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NEW rules ‘tighten up’ tax benefits associated with testamentary trusts

Testamentary trusts have long been recognised as a useful estate planning tool, particularly where minor beneficiaries are involved. In simple terms, a testamentary trust is a trust that comes into existence by virtue of having its terms contained in a valid Will. Essentially, any Will that provides one or more of the deceased’s assets to be held by a person (in their capacity as trustee) for the benefit of one or more beneficiaries will cause a testamentary trust to come into being.

As with an inter vivos trust, the beneficiaries of a testamentary trust are taxed on their share of the net (taxable) income of the trust, based on their proportionate share of the income of the trust to which they are ‘presently entitled’ (or ‘specifically entitled’ in the case of ‘streamed’ capital gains and/or franked dividends). The ‘income’ of the testamentary trust will be determined under ordinary concepts, unless the Will contains a provision to the contrary. In contrast, the ‘net (taxable) income’ of the trust is basically the taxable income of the trust as determined under S.95 of the ITAA 1936.

There are a number of tax advantages associated with testamentary trusts, one of which is the significant concessions afforded to minor beneficiaries. However, based on the way in which the relevant legislation currently operates in this area, there is an opportunity for some taxpayers to inappropriately obtain the benefit of this tax concession and exploit the provisions in a way that is not intended by the original policy intent of these measures.

Consequently, the Government announced on 8 May 2018, as part of the 2018/19 Federal Budget, that amendments will be made to improve the integrity of the taxation of testamentary trusts.

 

TAX WARNING – Amendments proposed to apply retrospectively

These measures are contained in the Treasury Laws Amendment (2019 Measures No.3) Bill 2019 (the ‘Bill’), which was introduced into Parliament on 5 December 2019. The Bill was still before the Senate at the time of writing and is not yet law.

Despite the Bill still making its way through Parliament, these amendments are proposed to retrospectively apply in relation to assets acquired by or transferred to a testamentary trust on or after 1 July 2019. Therefore, it is important that trustees of testamentary trusts are fully aware of these amendments and their associated impact on the way in which certain income of the testamentary trust may be taxed to minor beneficiaries going forward.

 

  • Should you have any queries, please contact Tax Ideas Accountants & Advisers on +61 2 83181545
  • Alternatively, you can book an appointment in our live calendar.

 

Tags: Trust

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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