Monday, May 30, 2011

2011 Federal Budget and deceased estates

Three relatively obscure changes announced in the budget recently have important implications for those in the estate planning space, namely –

1. Legislating the current Tax Office practice (see Practice Statement LA 2003/12) of allowing a testamentary trust to distribute an asset of a deceased person without a capital gains tax (CGT) taxing point occurring.

This is an important clarification and provides confirmation that there are effectively three CGT rollovers in deceased estates; that is -

(a) will maker to legal personal representative (LPR);

(b) LPR to testamentary trust; and

(c) testamentary trust to a beneficiary.

Unfortunately the stamp duty position is not so clear in relation to this 'third' rollover from a testamentary trust to a beneficiary.

It should be noted that it will be necessary to continue to rely on PS LA 2003/12 for the immediate future as the changes will only apply to CGT events happening on or after the day the legislation receives Royal Assent.

2. The Commissioner will be given a discretion to extend the two-year ownership period in which the trustee of a deceased estate (or beneficiary) must dispose of their interest in the deceased's dwelling to access a CGT main residence exemption.

This is also important as the two-year ownership period is currently the only CGT event where it is the date of completion (as opposed to the date of contract) that is the relevant date for CGT purposes.

3. Finally, as most will have seen, the relatively minor tax planning opportunity in relation to unearned income derived by minors through family trusts (via the low income tax offset) has been removed with effect from 1 July 2011. The indications seem to be that there will be no change however to the excepted trust income rules for minors receiving distributions via testamentary trusts.

Until next week.