Case Study – 

Jane’s only significant asset is her primary residence, which is a modest 2-bedroom apartment worth $800k. Jane leaves everything to Mary who is her only child. Mary has a job paying $120k p.a. and 2 children who are still in school.

Mary lives in a 3 bedroom townhouse, which she rents as she can’t yet afford to buy her own home. Once Jane’s apartment passes to Mary, to help pay the bills, Mary rents out Jane’s old apartment as an investment property, which earns $40k p.a. in rental income.

Mary holds Jane’s apartment as an investment property for 10 years and then sells it for $1M, making a $20k capital gain on the sale.

To see the tax rates that apply, look at the following table in the “Testamentary Trust’ column, where you can see the rates are the same as the normal adult rates. With a smarter will, those rates can also apply to children under 18 years old who otherwise have no income.

Mary’s circumstances with a Simple’ Will:

With an existing income of $120k p.a. from her job, the additional $40k p.a. in rental income from Jane’s old apartment all falls within the $80,001 – $180,000 tax bracket, the rate for which is 37%. 37% of $40k is $14,800, which is the extra tax that Mary will pay on the additional rental income every year.

In the final year, the $40k rent + $100k capital gain (after the 40% CGT discount) will all add to Mary’s income, pushing her total taxable income up to $260k, taking her well into the top tax bracket of 47%.

Mary’s circumstances with a ‘Smarter’ Will:

Mary streams the additional $40k in rental income to her 2 children, splitting it equally between them (i.e. $20k each). Her children each pay only $342 in tax as the first $18,200 for each of them is tax-free.  Instead of paying $14,800 in extra tax every year. Mary reduces the extra tax down to only $684, which is a saving of $14,116 per year, every year.

In the final year, the additional $140k income (i.e. $40k rent + $100k taxable capital gain) can similarly be split equally between Mary’s 2 children $70k each. This way, nothing falls within the top 47% tax bracket at all.

Asset protection against Family Law claims

Based on this case study if Mary, Jane’s beneficiary is involved in a marriage or de facto relationship that breaks down, then Mary’s former spouse may make claims against Jane’s apartment. The Family Court of Australia has broad powers to divide the beneficiary’s property between the spouses and require the payment of maintenance (i.e. alimony).

By placing her assets in a testamentary discretionary trust it may help to insulate Jane’s hard-earned asset from such claims. This is because technically the trust owns the assets and, as it is a discretionary trust, the beneficiary (Mary) does not have a fixed entitlement to the assets.

QLD Law Group’s Estate Planning and Family Lawyer Simon Pattison can assist with ensuring your assets are protected as per your wishes. Contact Simon today on or 3226 1733.

Please note: This guide should not be relied on as a substitute for obtaining legal, financial or other professional advice. This case study is intended to provide a general example in relation to income tax only and is not comprehensive. Other taxes also need to be considered – e.g. GST, stamp duty, land tax, etc. You must seek your own tailored professional advice.