Tax Concessions for Minors in Testamentary Trusts
Generally, the income of minors (individuals under 18 by the end of the tax year) is taxed at higher rates to prevent income splitting for tax reduction purposes. This applies to income earned directly by the minor or distributed through any trust, including testamentary trusts.
Exceptions to High Tax Rates
However, there are exceptions that allow for lower tax rates:
Excepted Persons: If the minor is working full-time or has a disability at the end of the income year, they are considered an 'excepted person' (Section 102AC).
Excepted Income: Income that qualifies as 'excepted income' or 'excepted trust income' (Sections 102AE and 102AG respectively) is taxed at the regular rates applicable to adults, not at the higher penalty rates.
Testamentary Trusts and Excepted Trust Income
In testamentary trusts, if the trust income distributed to a minor qualifies as 'excepted trust income', it is taxed at ordinary rates. This income arises from:
This setup means that income from assets directed by a Will to be held in a testamentary trust qualifies as excepted trust income. Moreover, any further income generated from these assets (including income from assets bought with the proceeds of the original assets) also enjoys this tax advantage.
Tax Planning Opportunity
This rule provides a significant tax planning opportunity to include assets in a testamentary trust via a Will, benefiting minor beneficiaries with lower tax rates on their income from the trust.
For more details or to discuss your specific circumstances, please contact Tax Ideas Accountants & Advisers at +61 2 83181545, or book an appointment directly through our live calendar.