Tuesday Tax Tip – Testamentary Trusts: Tainting of ‘excepted income’

One of the benefits of testamentary trusts is of course that income distributed to minors is able to be taxed as ‘excepted trust income’ taxed at regular marginal tax rates, rather than the higher tax rates which would ordinarily apply to trust distributions to minors.

Prior to legislative changes on 1 July 2019, it was possible to transfer further assets to a testamentary trust, and income accumulations generated from such assets would still be treated as excepted trust income.

However, the legislative amendments ensure that tax concessions available to minors in relation to income from a testamentary trust, only apply in respect of income generated from assets of the deceased estate that are transferred to the testamentary trust (or the proceeds of the disposal or investment of those assets). The intention is to ensure that assets unrelated to the deceased estate cannot be injected into the testamentary trust and derive income at concessional tax rates.

One example to be weary of is where there are loans on the balance sheet, that may have arisen as a result of a UPE. This has the potential to taint trust income going forward therefore caution should be applied when dealing with such matters.

Income from assets and accumulations held in a testamentary trust prior to 1 July 2019 can continue to be treated as excepted trust income.

Further questions? Please feel free to reach out.