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There has been a significant testamentary trust law change affecting how distributions to minors are taxed.
Testamentary Trust Law Change
In June 2020 there has been a significant change to the taxation of income coming from testamentary trusts when paid to minors. This income might no longer be taxed at favourable adult rates as so-called excepted income. But instead might be taxed at penalty rates for minors.
Paul Mackenroth of Cleary Hoare in Brisbane will discuss with you what this exactly means.
Here is what we learned but please listen in as Paul explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Testamentary Trusts
Testamentary trusts are created through a will/last testament and are extremely popular as part of an estate plan.
Why so popular? Because they save tax. A testamentary trust is the only legal entity that can distribute to minors at adult income tax rates. All other discretionary trust (and fixed trust as well as company) distributions to minors will attract penalty Div 6AA rates. Those penalty rates are much higher than adult rates. Hence the attraction of testamentary trusts.
At adult tax rates, minors can receive up to around $20,000 per year tax-free. That is pretty concessional. If those distributions were taxed at penalty rates, those minors would pay a lot more tax.
Excepted Income
These tax concessions are all about excepted income. Excepted income attracts the concessional adult rates. All other income doesn’t.
Before 1 July 2019 this was pretty straight forward. Any income derived by a testamentary trust counted as excepted income – more or less – as long the income resulted from property covered by a Will, codicil, (or a Court order varying a Will or codicil) or an intestacy (no will).
But this has changed now. From 1 July 2019 only some income counts as excepted income. The rest doesn’t.
Effective from 1 July 2019
You might remember the 2018/19 Budget when the federal government announced these changes.
These changes are now law. Parliament passed the legislation on 17 June 2020. The change is with effect from 1 July 2019, so apply to assets acquired by, or transferred to, the trustee of a trust estate on or after 1 July 2019.
Law Change
The law tightens the rules around what income qualifies as excepted income. Only excepted income attracts concessional adult rates. The rest is taxed at Div 6AA penalty rates.
Now only income from property “transferred from the estate of the deceased person concerned, as a result of the Will” counts as excepted income. In other words, only income from estate assets will now qualify.
So gone are the days when you could create a testamentary trust and transfer future assets into this trust at a much later stage, still enjoy ingconcessional adult rates for minors.
So now those future assets will attract Div 6AA penalty rates.
Replacement Assets
We forgot to ask Paul for his thoughts on income generated from replacement assets. So what happens when you sell an original asset and buy a new one?
And what about superannuation death benefits paid to the estate? The wording in the legislation doesn’t address these yet. We will cover these questions in a later episode.
Summary
So property unrelated to the deceased estate can no longer generate excepted income. Only estate assets transferred into the testamentary trust as part of a Will can.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 15 March 2021
Tax Talks spoke to Paul Mackenroth - Senior Associate at Cleary Hoare - for more details.
