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Tax Changes to Testamentary Trusts

By Tony Nunes and Amy Liu, Kelly+Partners Chartered Accountants

The 2018 Australian Federal Budget announced integrity measures affecting testamentary trusts. These changes are effective from 01 July 2019 and affect distributions from testamentary trusts to minor beneficiaries. Unfortunately, the issue of whether superannuation assets form part of the deceased’s estate, remains unresolved.

In the 2018 Budget, the government announced that, from 01 July 2019, the concessional tax rates available to minors receiving income from testamentary trusts will be limited to income derived from assets that are related to the deceased estate.

This amendment was introduced to prevent taxpayers accessing the concessional tax rate by injecting assets that are unrelated to the deceased estate into the testamentary trust.

A testamentary trust is a trust created under the Will of a deceased person. A testamentary trust is contrasted with an inter vivos trust, which is a trust established by a person during their lifetime.

The much-sought-after tax advantage of a testamentary trust is simply that minors (i.e., persons under the age of 18) are taxed like adults, with the benefit of a tax-free threshold of AUD 18,200. Distributions are made to them from an inter vivos trust, as subject to tax without the benefit of applying the tax-free threshold.

Example

If AUD 50,000 of taxable income is distributed to three minors under an inter vivos trust, each of the minors would be taxed at the top marginal tax rate of 45% and pay a total of approximately AUD 22,500 of tax. However, if AUD 50,000 of taxable income is distributed to three minors under a testamentary trust, the distributions could be tax free, as each minor will have a taxfree threshold of AUD 18,200.

Integrity Measures

The general anti-avoidance integrity measures currently exist to counter the above situation.

However, the new measure provides taxpayers with certainty and clarity.

Superannuation Assets of the Deceased

One question that was not clarified by the Budget is whether superannuation assets of the deceased are considered part of the deceased’s estate. If superannuation is part of the deceased estate, then distributions of the superannuation benefit from the testamentary trust to minors will qualify for the concessional tax treatment. If superannuation is considered an “injection” into the deceased estate, then a distribution made to minors will not qualify for the concessional tax treatment.

This uncertainty is created by the special characteristic of superannuation assets. Superannuation assets are usually held in a form of trust before death and do not automatically form part of the deceased estate. The superannuation assets of the deceased, or “death benefits”, must first be administered by the trustee of the superannuation fund according to the Superannuation Industry (Supervision) Act 1993. The trustee will pay the death benefits to the dependent (including minors) or legal representative of the deceased in accordance with superannuation law. The trustee will then transfer any remaining superannuation benefits to the deceased’s testamentary trust.

Given that there is a disconnect between the payment of the superannuation benefit and distribution to minors, the superannuation payment could be an “injection” to the deceased’s estate and thus not subject to the concessional tax treatment under the new law.

To counteract this uncertainty, taxpayers should consider including a clause under the Will to establish a superannuation proceeds testamentary trust, which is a trust especially created for receiving superannuation proceeds. The deceased can then provide a binding direction to the trustee of the superannuation fund to pay death benefits to the deceased estate, where it will then be used to create the superannuation proceeds testamentary trust.

Therefore, the superannuation benefit will form part of the deceased estate and any distribution of a superannuation benefit to minors should be subject to the concessional tax treatment. 


 

Tony Nunes

Tony Nunes

GGI member firm
Kelly+Partners Chartered Accountants
Advisory, Auditing and Accounting, Corporate Finance, Tax, Fiduciary and Estate Planning
Sydney, Australia
T: +61 2 9933 8866
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: www.kellypartners.com.au

Kelly+Partners Chartered Accountants is a specialist chartered-accounting business which assists private businesses, private clients, and families to manage their business and personal financial affairs. The Kelly+Partners tax-consulting practice is respected as one of the foremost tax-advisory firms in Australia and offers the full range of direct, indirect, and international tax services.

Tony Nunes has over 22 years’ experience in providing tax advice. He has extensive experience in advising clients on issues affecting crossborder transactions, acquisitions and restructures, and in all aspects of structuring the ownership and financing of corporations and their operations.
Amy Liu

Amy Liu

GGI member firm
Kelly+Partners Chartered Accountants
Advisory, Auditing and Accounting, Corporate Finance, Tax, Fiduciary and Estate Planning
Sydney, Australia
T: +61 2 9933 8866
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: www.kellypartners.com.au

Amy Liu is an experienced tax advisor with expertise in both direct and indirect taxation, advising clients in cross-border transactions, mergers and acquisitions, and corporate restructures. Amy also assists clients with tax audits, ruling applications, and liaising with the revenue authorities.


Published: Trust & Estate Planning Newsletter, No. 04, Autumn 2019 l Photo: Benjamin ['O°] Zweig - stock.adobe.com

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