As a core concept, trust distributions received by minors (persons under 18 years) are generally taxed at the top marginal tax rate. This is to negate any tax benefits that may be obtained by income splitting arrangements whereby adults divert their income to minors. However, under the Income Tax Assessment Act 1936 (Cth.), minors can be taxed at the ordinary adult individual tax rates for ‘excepted trust income’ prescribed under section 102AG. Such income includes income from a testamentary trust.
Previously, the provisions under subsection 102AG(2)(a) of the ITAA 1936 provided that ‘excepted trust income’ includes the 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 relates to the estate of a deceased person.
A trust estate that satisfies the above criteria is referred to as a ‘testamentary trust’. Under previous legislation, all assessable income from a testamentary trust was considered ‘excepted trust income’ when distributed to a minor. This allowed some taxpayers to inject assets unrelated to the deceased estate into the trust in order to inappropriately obtain the concessional tax treatment. To combat this, the Treasury Laws Amendment (2019 Measures No. 3) Act 2020, enacted additional provisions to limit ‘excepted trust income’ of a testamentary trust to only include income derived from assets of the deceased estate. Now, the property of a testamentary trust generating ‘excepted trust income’ is limited to:
- property originally transferred into the trust from the deceased estate;
- undistributed trust income or capital arising from property originally transferred into the trust;
- further accumulations of income or capital arising from the abovementioned undistributed trust income or capital.
These requirements mean that income from assets injected into a testamentary trust, that are unrelated to the original deceased estate, are not concessionally taxed when in the hands of minors; they are taxed at the top marginal rate.
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