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Taxation of Testamentary Trusts

New laws to impact upon Testamentary Trusts

The Treasury Laws Amendment (2019) Measures No 3 Bill 2019 received Royal Assent on 22 June 2020, and will potentially have a significant impact on the flexibility of Testamentary Discretionary Trusts into the future.

The ‘mischief’ that the amendments are aimed at is the injection of non-estate assets into an existing Testamentary Discretionary Trust so that minor beneficiaries can have the benefit of being taxed at normal adult rates rather than the higher tax rates that apply to minors receiving an income benefit under a Family Discretionary Trust.

Although the law prior to these most recent amendments contained provisions limiting the ability to inappropriately boost the income earning capacity of Testamentary Trusts, the most recent amendments make it clear that minors will be taxed at adult marginal rates only in relation to the income that the Testamentary Discretionary Trust generates from the assets of the deceased including the proceeds from the sale or investment of those assets.

These amendments will apply to assets acquired or transferred to the Trustee of a Testamentary Trust on or after 1 July 2019.

Potential taxation difficulty

Where we see potential difficulty is the circumstances of a husband and wife who each have a Will containing Testamentary Trust provisions so that on the death of the first of them, the assets of the deceased spouse can be used to provide income to infant beneficiaries.

Subsequently on the death of the surviving spouse, it has been common practise to provide that the assets from the estate of the second-deceased spouse will pass to the Testamentary Trust established on the death of the first-deceased spouse, so that administratively there is only a need to administer one Testamentary Discretionary Trust, rather than two. The amendments mean that the income earned on the estate of the second-deceased spouse will not receive the concessional tax benefits, if those assets are left to the Testamentary Trust established under the Will of the first-deceased spouse.

We believe this is perhaps an unforeseen consequence of the amendments which have been made and one to which careful consideration will now need to be given.

Legal help available

For further information and assistance on any Estate Planning or Estate Administration matter, please contact a member of our experienced Wills, Trusts and Estate Planning team at Bell Legal Group on 07 5597 3366 or email law@belllegal.com.au.


Important Note:

This publication was prepared by John Fradgley, Head of Wills, Trusts and Estate Planning for Bell Legal Group. It is for information only and is not legal advice.