Understand detailed insights into the function and best application of discretionary and testamentary trusts to manage tax matters for your clients.

Trusts are often perceived as tools exclusively for the extremely wealthy. However, they are accessible to a broad spectrum of clients and serve numerous purposes, most notably effective tax management. This article, which examines the strategic relationship between trusts and tax, is proudly sponsored by Allianz Retire+.

In the complex ecosystem of Australian wealth management, trusts stand out as one of the most powerful and versatile tools for asset protection, succession planning and, critically, tax-effective income distribution. For individuals and families seeking to manage wealth across generations or structure a business with maximum flexibility, a foundational understanding of trust mechanics is essential.

While various trust structures exist, two types of trust command particular attention due to their unique features and distinct tax implications: the discretionary trust (featured in this article, with a focus on family trusts) and the testamentary trust. The former is established during a person’s lifetime to govern ongoing business and investment activities, while the latter is a unique structure established via a Will, taking effect only upon death.

Successfully navigating the use of these trusts – from establishment and ongoing administration to crucial year-end resolutions – is vital to mitigate risk, maximise the tax advantages and ensure the financial wellbeing of beneficiaries.

Trust mechanics

A trust is a legal arrangement where a person or entity (the trustee) holds and manages property or assets for the benefit of designated individuals or entities (the beneficiaries). This structure is a highly versatile tool; it provides benefits in asset management and protection, estate planning and tax optimisation.

While a trust is generally not considered a separate legal entity, it is treated as a taxpayer entity for all tax administration purposes. The flexibility and control trusts offer over asset management and distribution make them invaluable tools commonly employed in investment and estate planning, as well as business contexts.

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. It should have its own tax file number, which the trustee uses when it lodges income tax returns for the trust. A trust is also entitled to an Australian Business Number if the trust is carrying on an enterprise.

Each Australian state and territory has its own specific trust legislation that governs the creation, administration and termination of trusts. The jurisdiction of a trust is therefore determined by the laws of the state or territory under which it is established, generally specified in the trust deed. However, it’s important to note that federal legislation overrides state legislation for complying superannuation funds.

There are two main parties in a trust, the trustee and the beneficiaries. You may also see reference to the settlor, who is the person who creates the trust and transfers property or assets into it.

Key parties and obligations of those parties

The trustee, who can be an individual or a company (known as a corporate trustee), is the central figure responsible for managing the trust’s assets.

The trustee is legally bound to manage the trust property according to two key documents: the trust deed – which outlines the intentions of the settlor – and relevant laws, including all tax legislation.

Under trust law, trustees are personally liable for the debts of the trusts they oversee. However, they are generally entitled to be indemnified from the trust property for liabilities incurred when acting properly within their powers. This right to indemnity is forfeited if a breach of trust has occurred.

Under tax law, the trustee manages the trust’s entire tax affairs. This includes:

• Registering the trust within the tax system
• Lodging the required trust tax returns
• Paying certain tax liabilities on behalf of the trust

The beneficiaries are the individuals or entities entitled to receive the benefits of the trust, which typically include distributions of income or capital.

Beneficiaries can be a broad range of parties, including:

• Individuals (for example, family members)
• Companies
• Other trusts

A trustee may also be named as a beneficiary. However, a key rule to ensure the trust remains valid is that the same person cannot be the sole trustee and the sole beneficiary. This conflict of interest is avoided if there are multiple trustees.

Tax and trust earnings

For tax purposes, a trust is treated as a distinct taxpayer entity. However, the burden of taxation is generally passed on: the way the trust’s income is taxed depends primarily on the beneficiaries’ entitlements to that income. If there is no beneficiary presently entitled to trust income, the trust can accumulate income, but the trustee must pay tax on it at the highest marginal rate. This ensures the trust’s purpose, to distribute income to beneficiaries, is fulfilled.

Distribution principle: Trusts typically distribute their annual earnings to beneficiaries. The beneficiaries are then taxed on their respective share of the trust’s net income, even if the cash has not yet been physically paid. This is known as present entitlement.

Calculating net income: The trust’s net income – the amount taxable in the beneficiaries’ hands – is calculated according to tax law: it is the assessable income minus allowable deductions. This calculation is performed as though the trustee were a resident of Australia, regardless of their actual residency status. Crucially, these two amounts may differ because trust income is defined by the trust deed while net income is defined by tax law.

Trustee responsibility: The trustee is responsible for all administrative tax matters, including lodging the trust’s tax return and ensuring overall compliance.

The structure of trust taxation allows for strategic tax management:

Proportional taxation: A beneficiary is taxed on their proportionate share of the trust’s net income. For example, a beneficiary entitled to 50% of the income is taxed on 50% of the net income.

Streaming concessions: Special rules apply to specific income types like capital gains and franked distributions or dividends. If permitted by the trust deed, these amounts can be streamed to particular beneficiaries. This is often done to optimise tax management; for example, allocating franked dividends to those beneficiaries who have the highest marginal tax rates.

Capital Gains Tax (CGT) and trusts

Trusts have specific and complex rules governing Capital Gains Tax (CGT), which significantly impacts how gains and losses are managed and taxed.

When a trust sells an asset and generates a capital gain, that gain is typically included in the trust’s net income and then distributed to beneficiaries in proportion to their respective entitlements.

Trustee liability: If there is no beneficiary legally entitled to the income generated by the capital gain, the trustee is taxed on that gain. Notably, if the trustee is taxed at the highest marginal rate, the 50 percent CGT discount is generally forfeited.

Net capital losses: A net capital loss generated by the trust cannot be distributed to beneficiaries. Instead, it must be carried forward and used to offset the trust’s future capital gains.

Specific entitlement: For strategic tax management, a trust can utilise the concept of ‘specific entitlement.’ This allows the capital gain to be allocated directly to a particular beneficiary. In this scenario, the capital gain is calculated for that beneficiary with the benefit of any applicable CGT discounts or concessions they may be entitled to.

Case study – specific entitlement

This example demonstrates how the power of streaming capital gains can impact the tax positions of different beneficiaries.

A trustee derived the following amounts in the 2023–24 income year:

1. interest income of $100
2. a capital gain of $200 that is eligible for the CGT 50% discount

The trust deed defines income to include capital gains. The income of the trust estate is therefore $300, comprised of $100 interest income + $200 capital gain.

When the 50% CGT discount is applied, the net income of the trust is $200 – $100 interest income + $100 net capital gain.

Assuming the trust deed does not prevent the trustee streaming capital gains, the trustee can make:

Beneficiary B specifically entitled to the $200 capital gain

Beneficiary A presently entitled to the remaining $100.

Beneficiary B has a $100 capital gain to consider in working out their own net capital gain. Because the gain was a discount capital gain, Beneficiary B must gross it up (double it) and apply the CGT discount (assuming they qualify for the CGT discount in their own right).

Beneficiary A has a $100 share of net income.

If the trustee did not stream the capital gain, Beneficiary A is presently entitled to one third of the income of the trust estate and Beneficiary B is presently entitled to two-thirds (because of their specific entitlement to the capital gain).

Consequently:

• Beneficiary A is assessed on $33 net income and has a capital gain of $34
• Beneficiary B is assessed on $66 net income and has a capital gain of $67
  Source: ATO

Absolute entitlement: The principle of ‘absolute entitlement’ is highly significant for CGT purposes. A beneficiary is deemed ‘absolutely entitled’ to a trust asset if they have a ‘vested and indefeasible’ interest in the entire asset^[1]. This means they have the power to demand the trustee immediately transfer the asset to them or to a third party. Where this rule applies, the asset is treated as if it were owned directly by the beneficiary, not the trustee.

Any CGT event that occurs in relation to that asset is considered to have been undertaken directly by the beneficiary rather than the trust. As a result, any capital gain or loss is made directly by the beneficiary and does not form part of the trust’s net income, simplifying the trust’s taxation of that asset.

Tax returns and payments

The trustee is required to lodge a trust income tax return, irrespective of the amount of net income involved, unless advised otherwise by the ATO. If the trustee is liable for tax, they will receive an income tax assessment as trustee; this is separate to their own assessment as an individual or corporate tax entity.

The beneficiaries (or the trustee when assessed on their behalf) may have to pay regular tax instalments based on their share of the trust’s instalment income.

Pros and cons of trusts

The following table details some of the advantages and disadvantages of the trust structure but is not an exhaustive list. Specific client circumstances could impact whether certain trust features are advantageous or disadvantageous, particularly from a taxation perspective.

Discretionary Trusts

A discretionary trust is a legal arrangement where a trustee holds assets for beneficiaries, and that trustee has the sole discretion over who receives income or capital, and how much they receive.

A family trust is a type of discretionary trust but has a specific structure for the benefit of a family group. While the trustee has the power to decide how to distribute income and assets among beneficiaries of a discretionary trust, a family trust restricts this to immediate family members and is often used for asset protection and tax planning for family groups. When a trust makes a ‘family trust election’, it is recognised as a family trust; this confers certain tax advantages but also specific tax obligations. Given the wide use of family trusts in tax planning, this article will focus on that class of discretionary trust.

Family trusts explained

Because it’s typically a discretionary trust, a family trust gives the trustee the power to decide how and when to distribute both income and capital among the designated beneficiaries. The beneficiaries are generally members of the same family group, and their entitlement to distributions is entirely at the trustee’s discretion. This inherent flexibility is the core advantage, enabling strategic financial planning and optimal management of tax liabilities.

To establish the trust, a trustee is appointed. This may be either an individual or a corporate entity. Many families opt for a corporate trustee due to significant advantages, including enhanced asset protection, limited liability and smoother succession planning. The trust’s operation is governed by the trust deed, which serves as the foundational document outlining management procedures, beneficiary classes and the rules for making distributions.

A key step in maximising the tax utility of a family trust is making the Family Trust Election (FTE) to the Australian Taxation Office (ATO). The FTE qualifies the trust for certain tax concessions, particularly those related to the utilisation of trust loss provisions.

There is, however, a counterbalance to the FTE. This is the requirement to distribute only within the defined ‘family group.’ Any distribution made to an individual or entity outside this specific group may trigger Family Trust Distribution Tax (FTDT). This tax is levied at the highest marginal rate plus the Medicare levy, making compliance with the family group rule essential for effective tax planning.

Why use a family trust?

The most common reasons for setting up a family trust include:

• Asset protection: by holding assets in a trust, families can protect them from potential creditors or legal claims against individual family members. If a family member faces financial difficulties, the assets held by the trust are not considered part of their personal estate which provides a level of legal insulation.
• Tax planning: family trusts offer considerable flexibility when it comes to tax planning. By distributing income to beneficiaries with lower marginal tax rates, families can minimise the overall tax burden. For example, a trustee might allocate more income to a beneficiary who earns less or is not employed.
• Investment and business planning: many families use trusts to hold investments or business assets. For instance, if a family trust owns a commercial property, the rental income can be distributed in a tax-efficient way. Family businesses are often structured as trusts, offering both asset protection and tax benefits.
• Succession planning: a family trust can be an effective tool for estate and succession planning. Rather than transferring assets directly to heirs, which could trigger capital gains tax (CGT) or stamp duty, the assets remain in the trust, allowing beneficiaries to continue to enjoy the benefits, such as income from shares or property investments.

Pros and cons of family trusts

As with trusts more generally, specific client circumstances could impact how advantageous or disadvantageous certain family trust features can be.

 Family trusts are effective tools used for tax planning, asset protection, and succession planning. Their primary advantage lies in giving trustees the flexibility to manage income distributions in a tax-efficient manner, offering advantages that other structures often lack.

Despite their benefits, family trusts can present certain challenges, particularly the need for careful ongoing compliance and the potential for disputes among beneficiaries. To ensure the trust meets its financial objectives while strictly adhering to legal regulations and tax obligations, careful planning and meticulous management are critically important.

Testamentary trusts

A testamentary trust is established through a will and only comes into effect after the will-maker – or testator – has passed away. Its main function is to control how assets from the deceased’s estate are distributed to beneficiaries.

Unlike a standard bequest, where assets are passed directly to the heirs, a testamentary trust holds these inherited assets under the control of a trustee. This trustee is legally bound to manage and distribute the assets strictly according to the terms outlined in the deceased’s will. This structured approach provides distinct legal, financial and tax advantages, making the testamentary trust a highly attractive option for effective estate planning.

Testamentary trusts explained

The creation of a testamentary trust formally occurs upon the death of the testator and only after the estate administration process has been completed. At this point, assets from the estate are legally transferred into the trust, where the trustee then manages them for the benefit of designated beneficiaries. These beneficiaries can include minor children, family members with specific needs, or individuals requiring financial protection.

Testamentary trusts may be structured as fixed trusts, where each beneficiary’s entitlement is predetermined, or, more commonly, as discretionary trusts. The discretionary form is preferred because it grants the trustee the flexibility to distribute income and capital among beneficiaries based on their current needs and prevailing tax circumstances. This high degree of discretion makes the testamentary trust, especially in its discretionary form, an invaluable tool for optimal long-term tax planning.

Why use a testamentary trust?

While testamentary trusts are primarily used to manage the distribution of assets to beneficiaries after death, they also serve several other key purposes:

• Tax efficiency: testamentary trusts can provide significant tax advantages, particularly when distributing income to minors. Normally, income distributed to children under the age of 18 is taxed at penalty rates to prevent parents from diverting income to lower-tax-rate children. However, testamentary trusts are an exception to this rule and minors who receive income from a testamentary trust are taxed at adult tax rates, which are typically much lower, and use can be made of the tax-free threshold. This provision allows families to reduce the overall tax burden on estate income and improve tax efficiency across family members.
• Asset protection: a testamentary trust can protect estate assets from creditors, legal disputes and family law claims. Because the beneficiaries do not have direct ownership of the trust’s assets – only an entitlement to income and distributions determined by the trustee – those assets are often shielded from legal action taken against the beneficiaries, such as bankruptcy or divorce settlements.
• Control over asset distribution: testamentary trusts allow the testator to retain control over how and when assets are distributed to beneficiaries. This is particularly useful to ensure that minors or financially irresponsible heirs do not receive large sums of money all at once. The trust can specify conditions for when beneficiaries can access their inheritance, such as reaching a certain age or meeting milestones, such as completing tertiary education.
• Long-term estate management: where an estate includes assets that require ongoing management, such as investments or property, a testamentary trust can ensure these assets are managed professionally and in the best interests of all beneficiaries. The trustee – who may be a family member, professional adviser or financial institution – oversees the investment and distribution of trust assets in accordance with the testator’s wishes.

A note on tax effectiveness

Tax efficiency is one of the most compelling reasons to establish a testamentary trust. Testamentary trusts allow for income splitting among beneficiaries, particularly those in lower tax brackets, thereby minimising the overall tax paid on estate income. By distributing income to beneficiaries based on their personal tax rates, the trustee can reduce the tax burden on the estate.

As indicated above, a notable tax advantage of a testamentary trust is the concessional treatment of income distributed to minors. Normally, income received by minors from trusts is taxed at penalty rates; however, income distributed to minors from a testamentary trust is taxed at the same rates as adults, which allows families to make use of lower marginal tax rates to their advantage. This can significantly reduce the tax on income derived from assets within the trust, such as rental income or investment returns.

However, it’s important to note that tax concessions are limited to income generated by assets directly transferred into the trust from the deceased’s estate. Income from assets introduced to the trust from external sources, such as gifts or loans, does not qualify for these tax benefits and will be taxed at the higher penalty rates for minors.

Pros and cons of testamentary trusts

As with trusts more generally, specific client circumstances can impact how advantageous a testamentary trust may be.

Testamentary trusts offer a powerful tool for estate planning, providing a robust mechanism for families seeking to protect assets, secure provisions for future generations, and optimise tax outcomes. However, they are not a one-size-fits-all solution; implementing a testamentary trust requires careful planning and consideration to ensure the structure perfectly aligns with the unique needs and circumstances of the family.

In summary, while family and testamentary trusts offer potent structural advantages for asset protection, succession planning and tax efficiency, these benefits are inseparable from the significant legal and tax obligations they impose. Trustees bear a crucial fiduciary duty to manage the trust’s assets and affairs strictly in the best interests of the beneficiaries, while the beneficiaries themselves are responsible for accurately reporting their share of the trust’s taxable net income. Given the complexity involved, particularly in areas such as income streaming and compliance with specific tax rules, any decision to establish or modify a trust structure must be carefully considered and always be guided by specialised professional advice. After all, a trust must operate in full compliance with all relevant legal and tax requirements and ultimately achieve the desired strategic and financial outcomes to be valuable part of a client’s financial and/or estate planning.

Take the FAAA accredited quiz to earn 0.75 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.75 hour.

Legislated CPD Area: Tax (Financial) Advice (0.5 hrs) and Technical Competence (0.25 hrs)

ASIC Knowledge Requirements: Taxation (0.5 hrs) and Estate Planning (0.25 hrs)

please log in to start this quiz

———–

Notes:
[1] https://www.ato.gov.au/businesses-and-organisations/trusts/trust-income-losses-and-capital-gains/trust-capital-gains-and-losses

The post CPD: Discretionary trusts, testamentary trusts and tax appeared first on AdviserVoice.

An improved understanding of the balance between legacy and liability, and the important tax consequences that emanate from estate planning.

More than a legal formality or a financial checklist, or deciding who inherits what assets, estate planning exists to protect a lifetime of achievements and ensure each client’s legacy is passed on according to their wishes. This article, proudly sponsored by Allianz Retire, explores the importance of tax considerations in estate planning.

Estate planning. It represents the culmination of a lifetime of work, the chance to protect assets and the opportunity to pass on wealth. At its core, estate planning is about leaving a legacy that reflects each client – who they are and what matters to them.

Yet even the most thoughtful estate plan can be undermined by tax implications if they are not carefully managed. From capital gains and inheritance considerations to the complexities of superannuation and trusts, tax plays a central role in how wealth is preserved and transferred.

Properly structured, an estate plan can help individuals and families navigate the complexities of wealth transfer, minimise tax payable by beneficiaries, consider any social security impact and create outcomes that reflect both their values and their intentions.

Estate planning is equally important for businesses as it is for individuals. Without structured tax planning, a considerable portion of an estate — whether personal or commercial — may be eroded by taxation, leaving beneficiaries with less than the client intended.

When guiding clients through estate planning, advisers should keep several important factors in mind:

• Jurisdictional differences – estate planning legislation varies by state, making it essential to understand and apply the rules specific to each client’s circumstances.
• Specialist input – encourage your clients to engage professionals early as collaboration between financial advisers, accountants and estate lawyers will ensure all aspects of estate planning are addressed.
• Philanthropy – directing part of an estate to charities can provide tax relief while also reflecting your client’s personal values.
• Ongoing review – estate plans are not set and forget. Life events such as marriage, divorce, the acquisition or sale of a business, or changes in family structure (births and deaths) can significantly alter the client’s intentions and tax position. Regular reviews are necessary to maintain alignment with current circumstances.

Ultimately, a well-constructed estate plan can secure the orderly transfer of assets, minimise tax liabilities and strengthen the client’s position should legal challenges arise. For advisers, ensuring clients adopt a proactive and regularly updated approach is fundamental to preserving wealth and intent across generations.

Tax matters and estate planning

The aim of estate planning is simple: to ensure that assets are distributed according to an individual’s wishes in the most efficient and equitable way. However, tax can significantly affect this outcome. Every dollar lost to unnecessary tax is a dollar less available to beneficiaries.

For example, a property that has grown substantially in value may trigger a large capital gains tax bill when sold after death, reducing the inheritance for children. Similarly, superannuation benefits may be taxed differently depending on whether they are left to dependants or non-dependants. Without careful planning, families can face unexpected liabilities, disputes, and even the forced sale of assets. Tax should never be treated as an afterthought. It is central to the design of any effective estate plan.

Capital Gains Tax

Capital Gains Tax (CGT) is often the most significant tax issue in estate planning. Assets such as real estate, shares and investment portfolios may have appreciated substantially over time. While the transfer of assets to beneficiaries on death does not immediately trigger CGT, the eventual sale by the beneficiary does. The cost base of the asset is carried over, meaning that substantial gains prior to the inheritance of an asset can still lead to large tax liabilities in the future.

Certain exemptions exist, most notably for the family home. However, these rules are complex and vary depending on how long the property is held after death. Therefore, good record keeping is essential. For example:

• Knowing what assets were acquired pre-CGT and which may attract capital gains tax.
• Is the family home a pre- or post-CGT asset and would it be wholly or partly covered by the main residence CGT exemption?
• Most clients can reduce taxable capital gains by claiming expenses but require records to substantiate any such claims.
• Assets acquired pre-CGT (prior to 20 September 1985) may not be subject to capital gains, however your client needs records to prove the asset is a pre-CGT asset.
• Changes to holdings in shares and managed funds that might arise because of dividend reinvestment, merger and acquisition activity, bonus issues and so on. Again, knowing which pre- and post-CGT holdings is important.

Key components of an estate plan

A comprehensive estate plan encompasses several elements to ensure your client’s wishes are honoured and their assets effectively managed:

• The Will – the Will is the foundation of any estate plan and details how a client’s assets should be distributed after death. It also designates an executor responsible for administering the client’s estate according to their specified wishes.
• Super – clients should make binding death nominations for super. The allocation of super is managed by each fund’s trustees and can’t be distributed via a client’s will. Binding and non-binding super beneficiaries will receive any unspent super money from the trustee.
• Power of Attorney (POA) – this allows your client to appoint a trusted individual to manage their financial and legal affairs in the event they become unable to do so themselves. An Enduring Power of Attorney is a specific type of POA that remains in effect if the client becomes incapacitated or unable to make decisions.
• Enduring Guardianship – in some jurisdictions, a medical Power of Attorney is granted, in others, an Enduring Guardianship grants a designated person the authority to make decisions regarding your client’s health and lifestyle should they become unable to do so.
• Advanced Care Directive – sometimes referred to as a Living Will, this document enables your client to outline their preferences for medical treatment and end-of-life care in situations they are unable to communicate their wishes.
• Trusts – a legal arrangement in which a trustee manages assets on behalf of beneficiaries, with distribution/s occurring at a predetermined time. Trusts can offer tax advantages and protect assets; an example is the establishment of a trust for a child that becomes accessible at a specific milestone birthday or other point in time.

All legal documents are best created by an estate lawyer. There are also a range of legal implications to consider:

• All estate planning documents must meet the legal requirements for validity. This includes compliance with relevant legislation, which varies by state or territory.
• Understanding the tax consequences of asset transfers is essential; you need to consider capital gains tax, stamp duty and income tax, each of which can significantly impact the value of assets passed to beneficiaries.
• Legal capacity is important to avoid potential challenges to the Will in the future. Your clients need to create a Will at a time they have the legal capacity to do so. No-one expects to lose capacity, but steadily increasing dementia rates means that statistically, it’s likely it will affect some of your clients (note: it is estimated that more than 433,300 Australians are living with dementia in 2025, a figure estimated to rise over the coming years^[1].

The Will

The Will is the cornerstone of estate planning. It serves as the primary legal document that outlines how a client’s assets should be distributed upon death, or in some cases, permanent incapacitation. Importantly, a Will ensures that your client’s wishes are clearly stated and legally enforceable, helping to avoid potential disputes among beneficiaries.

The functions of a Will include:

• Simplified estate administration – a valid will streamlines the process of handling your client’s estate after death. This expediates the process and reduces complications for all involved
• Asset distribution – a Will specifies who receives the client’s property, money, and personal belongings after death, ensuring their assets go to their chosen beneficiaries.
• Guardianship for minors – clients can name a guardian to care for their dependent children and make important decisions about their education, health and wellbeing
• Appointment of an executor – a will appoints an executor (or representative) who is responsible for managing the client’s estate; this includes securing assets, paying debts and distributing property according to your client’s instructions
• Establishment of trusts – as discussed later in this article, the Will can create testamentary trusts, which allow you to control how and when beneficiaries receive their inheritance
• Prevent disputes – by specifying who receives what, a client’s Will can prevent arguments and confusion among family members regarding the division of their estate

A Will plays other important roles. It revokes or cancels earlier Wills, enables clients to appoint a guardian for minor children and make specific bequests to individuals or charities. By formalising these decisions in a Will, your client takes control of their legacy.

Clients may hold two types of assets: estate assets and non-estate assets. The former includes any asset the client owns in their own name. Non-estate assets include those owned as a joint tenant, in a trust or in superannuation. Life insurance is also generally disposed of according to specific rules and not distributed via the client’s Will.

Without a Will, a client’s estate may be distributed according to state intestacy laws. This may not align with your client’s preferences and there’s the very real risk that the undocumented intentions of your client in relation to their estate may not be acted on. Further, depending on the marginal tax rates of the beneficiaries, intestacy can lead to an imbalance in the distribution of an estate due to higher rates of tax payable by some beneficiaries.

Intestacy can also reduce the size of your client’s estate thanks to other charges; for example, the administration of an estate is more expensive when outside parties are involved and compensated for their services. The family can generally expect to pay the government more revenue, in the form of legal and other fees, capital gains tax and income tax.

Powers of Attorney

While a POA won’t impact the tax implications of estate planning, it’s good form for clients to nominate a power of attorney while they are preparing their Will. As with the Will, each state has its own legislation in respect to POAs.

A POA is a separate legal document that enables your client to appoint one or more people to manage their financial and legal decisions on their behalf while they are alive. A POA ceases upon death.

An Enduring Power of Attorney (EPA) can be used to make decisions for your client in the situation they are unable to do so, if for example, they lose capacity. An attorney is legally required to act in your client’s best interests; therefore, the appointment of a trusted person to as POA should ensure your client’s affairs are managed as they would like them to be in the event they become incapacitated before death.

An EPA is of particular importance to those clients within a self-managed super fund. Regulations require all members of an SMSF to be trustees, but a person without capacity is prohibited from being a trustee. In the situation where a trustee of an SMSF loses capacity – whether your client or a non-client member of a client’s SMSF – decisions about the SMSF would have to be made by a tribunal if there is no EPA in place for that member. It’s good form to ensure that all SMSF clients have EPAs in place – and that all members of their SMSFs do too.

Superannuation

According to recent headlines, at least 6.5 million Australians will not have a say in who inherits their superannuation, according to research from Super Consumers Australia^[2]. The research found that just one quarter of those surveyed were sure they had made a legally binding nomination for who they want to receive their super after they die, while 36 percent had made no nomination at all.

Binding death nominations are important because as a non-estate asset, superannuation is treated differently to other investments. Because it’s managed by the trustee of your client’s fund, it can’t be incorporated into or distributed by their will.

There are four important considerations when estate planning for client’s superannuation^[3].

1. When a super fund’s member dies, the money is paid out of the fund
2. Only certain people (i.e. nominated beneficiaries) are eligible to directly receive a superannuation death benefit
3. Insurance proceeds inside a super fund may be heavily taxed on the member’s death
4. In some circumstances, there can be a death tax on super; there are strategies to minimise this or for beneficiaries to avoid becoming eligible to pay it.

Each client needs to nominate superannuation beneficiaries who will receive any remaining super once they pass away. There are two types of beneficiaries: binding and non-binding beneficiaries.

A binding death benefit nomination is a written declaration your client provides to their fund. This provides a legal obligation for the trustee to distribute your super to those people nominated by the client. Binding nominations are generally required to be validated every three years.

A non-binding nomination is the preferred choice of beneficiary that your client selects, the difference being that the super trustee is not obligated to follow this nomination. When distributing your remaining super, the trustee will take your non-binding nomination into account, along with the claims of other dependants.

In both cases, trustees must follow the relevant super laws. Beneficiary nominations are made available so clients can legally ensure their chosen beneficiaries receive payment, even where there may be claims over your client’s estate after their death.

Superannuation is also an area where tax plays a major role. Whether superannuation balances are distributed through the estate or directly to beneficiaries via a binding death benefit nomination, the tax treatment depends on the relationship between the deceased and the beneficiary.

It is important to know which beneficiaries are SIS-dependent beneficiaries and which are tax-dependent beneficiaries. In super law, this defines who can receive death benefits; in tax law, it defines if and how a recipient will be taxed.

Dependants for tax purposes, such as a spouse or minor children, generally receive superannuation benefits tax-free. However, adult children who are not financially dependent may face significant tax on lump-sum payments. This can create tension where parents wish to treat children equally, but the tax outcomes are not the same. Proactive strategies, such as using recontribution strategies, can help reduce tax burdens on beneficiaries.

A client can nominate an eligible dependant, such as their spouse, to continue receiving an income stream rather than a lump sum payment. This is called a reversionary pension and only applies to super savings already in pension mode.

From a tax perspective, there are several benefits to a reversionary pension:

• A super pension is generally tax free or in some cases, concessionally taxed, depending on your client’s age and the age of their beneficiary. Consequently, there may be tax benefits for the reversionary beneficiary.
• Because the assets supporting the pension payments remain within the super system, they continue to benefit from super’s lower tax environment.
• When the reversionary pension reverts to the beneficiary, the taxable and tax-free components that were calculated when the pension first started are preserved.

Where life insurance is held within super, any proceeds are paid as part of the superannuation death benefit to beneficiaries. As such, tax will be payable by those beneficiaries who are not tax-dependents.

Trusts

Using a trust in estate planning can provide tax efficiency (particularly for minors), asset protection (against divorce, creditors and disputes), and control (over how wealth is distributed across generations). A trust can help to preserve wealth and ensure it is both used tax-effectively and transferred in line with family intentions, rather than being exposed to erosion through tax, disputes or poor financial decisions.

Discretionary Trusts

Discretionary trusts – which includes family trusts – can be a powerful tool for estate planning. One of the key benefits is that trust assets fall outside the deceased estate and therefore bypass the probate process. This means distributions to beneficiaries can occur without the delays, costs or potential challenges associated with probate. Trust structures also provide stronger protection against family disputes and claims from creditors.

Another advantage is the control and flexibility a trust provides in managing intergenerational wealth. Trustees can adapt distributions to suit beneficiaries’ circumstances, and new family members can be added as beneficiaries without having to amend the trust deed.

Finally, because control of the trust can be transferred to a new appointor or to directors of a corporate trustee, a discretionary trust has the capacity to preserve and grow family wealth across multiple generations.

Testamentary Trusts

A testamentary trust can play a major role in the estate planning process and is usually written into the client’s Will and is dormant until the client’s death.

Administered by a trustee, a testamentary trust enables your client to leave money to beneficiaries who have use of that money – often subject to certain conditions – but it’s not their own property. This is a strategy commonly used to provide protection against relationship breakdowns, creditors, poor decision making and potential legal issues.

Clients may consider a testamentary trust in circumstances such as:

• They wish to protect their assets for future generations. For example, your client’s beneficiaries can benefit from assets such as an investment portfolio or family business, while the trustee controls how they’re managed. In this scenario, the assets are protected from potential legal action or actions of individual beneficiaries that could otherwise impact them.
• A client has a blended or complex family structure. Numerous scenarios can be modelled by the trustee to preserve assets or to ensure the relevant beneficiaries can access assets in the trust if others pass away.
• Your client needs to protect vulnerable beneficiaries, such as a disabled child. A trust can ensure they don’t lose this inheritance to creditors or that funds are used in their best interests. For those with young children, a trust can hold assets and/or manage assets until the children are old enough to do so themselves.
• Depending on assets held, a testamentary trust can provide tax benefits for your beneficiaries.

From a tax perspective, income generated by a testamentary trust is taxed at the marginal tax rate of the beneficiary of that trust. A testamentary trust also facilitates income splitting, where a beneficiary can allocate trust income to other beneficiaries. This strategy enables beneficiaries with lower marginal tax rates to receive income and pay tax at their lower rate.

Further, minors who receive ‘unearned income’ are generally taxed at the highest marginal tax rate (although the first $416 is tax free). This is not the case with income received from a testamentary trust. Tax law provides that income and capital gains derived by children under age 18 from assets received from a testamentary trust are ‘excepted trust income’ and taxed at normal adult marginal rates.

This means a minor receiving income from a testamentary trust has a tax-free threshold of $18,200 before being taxed at the usual adult marginal rate, depending on the level of income. Imputation credits relating to franked dividends received can be used by the minor.

One of the main advantages of using a testamentary trust for bequeathed assets is that income, capital gains and franked dividends can be distributed among your client’s family beneficiaries each year in the most tax-efficient way.

One of the most delicate aspects of estate planning is balancing fairness with tax efficiency. A client may wish to divide their estate equally among children, but tax treatment can make this challenging. For instance, leaving an investment property to one child and cash to another may seem equal in value, but the property may carry future CGT liabilities that the cash inheritance does not.

Estate planning is a vital process that goes beyond simply dictating the distribution of assets after death; it plays a critical role in tax management, asset protection and ensures that your clients’ wishes are fully honoured. By carefully considering the various components of an estate plan, your clients can ensure that their financial legacy is preserved, tax liabilities are minimised and their loved ones provided for according to their intentions.

The ethical and emotional dimensions of fairness often intersect with the financial realities of tax. Advisers play a key role in helping clients understand the implications of their decisions, the importance of clear documentation, and where appropriate, communicating intentions to beneficiaries to prevent misunderstandings.

Take the FAAA accredited quiz to earn 0.5 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.5 hour.

Legislated CPD Area: Technical Competence (0.25 hrs) and Tax (Financial) Advice (0.25 hrs)

ASIC Knowledge Requirements: Estate Planning (0.5 hrs)

please log in to start this quiz

———–

Notes:
[1] https://www.dementia.org.au/about-dementia/dementia-facts-and-figures
[2] https://www.abc.net.au/news/2025-08-26/who-gets-your-superannuation-when-you-die-binding-death-benefits/105678326
[3] Wills, death and taxes made simple, Noel Whittaker, 2024

The post CPD: Balancing legacy and liability – tax in estate planning appeared first on AdviserVoice.

How can your clients participate in philanthropic activities and benefit from the associated tax advantages?

Philanthropy offers a dual advantage: it supports charities, not-for-profits, and community groups while also providing tax benefits to the donor. This article, proudly sponsored by Allianz Retire+, examines the benefits your clients can garner from philanthropy.

Philanthropy plays a vital role in building stronger, more inclusive communities by addressing social, environmental and economic challenges. It enables individuals, families and organisations to contribute to causes they care about and help drive meaningful change and support those in need. Beyond charitable giving, philanthropy fosters a culture of generosity, collaboration and importantly, long-term impact. As our society faces growing complexity and inequality on a global scale, the importance of philanthropy in promoting equity, opportunity and resilience has never been greater.

Amid ongoing economic, humanitarian and geopolitical challenges, the latest research^[1] reveals that people remain committed to helping others. The fourteenth edition of the World Giving Index, based on responses from over 145,000 people across more than 140 countries, shows more individuals are donating money to a broad range of causes. The global giving score has reached its joint-highest level, equalling the peak recorded during the Covid-19 pandemic.

Australia is the eighth most generous country in the world^[2]. This rank is derived from three scores based on the number of people who: helped a stranger (69%), donated money (59%) or volunteered their time (34%). However, our ranking has slipped; Australia was ranked the fourth most generous country in 2022^[3]. A KPMG tax analysis found there to have been a significant decrease in the number of Australians donating over the past decade due to lower income pressures^[4]. The rising cost of living has no doubt compounded this.

Philanthropy in Australia

There many ways your clients can be involved in philanthropy.

At its simplest, clients can make one off or regular donations to charities; these donations are tax deductible if the recipient organisation has been endorsed as a deductible gift recipient (DGR) by the Australian Tax Office. Of note is fewer than half of Australia’s charities have DGR status.

Donating to a DGR allows your clients to make tax-deductible donations to a charitable organisation; they can deduct the amount of their donation from their own taxable income when they lodge their tax return.

At the other end of the giving spectrum, individuals or families may choose to establish a private foundation – such as a Private Ancillary Fund or a Charitable Endowment Fund – or contribute to a Public Ancillary Fund. These structures typically involve more substantial donations and are used to provide significant, multi-year grants to charitable organisations. Like simpler forms of giving, contributions to organisations with Deductible Gift Recipient (DGR) status may be eligible for tax deductions.

Philanthropy is defined as the planned and structured giving of time, expertise, goods, services, influence and money to enhance the wellbeing of individuals and communities. While it can take many forms, philanthropy most often refers to the financial support of charitable causes.

In Australia, it plays a vital role in sustaining a wide range of not-for-profit organisations and community initiatives. By directing private wealth toward the public good, philanthropy helps to:

• Support vulnerable populations
• Enrich cultural life
• Protect the environment
• Address the underlying causes of social and environmental challenges.

Crucially, philanthropy often steps in to meet needs that fall beyond the reach or priorities of government.

Grantmakers

Nearly one fifth of all charities are Grantmakers^[5]; that is, they are individuals, organisations or institutions that provide funding, typically in the form of grants, to support charitable activities, projects or organisations. Their role is to allocate financial resources to causes aligned with their mission, values or strategic goals.

There are several types of grant-making charities including:

• Ancillary funds which are trusts established for the purpose of providing money, property or benefits to deductible gift recipients. There are two types of ancillary funds:
  • Private ancillary funds (PAFs) are established for private philanthropy – for example by family groups
  • Public ancillary funds (PuAFs) collect donations from the public
• ‘Other types of trusts’ which have been established to hold and distribute funds for charitable purposes.

Private Ancillary Funds

A Private Ancillary Fund (PAF) is a charitable trust established by individuals, families or corporates to facilitate philanthropic giving. PAFs are structured to receive and distribute funds for charitable purposes, with the primary goal of providing long-term support to eligible charitable organisations and projects and make a positive impact on society. The most recent measure of PAFs showed there to be 2,035 Private Ancillary Funds in operation^[6].

A PAF is suitable for individuals, families, or businesses who wish to take a more active and personalised approach to structured philanthropy. It is ideal for those clients who:

• Have significant wealth and want to set aside a substantial amount (typically $500,000 or more) for long-term charitable giving
• Want greater control over how funds are invested, and which organisations receive grants
• Prefer to involve family members or trusted advisers in governance and decision-making, potentially creating a legacy of giving across generations
• Seek flexibility in timing, allowing donations to the fund in one year (for tax purposes) and distributing grants over future years.

PAFs are well suited to those clients who are committed to long-term giving, value strategic involvement, and are willing to take on the governance and compliance responsibilities that come with managing a charitable trust.

The key features of a PAF include the following:

Private control: The fund is overseen by trustees, who are usually the donors themselves or individuals they appoint. This structure allows donors to retain substantial influence over how the funds are invested and distributed.

Sustainable giving: The charity or causes supported by the PAF can benefit from the foundation in perpetuity.

Legacy creation: Individuals and family groups can create a giving tradition and name the PAF in honour of the family or in memory of a loved one. A PAF can operate in perpetuity, ensuring the funds invested continues to be used for the intended purpose.

Investment growth: PAFs are structured to invest their funds to generate income and grow the capital over time, thereby increasing the impact of their charitable giving.

Distributions: PAFs are required to distribute a minimum of 5% of their net assets each year to eligible charitable organisations and projects.

Regulation: PAFs are regulated by the Australian Taxation Office (ATO) to ensure compliance with the relevant laws and regulations governing charitable trusts and philanthropic giving.

Tax benefits: As long as the PAF is a registered DGR, contributions made to it are tax-deductible for the donor, providing a financial incentive for philanthropic giving. Investment earnings are income tax exempt and franking credits are reclaimable.

To be endorsed under the DGR category for PAFs, the fund must meet all the following requirements:

• Have an Australian business number (ABN)
• Be located in Australia
• Have acceptable rules for the transfer of surplus gifts and deductible contributions on winding-up or revocation of endorsement
• Apply to the ATO for endorsement as a DGR.

Importantly, the trustees of the PAF must comply with the rules in the Private Ancillary Fund Guidelines; the most recent Private Ancillary Fund Guidelines are the Taxation Administration (Private Ancillary Fund) Guidelines 2019, as updated in February 2022.

A PAF is entitled to receive income tax deductible gifts from the date its DGR endorsement starts and while it is endorsed. The donor (person or organisation) that makes the gift to the DGR must also be the entity to claim the available tax deduction.

During each financial year, apart from the year the fund is established, a PAF must distribute at least 5% of the market value of the fund’s net assets (as at the end of the previous financial year).  The fund must distribute at least $11,000 – or the remainder of the fund if that is worth less than $11,000 – during that financial year, if both of the following applies:

• The 5% is less than $11,000
• Any of the expenses of the fund in relation to that financial year are paid directly or indirectly from the fund’s assets or income.

The ATO can apply penalties for failing to meet minimum annual distribution requirements; however, a PAF can apply to reduce the minimum annual distribution rate.

A PAF might be a suitable philanthropic option for clients who:

• Want control over the choice of organisations they support
• Would like to provide a sustainable gift to a chosen cause(s)
• Have a recommended minimum of $500,000 for an initial donation.

Using a PAF for philanthropic giving attracts several favourable tax advantages for clients. Over the longer term, these tax benefits can increase the amount available to distribute to the selected charities.

Tax deductibility: as long as the PAF has DGR status from the ATO and meets its obligations, clients will receive a full tax deduction for every dollar donated.

Flexibility to spread deduction: for a donation of cash, publicly listed shares or other property worth more than $5,000, clients can claim a tax deduction over a period up to five tax years. This enables to your client to claim the tax deduction in a manner that best suits their individual circumstances.

Imputation credits: Because a PAF holds tax-exempt status, imputation tax credits can be claimed as a rebate from the ATO for any franked dividends received.

Public Ancillary Funds

A Public Ancillary Fund (PuAF) is a type of charitable trust that is established for the purpose of distributing funds to eligible charitable organisations and projects. Unlike Private Ancillary Funds, which are controlled by individual donors or families, Public Ancillary Funds are established for public benefit and are open to receiving donations from the general public.

A PuAF is suitable for those clients who wish to engage in structured, long-term giving without the administrative responsibilities of running a private foundation. It is ideal for those clients who:

• Want to support multiple charities over time rather than making one-off donations.
• Prefer professional management of the fund’s investment and compliance obligations.
• Are looking for a cost-effective and tax-efficient giving vehicle without needing to establish and manage a separate trust.
• Value flexibility, as donations can be made over time while retaining a level of control over which charitable organisations receive grants.

PuAFs are particularly attractive to those clients with a philanthropic intent who want to make a lasting impact, but who may not have the resources or desire to establish a Private Ancillary Fund (PAF).

Key features of a Public Ancillary Fund include:

Public benefit: PuAFs are established for the public benefit and are designed to receive contributions from multiple donors, rather than being controlled by a single individual, family group or organisation.

Support for charitable causes: PuAFs are required to distribute a minimum of 4% of their net assets each year (or a minimum of $8,800 – whichever is greater) to eligible charitable organisations and projects. These distributions support a wide range of charitable purposes, including (but not limited to) health, education, social welfare, environmental conservation and the arts.

Investment growth: PuAFs are structured to invest their funds to generate income and grow the capital over time, thereby increasing the impact of their charitable giving.

Regulation: PuAFs are regulated by the Australian Taxation Office to ensure compliance with the relevant laws and regulations governing charitable trusts and philanthropic giving.

Governance: The management and governance of a PuAF is typically overseen by a board of trustees or directors, who have a fiduciary duty to manage the fund prudently and in accordance with the fund’s charitable objectives.

Tax deductibility: Contributions made to a PAF are tax-deductible for the donor, as long as the PuAF is a registered DGR. This provides a financial incentive for philanthropic giving.

For a PuAF to be endorsed as a DGR it must meet the following requirements:

• Have an Australian business number (ABN)
• Be located in Australia
• Comply with the rules in the Public Ancillary Fund Guidelines 2022
• Have acceptable rules for the transfer of surplus gifts and deductible contributions on winding-up or revocation of endorsement
• Fall within the DGR category for PuAFs.

The PuAF must also have following characteristics:

• It is a ‘fund’.
• It is established and maintained under a will or an instrument of trust
• It is established and operated on a not-for-profit basis
• It is allowed, by the terms of the will or instrument of trust, to invest money in ways that an Australian law allows trustees to invest trust money
• It is established and maintained solely for the purpose of providing money, property or benefits to DGRs (except other PAFs or PuAFs) or the establishment of such DGRs.

While clients can donate to a PuAF that supports charities that resonate with the individual or group, those with a philanthropic bent can establish a feeder fund into that PuAF. An example is a charitable endowment fund; such structures are offered by several organisations, such as Australian Philanthropic Services.

Charitable Endowment Funds

Individuals, family groups or corporations can establish a Charitable Endowment Fund (CEF), which is generally a sub-group of a PuAF. It is a flexible, professionally managed tax-effective structure that can be used to manage long-term charitable giving. It enables the donor/s to provide enduring gifts to charitable organisations without the administrative burden associated with the establishment and management of a Private Ancillary Fund.

The key features of a CEF include:

Reduced administrative burden: Those managing the PuAF into which the CEW feeds are responsible for the ongoing management and compliance of the fund.

Tax deductibility: Contributions/donations made to a CEF will entitle the donor to claim a tax deduction (as long as the underlying PuAF is a DGR).

Flexibility to spread deduction: for a donation of cash, publicly listed shares or other property worth more than $5,000, the donor is able to claim a tax deduction over a period up to five tax years. This enables to the donor to claim the tax deduction in a manner that best suits their individual circumstances.

Testamentary trusts

Philanthropy often forms part of estate planning. Clients can establish a testamentary trust to support nominated charitable endeavours. This is established by the will of the benefactor and does not come into operation until after the individual’s death.

The will or trust deed can nominate family members and colleagues to be initial trustees and can specify appointment processes and other requirements of trustees in perpetuity. The trustees are responsible for and control governance, compliance, investments and giving strategies.

A testamentary trust can attain income tax exemptions, but donations are not tax deductible. Testamentary trusts must use their income to fund the charitable purpose as specified in the individual’s will.

Integrating philanthropy into financial advice is essential for delivering a holistic approach to wealth management, one that goes beyond financial goals to reflect clients’ personal values and desire for social impact. By incorporating philanthropic strategies into financial planning, advisers can help clients align their wealth with causes they care about, creating opportunities to make a meaningful difference in their communities and beyond.

This approach supports strategic, long-term giving, enhances the impact of charitable contributions, and can establish a lasting legacy for future generations. Philanthropy also offers practical benefits, such as tax deductions and concessions for ancillary funds, making it a valuable tool for tax-effective planning. Ultimately, weaving philanthropy into financial advice enables clients to achieve not only financial wellbeing but also deeper fulfillment and purpose through their giving.

Take the FAAA accredited quiz to earn 0.5 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.5 hour.

Legislated CPD Area: Technical Competence (0.25 hrs) and Tax (Financial) Advice (0.25 hrs)

ASIC Knowledge Requirements: Estate Planning (0.25 hrs) and Taxation (0.25 hrs)

please log in to start this quiz

———–

Notes:
[1] Charities Aid Foundation, World Giving Index 2024
[2] Ibid
[3] Charities Aid Foundation, World Giving Index 2022
[4] https://www.accountingtimes.com.au/tax/aussie-donation-rates-slow-as-taxpayers-feel-the-cost-of-living-pinch
[5] Australian Charities and Not-for-profits Commission, Australian Charities Report, 9^th edition, June 2024

The post CPD: Tax and philanthropy appeared first on AdviserVoice.

Advisers need enhanced knowledge the tax regime and requirements that apply to clients using Self-Managed Super Funds.

Super assets reached $4.2 trillion at the end of 2024, with SMSF assets forming roughly one third of the superannuation savings pool and exhibiting a six percent year on year growth^[1]. This article, proudly sponsored by Allianz Retire+, explores the tax benefits of using SMSFs, the tax regime that applies and requirements particular to the sector.

The first self-managed superannuation fund (SMSF) was established in 1999. A quarter of a century later, SMSFs have amassed more than one trillion dollars in assets, held by some 638,411 SMSFs, representing 1,184,287 members^[2].

Figure one examines the number of SMSF establishments, windups and total numbers of both funds and members. The financial year ended 30 June 2024 continued the strong trend in the establishment of new SMSFs and saw the number of exits decline. The total number of both funds and members continued to increase.

Figure two illustrates the growth in SMSF assets, from both an average and median perspective. The averages are typically skewed by larger numbers, so the median assets per member and per SMSF are more typical for the majority of funds.

The latest ATO statistical report (December 2024) showed that SMSF members continue to be heavily invested in equities with listed shares comprising 27 percent of total SMSF assets (compared to 29 percent at December 2023). Real property, both non-residential and residential is the next largest asset class, at 16.5 percent, closely followed by cash and term deposits at 16 percent.

SMSF regulatory environment

All super fund trustees must meet the sole purpose test: to run their fund for the sole purpose of providing retirement benefits as outlined in the Superannuation Industry (Supervision) Act 1993 (SIS Act). SMSF trustees are no different. Despite the obligations SMSF trustees must meet, there are numerous reasons more than one trillion dollars is invested in these funds.

The most commonly cited reasons for managing retirement savings via an SMSF can be explained by one or more of the following:

• Direct ownership of assets rather than beneficial ownership through a superannuation fund
• Ability to own direct residential or commercial property
• Ability to borrow money via a closed trust to be used for investment purposes
• Ability to own a broader range of direct assets, including collectibles and works of art
• Capacity to manage tax more effectively.

While SMSFs undoubtedly have several advantages, whether or not a client can maximise the benefits of the SMSF structure will be dependent on the fund’s investment objective and those of its members. The reasons in favour of SMSFs outlined above are not relevant for all funds or all members and, in some cases, those benefits may be outweighed by the costs and time requirement associated with managing an SMSF.

Requirements for managing an SMSF include:

• Trustees need the skills and time to commit to managing an SMSF
• Trustees must operate the fund within the law that regulate SMSFs; failure to do so may lead to penalties for the trustee/s and tax consequences for the fund
• Trustees need to make investment decisions for the SMSF that are in the best interests of all members, while complying with the restrictions on investments applicable to SMSFs
• Trustees must comply with all ATO requirements for SMSFs as failure to conform can lead to a loss of tax concessions for the fund.

It can be expensive to establish and manage an SMSF and the fees paid to operate an SMSF may be more than would be paid to another type of super fund. One of those expenses is the annual audit. Each year, an SMSF must undergo an independent audit, undertaken by an independent approved SMSF auditor that is registered with ASIC. An approved auditor will:

• Examine the SMSF’s financial statements
• Assess the SMSF’s compliance with superannuation laws
• Provide trustees with a detailed report
• Report any contraventions of the SIS Act to the ATO.

Once the audit has been finalised, trustees need to complete and lodge a SMSF Annual Return (SAR) by its due date. The SAR is a comprehensive report that covers the SMSF’s investments, transactions and benefit payments. It also reports super regulatory information, member contributions and is used to pay the SMSF supervisory levy.

This levy is a fee charged by the ATO for its supervision and is added to the tax return for each SMSF. The levy has been $259 since the 2014-15 financial year and remains the same for the current financial year. Calculating the correct tax payable is up to the individual preparing the SAR.

If the SAR is lodged more than two weeks late, the SMSF won’t be able to receive contributions or rollovers until the SAR is lodged. Once an SAR is lodged, the trustee must pay any tax owing as well as an annual supervisory levy.

In cases where an SAR isn’t lodged for a longer time period, there are a range of penalties issued by the ATO. These range from financial penalties through to (in more extreme cases) the disqualification of the fund’s trustee/s.

Given the requirements of administering an SMSF, most fund trustees elect to pay for additional help. Services sought by SMSF trustees include:

• Preparation of the SAR
• Valuation of the SMSF’s assets at market value to accurately prepare the fund’s accounts, statements and SAR; some classes of assets must be valued and reported in a specific way detailed by the ATO and trustees must be able to provide evidence of the valuation
• Actuarial certificates for SMSFs paying income streams (pensions)
• Financial advice, including asset allocation and investment recommendations
• Tax advice
• Legal fees
• Assistance with fund administration
• Insurances for members.

It’s important that your clients understand that one of the benefits of SMSFs is not early access to their retirement savings. If money is withdrawn from an SMSF earlier than superannuation rules permit, penalties can apply and include:

• The amount withdrawn can be taxed at penalty rates
• The SMSF can potentially lose its tax concessions
• The trustees may be penalised for allowing fuds to be released early.

Tax and SMSFs

Each SMSF must register with the ATO for both an ABN and TFN. If this isn’t done, the fund will not be registered as an SMSF and therefore not entitled to tax concessions nor will employers be able to claim deductions for contributions they make to the fund.

The SMSF structure akin to a company in that SMSFs are deemed to have income (including contributions and investment earnings) and expenses for tax purposes. SMSF members are entitled to the same reduced tax rates that are available through public super funds; a basic tax rate of 15%, which can be further reduced by offsetting expenses and tax credits. Payments received after the age of 60 are tax free.

While these tax benefits are common to all super funds, SMSFs have more flexibility to implement tax strategies around capital gains, taxable income or franking credits to minimise the tax payable. To illustrate, a key advantage of using an SMSF is that trustees can control when assets are disposed of. This allows the trustee to manage capital gains in a more targeted way. For example, an SMSF acquires an asset today and it appreciates by 50% by the time the fund’s members retire. That asset can then be sold to provide income to the complying pension stream with no tax owing on the realised capital gain of the asset.

The flexibility of SMSFs enable trustees and their advisers to optimise tax efficiency for the fund’s members. By tailoring strategies to the individual circumstances of members, and leveraging options such as contributions, reserves and distributions, trustees can mitigate overall tax liabilities within the fund. In contrast, personal circumstances cannot be factored into pooled superannuation funds because members must be treated consistently.

The SMSFs structure also provides flexibility with respect to managing taxable liabilities. An SMSF requires only one tax return despite potentially having up to six members. If the fund includes retired members who are tax-exempt, while others remain subject to the 15% tax environment, strategic allocation of earnings from the tax paying members to the retired members can yield tax advantages.

Income tax

As long as an SMSF is a ‘complying fund’ – one that follows the laws and rules for SMSFs – income is taxed at the concessional rate of 15%. Non-complying funds have the highest marginal tax rate applied to income received by the fund. The most common types of assessable income for complying SMSFs are assessable contributions, net capital gains, interest payments, dividends and rent. The following commentary on tax refers to complying funds.

Contributions

Contributions received by an SMSF are included in its assessable income and are generally taxed as part of the SMSF’s income at 15%. Assessable contributions include:

• Employer contributions, including those made via salary sacrifice
• Personal contributions where the fund member has notified the trustee they intend to claim as a tax deduction

These contributions are taxed in the SMSF as income, but at the concessional rate of 15% up to the contributions cap. The cap is currently $30,000 per year and the non-concessional contribution cap is currently $120,000.

Non-concessional contributions made into an SMSF are not included in the fund’s assessable income. These may include:

• Personal contributions made by the member for which no income tax deduction is claimed
• Contributions made for a spouse
• Contributions made for a child under 18 years old.

In the case a member does not provide their TFN, the SMSF will have to pay additional tax on their mandated employer contributions and cannot accept other types of contributions. The additional tax rate is 34% for complying SMSFs and the maximum tax rate + 2% for non-complying SMSFs.

There is a significant difference in the treatment of contributions between super funds and SMSFs.  Because contributions to SMSFs are treated as income, tax is levied once the expenses of the SMSF have been deducted.

Earnings

An SMSF in the accumulation phase will have income earned from its investments taxed at 15%. Franked dividends paid by an Australian company may entitle the SMSF to a tax credit, which will reduce its overall income tax liability. As with income received from contributions, income derived from earnings will be taxed on an after expenses basis.

When an SMSF has members that have reached the pension stage, the investment income received by the fund can be tax-free. This is referred to as exempt current pension income, and it can be used to offset the tax liabilities of the SMSF where the fund has other members who have not yet retired. 

Non-arm’s length income

It is a regulatory requirement that an SMSF must always transact on an arm’s-length basis. The purchase and sale price of fund assets should always reflect the true market value of the asset and the income from assets held by an SMSF should always reflect the true market rate of return. The ATO will tax any non-arm’s length income at the highest marginal rate.

The ATO considers income to be non-arm’s length income for a complying SMSF if it is:

• Derived from a scheme in which the parties weren’t dealing with each other at arm’s length
• More than the SMSF might have been expected to derive if the parties had been dealing with each other at arm’s length.

For example, the ATO considers income derived by an SMSF as a beneficiary of a discretionary trust to be non-arm’s length income, as are dividends paid to the SMSF by a private company (unless that dividend is consistent with arm’s-length dealing).

Non-arm’s length income also includes income derived by an SMSF from a scheme where the parties weren’t dealing with each at arm’s length and where the fund incurred lower expenses in deriving that income than would be expected if the parties were dealing on an arm’s-length basis.

Deductions

Like a company, a complying SMSF can deduct losses or expenses from its assessable income, as long as those losses or costs that are incurred in producing or gaining assessable income or incurred in running a business for the purpose of producing that income. These losses and expenses reduce the amount of tax payable by the SMSF.

However, for those SMSFs wholly in pension phase generally cannot deduct losses and costs relating to income because they pay no tax. If a fund has both accumulation and pension members, the expenses generally need to be apportioned to determine the amount that the SMSF can deduct.

Expenses aren’t allowable deductions when they are incurred in gaining or producing exempt income, non-assessable income or expenses of a capital or private nature.

The ATO notes the following as specific deductions that can be claimed in full or in part:

• Managing the tax affairs of the SMSF or complying with an obligation imposed on the SMSF that relates to its tax affairs, for example, the SMSF Supervisory Levy
• Death, total and permanent disability, terminal illness and income protection premiums to the extent specified in the relevant law.

Operating expenses incurred by an SMSF that are generally deductible include:

• Management and administration fees
• Audit fees
• Australian Securities & Investments Commission (ASIC) annual fee.

When it comes to investment expenses, the exact nature of those expenses is critical when determining deductibility. Examples of deductible investment-related expenses include:

• Interest
• Ongoing management fees or retainers paid to investment advisers
• Costs of servicing and managing an investment portfolio, such as bank fees, rental property expenses, brokerage fees
• The cost of advice to change the mix of investments, whether by the original or a new investment adviser, provided any changes do not lead to the creation of a new financial plan.

If the investment-related advice covers other matters or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible.

GST

Most SMSFs don’t need to register for GST although those with an annual GST turnover of more than $75,000 must register for GST. Annual GST turnover doesn’t include contributions, interest and dividends or residential rent or income generated outside Australia. It does include gross income from the lease of equipment or commercial property.

Capital gains tax

In an SMSF, a capital gain is any profit made from selling an asset. It’s classed as income and taxed as such. Similarly, any loss made from selling an asset is deemed a capital loss. Both need to be included in an SMSF’s annual return to the ATO.

Because capital gains are treated as regular income and an SMSF’s income is taxed at the concessional rate of 15%, capital gains are also subject to a 15% tax.

If an asset has been held by a complying SMSF for more than 12 months before it is sold, any capital gain may be eligible for a tax discount of 33.33%. That means only two-thirds of the capital gain will be taxed – i.e. at the rate of 10%.

SMSFs pay tax on net capital gains, calculated as:

• The fund’s total capital gains for the year
• Less any capital losses for that year and any unapplied capital losses from earlier years
• Less the CGT discount of 33.33% and any other concessions (if eligible).

A capital loss is not an allowable deduction and can only be used to offset against capital gains. If capital losses are greater than capital gains in a financial year, they must be carried forward to be offset against future capital gains.

If the capital gain is used to fund an income stream (i.e. a member’s pension) then zero tax will be applied to the proportion of capital gain funding the pension.

SMSFs in pension phase

When income from a complying SMSF is used to provide a pension income stream, no tax is payable. Those SMSFs invested in Australian equities can claim franking credit refunds from the ATO for any excess credits.

Investment income received by an SMSF is tax exempt to the extent that those assets are supporting retirement phase income streams. This income, exempt current pension income, is claimed in the SAR once the SMSF commences payment of one or more retirement phase income streams. It is important to note that an SMSF is not automatically entitled to exempt current pension income – the trustee/s must take several steps to be able to claim it.

A note on SMSFs and property investments

One of the key benefits of an SMSF is the ability to directly own commercial or residential property. There are two primary advantages to holding property inside an SMSF.

1. A concessional tax on rental income. Rent received by an SMSF will be taxed at a maximum rate of 15%. Some expenses related to ownership of the property will generally be tax deductible to the fund, lowering the effective tax rate. These expenses include such as rates and property maintenance.
2. Secondly, superannuation tax rates also apply to a capital gain resulting from an increase in a property’s value. Consequently, depending on when the property is sold, any capital gains the SMSF makes on its sale could be tax-free.

For example, if a median-priced residential property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000. If that property is held in a SMSF member in retirement, the CGT is zero after age 60^[3].

Overall, self-managed super funds offer trustees flexibility to develop strategies that enhance tax efficiency for the fund’s members. This flexibility enables a customised approach that considers each member’s unique circumstances, using methods such as tailored contributions, strategic use of reserves and personalised distributions to reduce overall tax liabilities within the fund. Unlike pooled superannuation funds – where uniform rules apply to all members – SMSFs provide a personalised solution designed to meet specific member needs.

The simplified structure of SMSFs, which requires only a single tax return, streamlines tax administration. Trustees can use this structure to strategically allocate fund earnings, particularly benefiting retired members who may be eligible for tax exemptions. In this way, SMSFs combine control, customisation and tax efficiency, positioning them as a powerful vehicle for wealth creation and retirement planning.

Take the FAAA accredited quiz to earn 0.5 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.5 hour.

Legislated CPD Area: Tax (Financial) Advice (0.5 hrs)

ASIC Knowledge Requirements: SMSF (0.5 hrs)

please log in to start this quiz

———–

Notes:
[1] APRA Superannuation Statistics, December 2024
[2] ATO, Quarterly Statistical Report, December 2024
[3]  SMSF Association

The post CPD: Tax and Self-Managed Super Funds appeared first on AdviserVoice.

What are the varied tax regimens as they apply to clients’ superannuation savings, in both the accumulation and decumulation phases?

Superannuation is regarded as the most tax-effective way to save for retirement. However, tax effective is not tax free. This article, proudly sponsored by Allianz Retire+, explores the super tax facts.

Australia’s total superannuation assets were $4.2 trillion at the end of 2024^[1] which makes our nation the fifth largest pension market in the world^[2]. The Australian superannuation sector has experienced phenomenal growth; the size of our asset pool has increased by nearly 500 percent over the last 20 years and, should this growth trajectory be maintained, Australia could become the second largest pension market globally by 2030^[3].

With money comes interest – from those keen to make it, those keen to manage it – and those keen to regulate it. The growing size of Australia’s superannuation assets have superannuation firmly in the sights of government agencies (including the ATO) and regulatory bodies. Although this scrutiny plays a vital role in safeguarding the nation’s retirement savings, it can also result in some ‘tinkering’ with the system.

While a well-known quote suggests that death and taxes are the only certainties in life, change is just as inevitable. Advisers are all too familiar with this reality, especially when it comes to superannuation and taxation. The rules governing super contributions, earnings, and withdrawals—along with their tax implications—are continually reviewed and adjusted.

Staying informed about the taxation system and its impact on superannuation is essential, as is the ability to clearly explain these complexities to your clients. By staying up to date with evolving tax and super laws, you not only showcase your dedication but also ensure your clients receive comprehensive, tailored financial solutions and are well positioned for positive retirement outcomes.

Super and tax

Super may be taxed at three points throughout its life cycle – on contributions, investment earnings and withdrawal. Super is generally taxed at a lower rate than regular income and withdrawals are tax-free if a client is 60 years or older. However, as with all taxable funds, it’s not straightforward. There are different types of contributions, some of which attract tax. The approach to taxation of earnings differs between the accumulation and pension phases. Super withdrawals can involve a wide range of complexities and variations. Finally, the tax treatment of defined benefit pensions differs from those drawn from an account-based pension.

Contributions

Limits apply to both concessional and non-concessional contributions; these limits apply to the amount your clients can contribute to superannuation each year before incurring additional tax. This applies to money contributed to both superannuation funds and self-managed superannuation funds (SMSFs).

Concessional contributions or ‘before tax’ contributions include employer super guarantee (SG) contributions, other amounts paid by your clients’ employer as part of an agreement with you as well as other amounts paid by your clients’ employer from their before-tax income to their super fund, such as administration fees and insurance premiums. Other concessional contributions can include salary sacrifice contributions up to the contributions cap.

Non-concessional contributions are after tax contributions made by your client or their employer. Clients over the age of 75 may not make voluntary contributions to their super but may receive Superannuation Guarantee contributions from an employer. If a client has $1.9 million or more in the super system on 30 June in the previous financial year, they’re not able to make any non-concessional contributions.

Before-tax contributions are generally taxed at 15%, unless your client:

• has not provided their Tax File Number to their super fund
• earns more than $250,000 per annum
• exceeds the concessional contributions cap.

For the 2024-2025 financial year, the contributions caps are:

• concessional contributions – $30,000
• non-concessional contributions – $120,000.

Any excess concessional contributions will count towards the non-concessional contributions cap.

Where a client exceeds their contributions cap, additional tax becomes payable. Only the amount above the relevant limit is subject to additional tax; for example, if your client contributed $20,000 over the limit, extra tax is charged only on that $20,000. Concessional contributions that exceed the cap are taxed at the client’s marginal tax rate (including Medicare Levy).

Withdrawals

Each client must satisfy a condition of release to withdraw money from super. There are four main conditions of release, which include:

1. your client turns 65, even if they haven’t retired

2. your client reaches preservation age (figure two) and

3. your client commences a transition to retirement income stream (TRIS) while continuing to work part or full time. A TRIS strategy enables your client to top up the income received from their employment with a regular income stream from their super once they have reached their preservation age.

This income stream enables your client to either reduce their working hours without reducing their income or continue working and increase salary sacrifice contributions to boost the value of their super.

There are restrictions on the amount a client can withdraw via a TRIS in any one financial year. A client under 65 years old must receive a minimum of four percent and a maximum of 10 percent of the balance of their super funds each financial year.

The exception to this is if and when your client meets a ‘nil cashing restriction’. This includes the scenario where your client:

• reaches preservation age and retire
• turns 65
• becomes permanently incapacitated
• us diagnosed with a terminal medical condition.

Satisfying a condition of release with a nil cashing restriction (as detailed above) means that the account-based pension is no longer subject to the restrictions that generally characterise a TRIS.

When implementing a TRIS strategy, you and your client need to decide from which payer to claim the tax-free threshold on the client’s tax file number declaration. If the client claims the tax-free threshold with both an employer and the super fund, they may face a tax liability at the end of the financial year.

A TRIS automatically rolls into the retirement phase as soon as your client reaches 65 years old. For the other conditions of release listed above, the client needs to notify their super fund to instigate the move from TRIS to the retirement phase.

4. The client satisfies an early access requirement, such as they:

• can claim on medical, compassionate, hardship or incapacity grounds
• can claim to withdraw voluntary contributions under the First Home Super Saver scheme
• are a temporary resident who is permanently leaving Australia.

Tax-free and taxable components of withdrawals

Some super is tax-free and some taxable upon withdrawal, depending on the type of contributions made and whether tax was paid on it.

Tax-free withdrawals are generally from your client’s non-concessional (after-tax) contributions, including personal contributions made from after-tax income, unless your client was allowed a tax deduction for them.

Taxable withdrawals are generally from concessional (before-tax) contributions – those made from income before tax was paid on it. This includes:

• super contributions made by your client’s employer
• contributions your client made by salary sacrifice
• super contributions your client claimed a tax deduction for.

The amount of tax paid on withdrawal of taxable super prior to age 65 depends on:

• contributions and related investment earnings on which your client’s super fund has paid tax (at the rate of 15%) forms the ‘taxed element’ of your taxable super
• any amount included in your client’s taxable super that the fund has not paid tax on forms the ‘untaxed element’ of their taxable super.

Generally, a client’s super benefit will include both a tax-free and a taxable component. When a withdrawal is made, the super fund calculates the components of the withdrawal based on the proportion of components that make up the total value of your client’s super account.

Investment earnings

Superannuation is regarded as a good retirement savings vehicle because of the low tax paid on investment earnings. During the accumulation phase, earnings are taxed at 15 percent and are deducted from those earnings by the fund. Once a client opens a retirement income stream, investment earnings are tax-free.

Where a client takes a lump sum and invests it outside of superannuation, investment earnings may be subject to tax.

Tax offsets

Those clients who are retired or over 60 may be eligible for tax offsets; this is dependent on their income and assets, where their income is derived and whether they retired, fully or partly.

The relevant offsets are:

• The seniors and pensioners tax offset (available only to those who qualify for the Age Pension)
• Lump sum tax offset
• Super income stream tax offset

Most super accounts are comprised of taxed and untaxed elements. A client receiving income from a super income stream may be eligible for a tax offset equal to:

• 15% of the taxed element
• 10% of the untaxed element

The tax offset amount available to your client on the taxed element will be shown on the PAYG payment summary received from their super fund at the end of each financial year.

The tax offset amount the client can claim on the untaxed element will not be shown on this payment summary and is subject to a cap (figure three).

Tax offsets cannot be claimed for the taxed element of any super income stream your client receives before they reach their preservation age, except where the super income stream is a disability super benefit or death benefit income stream.

Lump sum withdrawals

Lump sum withdrawals may be subject to tax (figure four), especially if the client has not reached preservation age; for those under, 60 lump sum payments may be accessible only if special circumstances are met.

The low rate cap amount is the limit set on the amount of taxable components (taxed and untaxed elements) of a super lump sum that can receive a lower (or nil) tax rate. It applies to clients who have reached their preservation age but are below 60 years. It’s a lifetime cap that’s reduced by any amount previously withdrawn and applied to the low rate threshold.

Once a lump sum is withdrawn from a super account, it’s no longer considered to be super. If your client invests the money, earnings on those investments are not taxed as super and generally need to be declared in the client’s tax return.

Defined benefit pensions

Income received from a defined benefit pension is generally comprised of three components:

• a tax-free component
• a taxable component that is already taxed
• an untaxed taxable component.

The untaxed component is included in your client’s assessable income and tax is paid at their marginal tax, rate less a 10 percent tax offset. However, if the client is over 60, the tax-free and taxable component are generally received tax free and are not assessable.

This changes when the client’s total annual pension payments are above the defined benefit income cap, which is $118,750 for the 2024-25 financial year. In this scenario, the client will lose the 10 percent offset above this amount. In addition, 50 percent of the tax free and taxable components above this amount become taxable.

Division 296 tax

This new proposed tax has proved divisive and has yet to get legislative support. It was rescheduled for debate on 13 February 2025, as the last bill on the last day of the current parliamentary sitting period. It was not passed and is unlikely to be put to the Senate before the next federal election.

The proposed new tax would be introduced under Division 296 of the Income Tax Assessment Act 1997 and will apply at a rate of 15% to the portion of ‘earnings’ exceeding $3 million at the end of the financial year, calculated using the following formula:

Tax Liability = 15% × Earnings × Proportion of Earnings

This 15% tax will be imposed in addition to the tax already paid by the superannuation fund on assessable income.

The proportion of earnings above $3m at the end of the financial year subject to the new 15% tax will be calculated under the following formula:

Proportion of Earnings = Total Super Balance Current Financial Year − $3 million

The ‘earnings’ component will be calculated as the movement in the total superannuation balance of the member for the year, adjusted for most contributions and withdrawals through the year, using the following formula:

Earnings = Total Super Balance Current Financial Year − Total Super Balance Previous Financial Year + Withdrawals – Net Contributions 

The Australian Taxation Office (ATO) will assess the tax at the individual level, following the same approach used for Division 293 tax. Individuals will have the option to pay the tax personally or authorise their superannuation fund to make the payment on their behalf.

In summary, it is crucial for financial advisers to have a thorough understanding of the tax regime as it applies to the superannuation system. As you guide your clients through the complexities of the financial landscape, the interplay between tax and super highlights your essential role in maximising your clients’ retirement outcomes.

In an ever-changing economic environment, where legislative updates are frequent and market fluctuations can cause client uncertainty, advisers with in-depth knowledge of taxation within the superannuation framework are best equipped to provide timely and relevant guidance.

Take the FAAA accredited quiz to earn 0.25 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.25 hour.

Legislated CPD Area: Tax (Financial) Advice (0.25 hrs)

ASIC Knowledge Requirements: Superannuation (0.25 hrs)

please log in to start this quiz

———–

Notes:
[1] Superannuation Statistics, ASFA, 31 January 2025
[2] Global Pension Assets Study – 2025, Thinking Ahead Institute, January 2025
[3] Ibid.

The post CPD: Super tax facts appeared first on AdviserVoice.