Boutique firm shines light on impact of new tax laws
Under government budget plans to implement an integrity measure to improve taxation of testamentary trust, a new law seeks to put a stop to the exploitation of assets which has made their way into trusts under loopholes in minor tax rates.
Currently, income received by minors from testamentary trust is taxed at normal adult rates rather than higher tax rates which generally apply to minors. Some taxpayers will use this to inappropriately obtain the benefit of a lower tax rate by injecting assets that are unrelated to the deceased estate into the testamentary trust.
Townsend Business and Corporate Lawyers said: “The new law will clarify 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.”
The firm said division 6AA and section 13 of the Income Tax Rates Act 1986 imposes higher tax rates on minors as a “specific tax integrity measure to deny most minors tax advantage from receiving income” that flows from income-splitting arrangements. This means rules discourage the diversion of income from adults to minors.
However, there is one exception that imposes higher tax rates on minors is accessible income resulting from an entitlement to income from a testamentary trust.
“The existing law doesn’t specify that the assessable income of the testamentary trust be derived from assets of the deceased estate – or assets representing assets of the deceased estate,” Townsend Business and Corporate Lawyers noted.
“As a result, assets unrelated to a deceased estate that are injected into testamentary trust may, subject to anti-avoidance rules, generate excepted trust income that is not subject to higher tax rates on minors.”
The proposed law will clarify that excepted trust income of testamentary trust must be derived from assets transferred to the trust from the deceased estate.