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Tracing of testamentary trust distributions proposed

Tracing of testamentary trust distributions proposed

Blake Indian and Richard Wilkins discuss a proposal where income distributions to minors may need to be derived from deceased estate property before qualifying for concessional tax treatment.

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The Federal Government has released an exposure draft, and associated explanatory materials, clarifying proposed changes to the taxation of testamentary trust income that is distributed to minors. If implemented, then from 1 July 2019, only the income derived from deceased estate property would qualify for normal individual tax rates, where distributed to minors.

Other income distributed to minors from the testamentary trust would broadly be subject to the highest marginal tax rate as set out in Division 6AA of the Income Tax Assessment Act 1936.

The current rules with testamentary trusts and minors

Broadly speaking, passive income derived by individuals under the age of 18 (minors) is subject to tax at the highest marginal rate, to discourage the transfer of assets to such individuals.

A number of exceptions to this treatment exist. This includes where the income is derived from a testamentary trust. However, the current provisions do not distinguish between income generated from deceased estate assets and income from assets transferred to the testamentary trust from other sources (or, as the explanatory materials put it, injected into the trust).

Only income derived from deceased estate property should qualify

The explanatory materials state that the intention of the exception is that only the income derived from the assets of the deceased that are transferred to the testamentary trust should be subject to the preferential tax treatment, and this is what the proposed changes seek to ensure.

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