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workings of a testamentary trust

Newbie

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Not sure if this is the right forum for this question. I've been researching testamentary trusts (as an alternative to a normal Will). 

I just reading the online example "How does a testamentary trust save tax?" on the slatergordon website.

In the example calculation on this page a testamentary trust is in place which distributes trust income to minor beneficiaries (ie the grandchildren of the deceased). It seems the minors are eligible for the full tax-free income threshold in this circumstance. Am I understanding this correctly? This is different to distributions from normal family trust distributions where only $416 a year can be distributed to a child tax-free last time I checked.

The example also states that the trust distribution will be "applied towards their school fees and other living expenses". Is this a requirement that only certain uses of funds from testamentary trust distributions are permitted (eg. school fees)? Is there an ATO webpage that explains this?

 

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Most helpful response

Former Community Support

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Hi@JA,


Thanks for your patience whilst I contacted our experts for a response to your post.


Minors are generally taxed at the top marginal rate on their share of trust net income. However, where a beneficiary under the age of 18 is entitled to income from a testamentary trust, the standard income tax rates for individuals apply to their share of the trust net income, including the higher tax-free threshold. This is referred to as excepted trust income.


There are no specific requirements on how the income must be applied provided that the child is presently entitled to the income under the trust. This can be a complex question which will be largely dependent on the terms of the testamentary trust created under the will.


In addition, there are specific integrity rules which can apply to these arrangements. These are primarily concerned with non-arm’s length transactions and agreements that are entered into for the purpose of creating excepted trust income.

 

Further information can be found at the following links:
• Appendix 9: Instructions to trustees where a beneficiary is under 18 years of age – other than trust...
• Appendix 10: Rates of tax payable by trustees on behalf of beneficiaries under 18 years old

 

I hope this helps, @JodieM

3 REPLIES 3

Former Community Support

Replies 0


HI @JA,


Welcome to ATO Community and thanks for your post! We've reached out to our experts to ask for additional assistance, and we hope to get back to you in the next couple of days. We really appreciate your patience while we look into this further.

 

Thanks @JodieM
 

Most helpful response

Former Community Support

Replies 1

Hi@JA,


Thanks for your patience whilst I contacted our experts for a response to your post.


Minors are generally taxed at the top marginal rate on their share of trust net income. However, where a beneficiary under the age of 18 is entitled to income from a testamentary trust, the standard income tax rates for individuals apply to their share of the trust net income, including the higher tax-free threshold. This is referred to as excepted trust income.


There are no specific requirements on how the income must be applied provided that the child is presently entitled to the income under the trust. This can be a complex question which will be largely dependent on the terms of the testamentary trust created under the will.


In addition, there are specific integrity rules which can apply to these arrangements. These are primarily concerned with non-arm’s length transactions and agreements that are entered into for the purpose of creating excepted trust income.

 

Further information can be found at the following links:
• Appendix 9: Instructions to trustees where a beneficiary is under 18 years of age – other than trust...
• Appendix 10: Rates of tax payable by trustees on behalf of beneficiaries under 18 years old

 

I hope this helps, @JodieM

Newbie

Replies 0

This topic seems to be about the closest to the subject I seek some guidance about.

 

I'll llist some facts.

 

  1. My step grandfather died in the United Kingdom in 2010. His Will bequeathed a sum of money to be equally divided amongst his grandchildren and great grandchildren, accessible to each only upon attaining aged 18 years.
  2. About 13 of the beneficiaries under aged 18 years resided in Australia. I agreed to act as trustee of the funds.
  3. Rather than manage 13 separate relatively small investments for the next 10+ years, I had a Trust created, within which the total could be invested. The Trust was created by virtue of a Deed of Appointment dated 23 Sep 2011. The Deed doesn't use the term 'testamentary trust', but from what I can glean, the Trust amounts to a protected testamentary trust.
  4. For context, the total amount within the Trust started out at around AUD 25,000. As a beneficiary turns 18 years, the respective portion of the investment is released to the beneficiary. The number of beneficiaries who've not yet reached aged 18 years now stands at 8 or 9, and the assets of the Trust stand at about AUD 35,000.
  5. GIven the small amounts ultimately flowing through to each beneficiary, I initially assumed an income tax return wouldn't be applicable. The ATO eventually contacted me, calling for about 4 tax returns, up to 2016. Completing the tax returns was a substanial headache, but I felt I had to do them myself, because to engage an accountant would've wiped out any earnings, and even eroded the capital.
  6. Initially significant income tax was imposed on the trust. I argued with the ATO that this must surely be incorrect. After all, creation of the Trust was merely an efficiency measure to look after the interests of a collective of beneficiaries, whose individual benefeit was inconcsequential in terms of tax thresholds.
  7. I eventually had a win with the ATO. However the Trust then had a Medicare levy imposed. That led to me seeking a Private Ruling, which in turn led to the Medicare levy being removed. From memory, I was eventually informed by the ATO that question 55V should have had the number 26 inserted, rather than 37. It was the ATO who had previously informed me that 37 was the applicable code. 
  8. In June 2020 I submitted the Trust's tax returns for 2017, 2018 and 2019. Following suit from previous advice, for the 2017 return I used 26 at 55V for the single distribution. Same for 2018. For 2019, there was no distribution, so 55V, so far as I understand, is inapplicable.
  9. I subequently received a Notice of Assessment, which incorporated an income tax bill. I contacted the ATO, objecting to this, and was informed that 55V was supposed to be 37. I was asked to write in to confirm this, which I did by way of letter dated 27 Sep 2020, within which I noted non receipt of Notices of Assessment for 2017 and 2018.
  10. A letter dated 15 Jan 2021, received 25 Jan 2021, presumably following up 2020 returns, prompted me to contact the ATO because I'd seen no response to my letter dated 27 Sep 2020. I followed up the ATO on 25 Jan 2021 via a call to 132 866. I informed the ATO representative that I was still waiting a response to my letter of 27 Sep 2020. The representative located a copy of the letter, which hadn't been actioned. The represnetative implemented a follow up action, stating that there was up to 30 days turnaround time.
  11. An ATO representaitve contacted me earlier this week, maybe 22 Feb 2021. There seems to be some confusion. The ATO representative is suggesting to me that her calculations indicate a tax liability within the Trust. I've objected to this, basically saying that this has all been discussed previously, there should be no tax. It was suggested to me that I seek advice from a tax law specialist, then let the ATO representative know what to do. Of course seeking professional advice for this will cost more than the trust returns, it's just not feasible.
  12. Since my last conversation with the latest ATO representative I've spoken with, the problem seems to lie with this difference of opinion that seems to exist amongst ATO representatives about 55V, ie. coding it 26 vs 37. Having waded back through all of the communications, it seems that 26 is indeed correct, and it seems there is no coding at 55V if there is no distribution within that financial year.
  13. Within this topic, reference is made to Appendix 9 and Appendix 10, neither of which seem applicable to the scenario which I'm dealing with, ie. protected testamentary trust for beneficiaries less than aged 18 years. Is there a relevant Appendix or other legislative clause or ruling which I can point the latest ATO representive to, which ultimately leads to no income tax nor Medicare levy within the trust, and no income tax nor Medicare levy imposed upon individual beneficiaries? I'd have thought it'd be enough to refer to the 2016 return and associated correspondence, as precedent, but this doesn't seem to be the approach.