribute income accordingly.

For a Melbourne family, this could mean:

• Supporting University Students: A grandchild at university with little or no other income can receive a distribution, utilising their tax-free threshold and low marginal tax rates to fund their studies and living expenses.
• Assisting a Low-Income Spouse: Income can be streamed to a spouse who is not working or has a low income, rather than to a spouse already in a high tax bracket.
• Managing Capital Gains: Capital gains realised from the sale of trust assets can be streamed to a beneficiary with available capital losses, potentially negating any Capital Gains Tax (CGT) liability for that financial year.

This ability to strategically “sprinkle” income among beneficiaries with lower marginal tax rates can dramatically reduce the overall tax burden on the family’s inherited wealth, allowing the capital to grow more effectively over time.

A Practical Example: The Power of a Testamentary Trust in Action

Let’s consider a hypothetical Melbourne-based couple, David and Sarah, who have a combined estate valued at $3 million, including their family home, an investment property, and a share portfolio. They have three children: Emily (25, a high-income professional), Tom (19, a university student), and Chloe (16, in high school).

Without a Testamentary Trust: If David and Sarah were to pass away leaving their assets directly to their children in equal shares, Emily would inherit $1 million, adding to her already high taxable income. Tom and Chloe would also receive their shares, but with Chloe being a minor, her inheritance would likely be held by a guardian, and any income generated would be subject to those punitive minor tax rates.

With a Testamentary Trust: David and Sarah’s will establishes three separate testamentary trusts, one for each child. The investment property and share portfolio are placed into these trusts. The annual income of $90,000 is generated.

The trustee can now make the following distributions:
* Chloe (16): Receives $20,000. The first $18,200 is tax-free, with a small amount taxed at the lowest marginal rate. This income can be used for her school fees and other expenses.
* Tom (19): Receives $30,000. His income is also taxed at low adult rates, providing him with financial independence while he studies.
* Emily (25): Receives $40,000. While she pays tax at her marginal rate, the family’s overall tax outcome is vastly superior to the alternative. The trustee could even decide to distribute less to Emily and retain income in the trust, to be paid out in a future year when her income is lower.

This strategic approach not only saves the family tens of thousands of dollars in tax each year but also protects each child’s inheritance from any personal or professional liabilities they may face.

Navigating Compliance and Legal Obligations in Victoria

While powerful, testamentary trusts are not a “set and forget” solution. They are subject to legal and financial reporting obligations. The trustee has a fiduciary duty to act in the best interests of the beneficiaries and must adhere to the terms of the trust as set out in the will.

In Victoria, this includes:
* Annual Tax Returns: The trust must be registered with the Australian Taxation Office (ATO) and file an annual tax return.
* Trustee Meetings and Resolutions: The trustee must keep records of decisions made regarding asset management and income distributions.
* Adherence to the Trustee Act: The Trustee Act 1958 (Vic) governs the powers and responsibilities of trustees in Victoria, setting standards for investment and management.

Engaging a professional trustee or ensuring the appointed family member has access to expert legal and accounting advice in Melbourne is paramount to ensuring the trust is managed effectively and compliantly.

Asset Protection: A Legacy Beyond Tax Benefits

While the tax advantages are a primary driver for many, the asset protection qualities of a testamentary trust cannot be overstated. Assets held within the trust are not owned by the beneficiaries, meaning they are generally protected from:
* Bankruptcy: If a beneficiary runs into financial difficulty or becomes bankrupt, creditors cannot typically access assets held in the trust.
* Family Law Disputes: In the event of a beneficiary’s divorce or separation, the Family Court may have difficulty treating the trust assets as part of the divisible marital property pool, particularly in a discretionary trust structure.

This ensures that your legacy remains for the benefit of your intended beneficiaries, insulated from the unforeseen challenges life may bring.

Conclusion: Secure Your Family’s Future with Expert Guidance

For families in Melbourne seeking to provide a lasting legacy, the testamentary trust offers an unparalleled combination of asset protection, flexibility, and tax efficiency. By allowing minors to be taxed as adults on their distributions and providing a vehicle for strategic income splitting, these trusts ensure that more of your hard-earned wealth is preserved for the next generation.

The establishment and management of a testamentary trust require careful consideration and expert legal drafting. We recommend seeking advice from a specialist wealth management and estate planning lawyer to determine if a testamentary trust is the right solution for your unique circumstances and to ensure your will is structured to achieve your long-term financial goals.

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