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Estate Planning, Tax

Trust change improves tax position for minors

testamentary trust death benefit

New tax laws to prevent the misuse of death benefit testamentary trusts have also clarified minors will not be excessively taxed on income from the trust.

A recent change to prevent external income from being injected into a testamentary trust that has received a death benefit has also meant minors receiving that benefit will not be charged excess tax on income derived by the trust, according to an SMSF lawyer.

DBA Lawyers lawyer Shane Backhaus said a new subsection of the Income Tax Assessment Act, introduced by the Treasury Laws Amendment (2019 Measures No 3) Act 2019, will stop people from misusing testamentary trusts, but also clarified what will be considered as excepted trust income (ETI).

“This subsection is trying to prevent the inflating of a testamentary trust with assets from outside the estate from some sort of discretionary trust distributing money that does not relate to the estate of the deceased person,” Backhaus said as part of a recent webinar.

He said under the new subsection – 102AG(2AA) – ETI was defined as assessable income derived by the trustee of the trust estate from property where the property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person.

The explanatory memorandum accompanying the treasury bill stated these requirements ensured assets unrelated to the deceased estate could not be injected into the testamentary trust and also requires that there is a connection between the property from which ETI is derived and the deceased estate, he said.

He added while the change was aiming to address this problem, it also clarified that minors who are beneficiaries would only be taxed at adult marginal tax rates on income generated by the testamentary trust, but added this had yet to be tested before the ATO.

“I think this is a very good position that once death benefits are paid to the legal personal representative they form part of the estate and have a necessary connection and should be able to form a part of the ETI,” he said.

“We don’t have any clear guidance as this is still quite new, but suggest when this happens parties will probably get tax rulings and should still be seeking advice.”

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