The tax treatment of testamentary trusts is being tightened, to ensure that minors who are trust beneficiaries do not receive tax concessions they are not entitled to.
Last week, the Government introduced draft legislation for consultation.
Generally, tax law imposes higher tax rates on minors, as a way of stopping them receiving income as part of income-splitting arrangements.
An exception applies to income resulting from an entitlement to income from a testamentary trust. Income of this type is usually taxed as ordinary income.
A testamentary trust is a trust that arises upon the death of a testator, as specified in a will.
A problem arises where assets unrelated to a deceased estate are added to a testamentary trust. These assets will also generate income that is taxed at normal rates.
The Government’s view is that this is an unintended consequence, which allows some taxpayers to obtain the benefit of concessional tax treatment inappropriately.
Under the new bill, excepted trust income of the testamentary trust must be derived from assets transferred to the testamentary trust from the deceased estate.
The tax concession available to minors is limited to income derived from assets in the testamentary trust that were transferred from the deceased estate or subsequently accumulated.
The explanatory memorandum accompanying the draft bill gives the following example.
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 tuts is established, a related family trust makes a capital distribution of $1 million to the testamentary trust. The $1.1 million is invested in ASX-listed shares.
Dividend income is $110,000 in the 2019/20 financial year and the minor is entitled to 50 per cent.
Under the proposed legislation, $50,000 is attributable to assets unrelated to the deceased estate and not excepted trust income.
Only $5,000 is excepted trust income on the basis that it is assessable income of the trusts estate that resulted from a testamentary trust, derived from property transferred from the deceased estate.