By Kerstin Glomb
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05 Aug, 2020
INCOME CONCESSIONS CHANGED | New measures approved on June 22. Graphic (left): Steve Buissinne/Pixabay. Children (right): Pixabay. ON JUNE 22, the Treasury Laws Amendment (2019 Measures No 3) Bill was approved. This means tax concessions previously available to minors when they get income from a testamentary trust have changed and are no longer as generous. Testamentary trusts vs inter vivos trusts A testamentary trust is a trust which only comes into existence when someone dies. An inter vivos trust is a trust which comes into existence while the individual is still alive. Distributions to a minor (someone under 18) from an inter vivos trust are taxed harshly, with only the first $416 tax-free. Tax is charged at 66 per cent on the next $891 and then tax is charged at 45 per cent on any amounts over $1307. These rates create a disincentive to distribute income to minors from inter vivos trusts. Distributions to a minor from a testamentary trust have been taxed more leniently. The old situation Under the former law, any income received by a minor from a testamentary trust was taxed as though the minor was an adult. This meant that the first $18,200 of income was tax-free, the next $18,800 was taxed at only 19 per cent, and so on. It was irrelevant whether this income was derived from assets of the deceased estate or from assets added to the testamentary trust from other sources, for example, assets which were transferred into the testamentary trust from a family trust or from borrowings. This was one of the aspects which made a testamentary trust attractive for estate planning. ' If you administer a testamentary trust and assets were injected into it on or after July 1 last year, separate accounts should be set up so income from these assets is kept separate. ' KERSTIN GLOMB Special Counsel, Estate Planning The new situation The Treasury Laws Amendment (2019 Measures No. 3) Bill 2019 amended the Income Tax Assessment Act 1936 to insert a new clause, s102AG(2), tightening tax concessions available to minors in respect of testamentary trusts. It has the effect that income from assets transferred to a testamentary trust on or after July 1 last year will no longer be "excepted trust income" under the legislation and will no longer qualify for the tax concession unless it's income from assets transferred to the trustee of the testamentary trust from the deceased estate or are an accumulation of such income. Examples given by the Australian Tax Office with respect to how they're interpreting these provisions include not just the anticipated scenarios of an inter vivos family trust distributing money or assets to a testamentary trust but also include the testamentary trust borrowing funds to acquire an asset. So, if a testamentary trust bought a property for $1,000,000 using $500,000 of its own cash from the estate and $500,000 in borrowings, generating a return of $40,000 per annum, and distributed all $40,000 to a minor, only $20,000 of it would be exempted income and taxed concessionally and the other funds would be taxed at the harsher rates. What to do? Should you currently administer a testamentary trust and assets are or have been injected into the testamentary trust on or after July 1 last year, separate accounts should be set up within the testamentary trust so income derived from the injected assets is kept separate to income derived from assets of the deceased estate. Should you and your partner have mirror wills in place under which you provide that each of your respective estate flows into the same testamentary trust, the estate assets of the second person to die will be considered as "injected assets" of the testamentary trust. To avoid this problem, consideration should be given to amending your wills to allow for separate testamentary trusts to be established. For more information or to discuss the implications for you and your partner, don't hesitate to call us, 6281 0999.