Proposed changes to how testamentary trusts are taxed
The use of Testamentary Trusts as an estate planning tool is becoming more common. Testamentary Trusts provide certain advantages to the nominated beneficiaries including asset protection and in some cases taxation benefits.
The Treasury Laws Amendment (2019 Measures No.3) Bill 2019 (Bill), which is currently before the Senate, seeks to impose restrictions on the taxation benefits which are available to beneficiaries of a Testamentary Trust.
Testamentary Trusts are a type of discretionary trust, which provides the trustee with the power to determine who, within a class of beneficiaries, will receive a distribution of income from the trust.
It is well known that division 6AA of the Income Tax Assessment Act 1936 and section 13 of the Income Tax Rates Act 1986 impose higher rates of tax on distributions from discretionary trusts to minors (i.e. children under the age of 18). These provisions do not apply to distributions to minors from a Testamentary Trust, rather the minor beneficiary is taxed in at the applicable marginal tax rate.
As the law stands, additional funds can be injected into a Testamentary Trust after it has been established and income generated using those funds will be treated the same as an ordinary distribution from a Testamentary Trust (i.e. you can utilise the minor beneficiary exception).
The amendments contemplated in the Bill seek to limit the tax concessions which are available to minors to income which is generated solely from estate assets. The Bill will apply in relation to any asset acquired by or transferred to the trustee of an estate on or after 1 July 2019.
This will mean that income derived from assets injected into the Testamentary Trust after it is established which is then distributed to a minor will be subject to the highest marginal tax rate.
Advisors should be aware of the changes and, assuming it is passed, keep accurate records of the trusts assets where a testamentary trust contains blended assets (i.e. assets from the deceased together with assets contributed separately).
If you or your clients have any questions, please contact us.
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Thomas Hanna, Associate