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New considerations of Testamentary Trusts


Do you currently have a Testamentary Trust, or have you considered establishing one? In this blog post you will learn some of the benefits associated, and recent legislation changes it is imperative to be aware of.

A Testamentary Trust is a ‘legal entity, created by a trust deed, which is able to own assets and invest money. However, it does not normally pay tax in its own right but acts as a funnel that passes the income down to beneficiaries, who pay tax instead.’ (1) With that in mind, Testamentary Trusts provide many benefits such as concessional tax treatment for the distributions of incomes to minors and tax effective distributions to adult beneficiaries and can form an important part of your estate planning.

The Furse case (2) has previously allowed a discretionary Testamentary Trust to borrow money to acquire an asset from which then the income derived was considered excepted trust income. In the original Furse case, the Trust was established under a Will, the trustee then used the deceased’s assets to borrow funds and acquire units in a trust. The income derived from these units was included as net income of the Testamentary Trust. The result in Furse was that to be assessable income, it need not be sourced in the Will or property of the deceased.

However, the 2018 Australian Federal Budget announced the enactment of new legislation that changes the way distributions of income from Testamentary Trust to minors are treated. The new legislation, which was passed on the 23rd June 2020, means that only the property that is transferred to the Testamentary Trust from the deceased’s estate will be excepted trust income. The notion in Furse, that excepted income from a Testamentary Trust may be sourced from assets outside the deceased estate, has been quashed.

Originally, minor beneficiaries were taxed at the highest marginal tax rates. If the minor beneficiaries receive income from a Testamentary Trust or resulting from a Will, codicil or intestacy, they will now be taxed at marginal rates, i.e. concession tax rates. However, the interpretation of the new legislation suggests that any income derived from the acquisition of assets using money borrowed externally by a Testamentary Trust, similar to that in Furse, will not be considered excepted income and will be taxed at the top marginal rate.

According to the ATO, the new legislation will apply ‘to property acquired by or transferred to the trustee of a testamentary trust estate on or after 1 July 2019’ (3).

Testamentary Trusts continue to offer many attractive tax benefits. However, the new changes make it vital that advice is sought from a succession law expert to ensure the Testamentary Trust in your Will is catered to your wishes.

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References

(1) Sydney Morning Herald 2020, ‘It’s worth knowing the inner workings of ‘testamentary’ trusts,’ https://www.smh.com.au/money/super-and-retirement/it-s-worth-knowing-the-inner-workings-of-testamentary-trusts-20201123-p56h69.html

(2) The Federal Court case of Trustee for the Estate of the late A W Furse No. 5 Will Trust v FCT (1990) 21 ATR 1123 (Furse)

(3) ATO 2020, ‘Taxation treatment of distributions of income from testamentary trusts to minors’

https://www.ato.gov.au/Business/Business-bulletins-newsroom/Trusts/Taxation-treatment-of-distributions-of-income-from-testamentary-trusts-to-minors/

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