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Estate Planning, Strategy

Exempt trust income treatment still unclear

excepted trust income

The treatment of assets passed from a super fund to a testamentary trust remains unclear after changes made in last year’s budget.

Changes made to tax rules about excepted trust income (ETI), particularly where it is paid from a superannuation fund into a deceased estate, still remain unclear and would benefit from further guidance from the ATO, an SMSF legal specialist.

Cooper Grace Ward partner Clinton Jackson said changes made in the 2020 federal budget regarding ETI were designed to stop people putting extra cash into testamentary trusts to subsequently distribute it to minors at a later date.

Speaking at the firm’s recent Annual Adviser Conference, Jackson said the rules were not as clear they could be, and the ATO had only provided limited guidance to date, which had affected their usage in a superannuation context.

He explained a typical ETI includes a testamentary trust that holds assets and earns income that can then be distributed to children at normal adult tax rates, even if they are under age 18.

Further he noted the testamentary trust should not receive any income or assets, such as a superannuation or death benefit, that were not part of the original trust holdings.

“There are a couple of issues that arise for us here in terms of the super context,” Jackson said.

“What happens if you have a superannuation payment that the trustees choose to pay from the super fund to the estate on a member’s death and that money forms part of a testamentary trust?

“There’s a grey area as to whether that is part of the proceeds of an estate that are approved for the purpose of excepted trust income rules.

According to Jackson a better interpretation of the status of the asset would be to view it is an estate asset at the time it becomes or is distributed to the testamentary trust.

“We think this approach shouldn’t have any additional issues coming up because you have super that is paid from a fund to the estate and forms part of a testamentary trust,” he said.

“[However] we do need a little bit more guidance from the ATO to be absolutely certain  hat we’re not going to have any concerns here.”

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