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workings of a testamentary trust

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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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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

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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
 

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Best answer

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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