Estates Update - The 2018 Budget, Testamentary Trusts and Elder Abuse

The 2018 Federal Budget was handed down by Treasurer Scott Morrison at 7.30pm on Tuesday 8 May 2018.

Of particular interest to those in the Estate and Elder Law ‘space’ was the Government’s clarification on the taxation of income derived within a Testamentary Trust and the Government’s $22 million funding to protect the ageing population from elder abuse.

Testamentary Trusts

The Federal Government has stated that from 1 July 2019, the concessional tax rates available for minors receiving income from Testamentary Trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.

Currently, income received by minors from Testamentary Trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors.

This measure clarifies that minors will be taxed at adult marginal tax rates only in respect of income a Testamentary Trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).

(Source – Budget Measures 2018-2019 – Part 1 Page 44)

In other words, if a Testamentary Trust is ‘topped up’ or injected with new assets that have not derived from a deceased estate, the concessional treatment will not apply.

Does this measure change anything?

The short answer is “no” – we believe this has always been the case.

Section 6AA of the Income Tax Assessment Act 1936 applies penalty tax rates to unearned income of a minor except where the income is considered ‘Excepted Trust Income’.

Section 102AG (2) of the Income Tax Assessment Act 1936 defines ‘Excepted Trust Income’ to include (among other things) amounts which:

  • Is assessable income of a trust estate that resulted from:
  • a Will, codicil or an Order of a Court that varied or modified the provisions of a Will or codicil or
  • an intestacy or an Order of a Court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate.

So in other words, income of a minor which derived from a deceased estate does not attract penalty tax rates but instead, is taxed at adult progressive tax rates. This is precisely one of the major reasons why Testamentary Trusts are (and continue to be) a major tax planning tool for families when drafting their Wills.

The Budget measure simply serves to clarify and remind us that assets injected into a Testamentary Trust that have not been derived from the deceased estate will not receive the concessional tax treatment with regard to minors.

This measure does not mean that assets which have not derived from the deceased estate cannot (or should not) be injected into a Testamentary Trust that has already been established. Assets held within a Testamentary Trust structure (provided it is drafted carefully and correctly) can be significantly safeguarded when it comes to Family Law separation or bankruptcy.

Of course, specialist advice should always be obtained if assets are subsequently injected into a Testamentary Trust for the sole purpose of defeating a Family Law or creditors claim.

Elder Abuse

The 2018 Budget has also announced a $22 million commitment to protect the ageing population from elder abuse. The Government has committed to the creation of an Elder Abuse Knowledge Hub, a National Prevalence Research scoping study, and development of a National Plan.

The Law Council of Australia has provided some comment as to the spending of these funds, but no doubt in the weeks and months that follow, we should hear more about how the Federal Government intends to use these funds towards the combat of elder abuse.

Written by Golnar Nekoee, Director, Wills and Estate Planning. To create a power of attorney, or review your will and estate plan, please contact us.