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Learn More For more information, contact Maddocks on 03 and ask to speak to a member of their team. Stephanie McLennan, Maddocks Lawyers Overview A trust deed for discretionary trusts will govern which persons qualify as beneficiaries, and how the trustee is to determine the trust's income for the relevant year.
Generally speaking: a beneficiary will only be eligible if they fall within a class of beneficiaries described in the trust deed; and a beneficiary will only be presently entitled to trust income if a trustee passes the resolution determining the specific beneficiaries by 30 June. The trust deed It is essential that trustees check their trust deed and ensure they only make distributions to eligible beneficiaries. What is the effect of a resolution?
It is therefore important to determine that: a beneficiary is eligible under the deed; and the resolution ensures each relevant beneficiary by operation of the resolution, becomes presently entitled to receive the trust income. What happens if a trustee does not pass a resolution by 30 June, or at all? If: the trustee does not pass such a resolution by 30 June or passes a resolution after 30 June ; or one or more of the distributions determined by the resolution are ineffective say, because a determination was made to distribute income to someone who was not an eligible beneficiary , then the trust's net taxable income may be assessed to the default beneficiaries or to the trustee.
Resolutions Checklist The Resolutions Checklist divides tasks up in to two lists: tasks to be completed before 30 June; and tasks to be completed after 30 June.
The Resolutions Checklist is extracted below. Before 30 June Do you have a complete copy of your trust deed? Trustees must have a complete copy of the trust deed including amendments and the trustee resolution must be consistent with the terms of the trust.
When do you have to make resolutions? Generally, the trustee must have made the trustee resolution by the end of an income year 30 June. Home Tax Training Online. Monthly Tax Update. Monthly Special Topic. Tax Fundamentals. Upcoming webinars. Past recordings.
Small business CGT concessions. In-house Training. Public Session Training. About TaxBanter. Our Tax Trainers. Our Tax Writers. The TaxBanter Team. Login to training. Login to TaxLibrary. Share on facebook. Share on twitter. A beneficiary who is presently entitled at 30 June is assessed on their share of the net income for the whole of the income year.
The income is assessable in the year the present entitlement arose, not in the year the amount is received. For example, if a beneficiary was presently entitled to the deceased estate income on 30 June but did not receive it until September , they are personally assessable on that amount in the income year ended 30 June , not in the income year ended 30 June Beneficiaries presently entitled but under a legal disability also need to know the amount of tax you've paid on their behalf.
They are entitled to receive a tax credit for this so that the same amount isn't taxed twice. The benefits of a testamentary trust can be summarised as follows:. Asset protection — provided that the trust is a discretionary testamentary trust, no one beneficiary will have any claim on the assets of the testamentary trust.
This will prevent the assets of the testamentary trust from being exposed to a successful claim by a creditor of a beneficiary or being transferred as a consequence of family law proceedings relating to a beneficiary. Distribution of income and capital — the trustee of the testamentary trust can generally distribute the income of the trust to any one or more of the general beneficiaries, allowing the trustee to distribute the income in the most tax effective manner.
The trustee will have similar discretions in relation to the capital of the trust. Income distributed to infant beneficiaries — the income generated by a testamentary trust can be distributed to infant beneficiaries and taxed in their hands at the normal adult marginal tax rates.
This issue is discussed in detail on page 8 of this paper. Providing for several generations — a deceased will often wish to provide for a surviving spouse during his or her lifetime and their children thereafter.
An ordinary will would generally provide that all the assets be transferred to the surviving spouse. It would then be necessary for the surviving spouse to draft his or her will to provide for their children. The establishment of a testamentary trust allows the assets to be transferred to a trust and then administered for the benefit of successive generations.
The deceased can provide a direction that the testamentary trust be administered firstly for the benefit of the surviving spouse and thereafter for their children. Further, the surviving spouse can be appointed trustee and effectively control the trust until their death or incapacity. Subsequently control can pass to the children. This allows for effective family succession planning. Taxation of Testamentary Trusts. A beneficiary will be assessed on the share of the net income of the testamentary trust to which they have a present entitlement in accordance with section 97 of the ITAA36 discussed above.
However, there are three areas where the treatment may differ. Taxation of infant beneficiaries. This would apply where an estate is in its final stage of administration or a testamentary trust created under a will ; and derived by the trustee of a trust estate from the investment of any property that devolved for the benefit of a beneficiary or was transferred to the trustee by another person for the benefit of the beneficiary within 3 years after the date of the death of the deceased person.
This will occur when property is transferred to an inter vivos trust under a will or an inter vivos trust is established and assets from a deceased estate are transferred to it. It is important to note that there are a number of anti-avoidance provisions contained in Division 6AA of the ITAA36 to ensure that the concessionary provisions are only used for their intended purpose A further limitation on the benefits of excepted trust income is included in section AG 2A of the ITAA36 which provides that the beneficiaries of the trust estate must be entitled under the terms of the trust to acquire the trust property.
Assets passing from a testamentary trust to a beneficiary. Capital gains tax CGT and its application to deceased estates is discussed later in this paper. However, the operation of section 3 of the Income Tax Assessment Act ITAA97 is relevant to the treatment of assets that pass from a trustee of a testamentary trust to a beneficiary.
Section 3 of the ITAA97 provides that any capital gain or loss that a LPR makes if an asset passes to a beneficiary of an estate is disregarded. As a consequence the disposal of an asset of a testamentary trust will not trigger a CGT liability until such time as it is disposed of to a third party i. If the asset was not owned by the deceased, then the disposal by the trustee to a beneficiary will give rise to CGT event A1 14 and a capital gain or capital loss may result.
Division CGT concessions. The general rule that governs the effect of death on the CGT provisions is described in section of the ITAA97 and provides that a capital gain or capital loss from a CGT event that arises in relation to a CGT asset that the deceased taxpayer owned just before dying is disregarded.
Once the CGT asset has devolved to the LPR or passed to a beneficiary there are further consequences in relation to the cost base of the asset and its date of acquisition. Section of the ITAA97 contains the following provisions:. Date of acquisition — The LPR or beneficiary are taken to have acquired the asset on the date of death of the taxpayer Cost base of the asset — The cost base of the asset in the hands of the LPR or beneficiary depends on the date of acquisition of the asset by the deceased.
The rules are set out in subsection 3 as follows:. For this kind of CGT asset:. One you acquired on or after 20 September , except one covered by item 2 or 3.
The cost base of the asset on the day you died. The reduced cost base of the asset on the day you died. One that was trading stock in your hands just before you died. The amount worked out under section A dwelling that was your main residence just before you died, and was not then being used for the purpose of producing assessable income.
The market value of the dwelling on the day you died. One you acquired before 20 September The market value of the asset on the day you died. In addition to the cost base rules described above, subsection 5 of the ITAA97 provides that a beneficiary can include in the cost base of an asset any expenditure that the LPR would have been able to include at the time the asset passes to the beneficiary.
An example of expenditure that may fall into this category is council rates paid by the LPR in relation to land that passes to a beneficiary.
Section of the ITAA97 describes the circumstances in which an asset passes to a beneficiary. It requires that the beneficiary become the owner of the asset under the will, by operation of an intestacy law, because the asset is appropriated to the beneficiary in satisfaction of pecuniary legacy or some other interest or share in the estate or under a deed of arrangement entered into by the beneficiary to settle a claim to participate in the distribution of assets of the estate.
An asset transferred in specie to a beneficiary to satisfy an interest will receive concessional treatment. However, an asset does not pass to a beneficiary if an option is granted to the beneficiary to purchase an asset of the estate.
Assets owned as joint tenants. An interest held as a joint tenant entitles the holder to an undivided part of the whole asset. Upon the death of one joint tenant the surviving joint tenant automatically owns the whole asset. Therefore, for CGT purposes the death of a joint tenant gives rise to a disposal of an asset and any capital gain or loss will be ignored due to the operation of section of the ITAA Section of the ITAA97 sets out the cost base rules for the acquisition of an interest by joint tenants.
The main residence exemption contained in Division of the ITAA97 that enables a taxpayer to ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is their main residence also applies to deceased estates. The basic rule is contained in section of the ITAA Subsection 1 provides that a capital gain or capital loss you make from a CGT event that happens to a dwelling or an ownership interest in it is disregarded if:.
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