Testamentary trusts - it's not child's play
In the 2018 Federal Budget the Government announced that it would be amending taxation laws in respect of benefits paid to minors from testamentary trusts.
When a person dies and their super and other assets are transferred to a testamentary trust established by the deceased’s Will, there are tax concessions for amounts paid from the trust to children under 18. Ordinarily, minors are not subject to income tax on income of up to $416, but then they pay 66% on income from $147 to $1,307 and 45% on income above $1,307. Income received from testamentary sources is called excepted trust income and is taxed at ordinary adult rates.
The amendments ensure that only income derived from assets of the deceased estate that are transferred to a testamentary trust, including the proceeds of the disposal or investment of those assets is subject to adult tax rates. Any income from assets in a testamentary trust that come from non-testamentary sources are taxed at the higher penalty minor rates.
The Budget announcement came as a surprise to many practitioners as this was always the understanding, that only assets from testamentary sources receive the concessional tax treatment. However, there was a potential technical deficiency in the legislation that, in certain circumstances may have given rise to a situation where non estate assets injected into a testamentary trust could give rise to excepted trust income. This was an unintended consequence and the amendments provide the required clarification.
The amendments were passed on 23 June 2020 and are retrospectively effective from 1 July 2019.
If clients have any situations where minor children are receiving income from a testamentary trust it is important to ensure that only assets from the deceased estate are transferred to the testamentary trust and then taxed concessionally. The Australian Taxation Office is expected to apply considerable resources to ensure that tax on income paid to minors from testamentary trusts is appropriately calculated.