Tax changes to Testamentary Trusts
The 2018 Australian Federal Budget announced integrity measures to clarify the concessional tax rates available for minors receiving income from Testamentary Trusts. From 1 July 2019, the benefit of adult marginal tax rates applying to distributions from Testamentary Trusts to minor beneficiaries will only be available for income generated from the assets placed in the Testamentary Trust by the deceased or the proceeds of the disposal or investment of those assets.
This is not a significant change, as this integrity issue has always been debatable where non-estate funds are added to a Testamentary Trust, although the changes do leave open the question of whether non-estate assets received before1 July 2019 qualify for the concessional treatment. That said, the Australian Taxation Office has taken a conservative view for some time which we have advised clients to follow despite some arguments to the contrary.
However, one question left open by the Budget is whether superannuation assets will be considered to be outside the deceased’s estate (as superannuation is held in a form of trust before death) and not qualify for the concessional tax treatment where they are distributed to the estate and held via a Testamentary Trust or a Superannuation Proceeds Testamentary Trust in their Will.
We now regularly advise our clients to have the option of a Superannuation Proceeds Testamentary Trust in their Wills due to the changes to superannuation last year forcing funds to be paid out of superannuation on death in certain circumstances. Our view is that if the deceased has a nomination directing the trustee to pay death benefits to the legal personal representative, then they will form part of the estate. However, until further details are published by the Government we cannot be certain.
Even if the legislation does not adopt our view in respect of superannuation, Testamentary Trusts will continue to provide many benefits including:
- asset protection from creditors (as the assets are held by the trustee for the beneficiaries of the trust)
- some protection in family law disputes (depending on the circumstances) and the structure and control of the Testamentary Trust
- taxation benefits, including the ability to make distributions to a wide range of adult beneficiaries (determined by the trustee) allowing for tax effective distributions and
- significant concessional tax treatment for distributions to minors which lifetime trusts do not offer, as they are taxed at penalty rates. Children receiving income from Testamentary Trusts are instead taxed at ordinary adult marginal rates. The low income tax offset also continues to apply to income earned from Testamentary Trusts. The combined effect of this is that a child can receive up to $20,542 of income from a Testamentary Trust without income tax being payable (as at 1 July 2016 and assuming they receive no other income). The following is an example and the benefits are even greater the more minors there are, as the trust can last for up to 80 years from the date of death to potentially benefit grandchildren and great grandchildren:
- the adult pays the top marginal tax rate on their non-inheritance income
- the beneficiaries of the testamentary trust include three
- the low income rebate applies to the distributions to minors and
- the inheritance earns income of $60,000 per annum.
|No testamentary trust|
|Income distributed||($60,000)||Tax payable|
|Beneficiary||Income distributed ($60,000)||Tax payable|
|Tax saving per year= $28,200|
Testamentary Trusts and Superannuation Proceeds Testamentary Trusts can also be optional, allowing the estate to pass directly to a person or through to a Testamentary Trust or Superannuation Proceeds Testamentary Trust. This gives flexibility and means the executor can decide the best course of action at the time taking into account the tax treatment of the trust and all circumstances to decide whether it is worthwhile establishing it.
You might be also interested in...
Private Clients | 21 May 2018
Since our article US citizen – who me? Beware the dreaded US estate and gift tax was published, we have seen President Trump sign the ‘Tax Cuts and Jobs Act’ into law on 22 December 2017 and we are still seeing Australian senators who are not sure about their citizenship.
Private Clients | 23 May 2018
Discretionary trusts are usually established for tax and asset protection reasons. Given your client’s trust may hold a significant proportion of their wealth, it is important that the deed is up to date from a tax, asset protection and succession planning perspective.