New integrity measure for testamentary trust
In broad terms, the amendments will limit the tax concessions available to minors in relation to income from a testamentary trust to income derived from assets in the testamentary trust that were transferred from the deceased estate or subsequently accumulated. This is achieved by imposing additional conditions that must be met to ensure that there is a connection between the asset and the deceased estate in order for the testamentary trust income to be excepted trust income.
In particular, for income of a testamentary trust to be considered ‘excepted trust income’, proposed S.102AG(2AA) will be inserted with the following requirements:
- the assessable income must be derived by the testamentary trust from property; and
- the property satisfies any of the following requirements:
- The first requirement – the property was transferred to the testamentary trust to benefit the beneficiary from the estate of the deceased person concerned, as a result of the Will, codicil, intestacy or order of a court (as mentioned in S.102AG(2)(a)).
- The second requirement – the property represents accumulations of income or capital from property that satisfies the first requirement.
- The third requirement – the property represents accumulations of income or capital from property that satisfies the second requirement or from property that has already satisfied this (third) requirement.
TAX TIP – Injection of asset may lead to administrative nightmare
To the extent that no assets are injected into a testamentary trust, all of the testamentary trust’s assessable income will be excepted trust income, subject to the operation of the anti- avoidance provisions in S.102AG(3) and (4).
The proposed amendments provide a clear incentive for testamentary trusts to avoid allowing any assets to be injected into the trust. To do otherwise could potentially lead to an accounting and administrative nightmare, due to the need to track the assessable income from the various different assets, not to mention the need to ensure allowable deductions are allocated in a reasonable manner accordingly.
Income must be derived from property
The first part of the proposed new measures requires that the assessable income be derived by the testamentary trust from property, which is defined by S.102AA(1) as “property, whether real or personal, and includes money”.
Furthermore, S.102AA(4) provides that a reference to income derived from property includes income derived from property that, in the opinion of the Commissioner, represents that property. This has the effect of allowing ‘eligible property’ (i.e., one that satisfies any of the three requirements below) to be converted from one asset type to another and still maintain its status as an ‘eligible property’ (i.e., income derived by the converted asset is also excepted trust income).