Concession for testamentary trusts wound back

In the Federal Budget last April, the Government announced it would make changes to the tax treatment of testamentary trusts, and an exposure draft of amendments was released by Treasury at the start of the current quarter.

The assessable income of a minor from a distribution from a testamentary trust is taxed at ordinary rates, rather than the highest marginal tax rate like other passive income received by minors. This has led some taxpayers to inject unrelated assets into one of these trusts to take advantage of the concession that is available to minor beneficiaries of these trusts. 

This change will ensure that this tax concession available to minors in these trusts only applies in respect of income generated from assets of a deceased estate that are transferred to the testamentary trust under a will, or the proceeds of the disposal or investment of those assets. 

The amending legislation does this by clarifying that the excepted trust income of the testamentary trust must be derived from assets transferred to the testamentary trust from the deceased estate or from the accumulation of such income. 

This amendment will apply to assets transferred to the trust on or after 1 July 2019. 

EXAMPLE 1 – injected asset 

On 1 July 2019, testamentary trust ABC is established under a will of which a minor is a beneficiary. Pursuant to the will, $100,000 is transferred to the trustee from the estate of the deceased. Shortly after the testamentary trust is established, a related family trust makes a capital distribution of $1 million to the testamentary trust. The resulting $1,100,000 is invested in ASX listed shares on the same day. Dividend income of $110,000 is derived for the 2019-20 income year. The net income of the trust is $110,000 and the minor is presently entitled to 50% of the amount of net income. 

The minor’s share of the net income of the trust is $55,000. $50,000 is attributable to assets unrelated to the deceased estate and not excepted trust income. $5,000 is excepted trust income on the basis that it is assessable income of the trust estate that resulted from a testamentary trust, derived from property transferred from the deceased estate.

EXAMPLE 2 – income from retained excepted trust income 

Following on from example 1, the minor’s share of the net income of the trust (being $55,000, comprising $5,000 excepted trust income and $50,000 not excepted trust income) is not paid to the minor by the trustee but is invested for their benefit in ASX listed shares shortly after the commencement of the 2020-21 income year. For the 2020-21 income year, that investment derives income of $5,500, and the minor is presently entitled to the entire amount. 

$5,000 is attributable to assets unrelated to the deceased estate and not excepted trust income. $500 is excepted trust income on the basis that it is assessable income of the trust estate that resulted from a testamentary trust, derived from income that was previously excepted trust income.

Harper Group Pty Ltd – Chartered Accountants Frankston - Ph 9770 1547 

Disclaimer: All information provided in this article is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.