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TAX TIP #12: TESTAMENTARY TRUSTS

Writer's picture: Playna HoPlayna Ho

Updated: Mar 18, 2024

Facts

Mum and Dad pass away suddenly.

In their Will, they gift all their assets to their Child (8 years old).

Their assets include a house, cash in the bank and shares.

The Child receives income by way of rental, interest and dividends from the assets.


Question

Will the Child pay less tax if instead Mum and Dad gifted the assets to a Testamentary Trust?


Answer

No.


Tax Tip

  1. Minors are taxed at the highest marginal tax rate, plus Medicare Levy on any amount above $416, unless the minor is an ‘excepted person’ or the income is ‘excepted income’.

  2. These higher taxation rates on minors imposed by Division 6AA of ITAA 1936 are targeted at avoiding any tax advantages arising from income splitting arrangements, for example, distributing trust income to a minor beneficiary.

  3. Although there are a number of different categories of ‘excepted income’, there are two categories which apply to income generated on assets sourced from a deceased estate:

    1. assets transferred to a beneficiary under the provisions of a will (section 102AG(2)(a)(i); and

    2. assets transferred to a Testamentary Trust from a deceased estate (section 102AG(2)(d)(i)).

  4. Provided the provisions of 102AG are satisfied, a minor beneficiary will pay the same income tax rates as an adult for all income the minor beneficiary receives, one of the major benefits being that the minor beneficiary can receive $18,200 tax-free.

  5. It should be noted that recent changes in legislation clarify that income is only ‘excepted income’ if it is derived from assets transferred to the Testamentary Trust directly from the estate of a deceased person (section 2AA). This means that income derived from assets that are unrelated to the deceased estate will generate income that is not exempt from penalty tax rates.

  6. In this case, the Child’s income will be taxed the same regardless of whether Mum and Dad gifts the assets to the Child directly or to a Testamentary Trust for the Child’s benefit.

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