Following last week’s post I was reminded of a further Tax Office private ruling that looked at the amalgamation of 2 testamentary trusts ‘post death’, namely ruling number 1012622867641.
Broadly the situation was as follows:
Two separate trusts were created for two minors using cash sourced from a superannuation death benefit paid when their parent passed away intestate.
Primarily to reduce the administration costs, the trustee wanted to merge the two trusts, with the entitlements of the beneficiaries’ in the new trust maintained.
The Tax Act creates access to ‘excepted trust income’ in a range of situations, including where:
‘… the assessable income of a trust estate…in relation to a beneficiary of the trust estate to the extent to which the amount…is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary… directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund…’
Here the Tax Office confirmed that the combined trust could not change the status of the excepted trust income, primarily because it continued to satisfy the above quoted provisions.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Spice Girls song ‘2 become 1’. View hear (sic):
Last week’s post focused on a scenario where additional testamentary trusts can potentially be established unnecessarily, particularly where a couple passes away in close proximity to each other.
In this scenario, if each spouse has established a testamentary trust under their respective will, then it is likely one of the testamentary trusts will be commercially inappropriate.
If there is no power under the wills to effectively sidestep one of the trusts (as explored in last week’s post) there may still be the ability to ensure that all assets pass to a single testamentary trust.
An example in this regard is set out in the private ruling released by the Tax Office under authorisation No. 1012603789935.
In this ruling, where two testamentary trusts had been established in a scenario where only one was required, the Tax Office confirmed:
Due to the range of beneficiaries under the testamentary trusts and the powers given to the trustees, the assets of one trust could be, at trust law, distributed to the other.
While the distribution of assets from the first testamentary trust to the second was a capital gains tax (CGT) event, no CGT was payable due to the longstanding administrative approach adopted under Law Administration Practice Statement PSLA 2003/12 (this statement is explained in more detail in a previous post).
Any income distributed from the continuing testamentary trust (even if it was derived from assets that had been distributed to the testamentary trust from the other estate) would be treated as excepted trust income (and in particular, allowing distributions to infant children to be taxed at the normal adult rates).
While the private ruling is obviously only binding on the Tax Office in relation to the particular taxpayer it was issued to, it does provide very useful insight as to the approach that is likely to be taken in similar scenarios.
This said, it is important to also consider the stamp duty consequences of any restructure as there is a significant risk that stamp duty may be payable, again as touched on in a previous post.
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** for the trainspotters, the title today is riffed from the Smiths song ‘This charming man’. View hear (sic):
One issue that potentially arises whenever spouses embark on an estate planning exercise is the prospect of there being testamentary trusts established unnecessarily.
In particular:
As there is never a way to know with certainty which spouse will die first, best practice dictates that each spouse establishes a testamentary trust under their respective will (assuming testamentary trusts are otherwise appropriate).
If one spouse dies, then often steps are taken by the surviving spouse to remove the testamentary trust from their will, and instead ensure that the remaining estate passes to the testamentary trust established under the deceased spouse’s will.
If however both spouses die in close proximity to each other, or alternatively, the surviving spouse fails to update their will, then two testamentary trusts are established (one under each estate).
In many cases, particularly where there are young children, the establishment of two testamentary trusts can be unnecessary and cause significant additional complexity and costs.
To help avoid this outcome, most specialist estate planning lawyers will ensure that they draft provisions into the wills to allow the legal personal representative of the estate of the second spouse to die to distribute assets directly to the testamentary trust established under the will of the first spouse to die.
Depending on the terms of the testamentary trusts, it may be possible to achieve the same outcome without the relevant clause and the post next week will explore a private ruling released by the Tax Office where such an outcome was able to be achieved without any taxation consequences.
** for the trainspotters, the title today is riffed from the Paul Weller song ‘Kosmos’. View hear (sic):
Last week’s post touched on statute barred loans from a Division 7A perspective.
The issues in relation to statute barred loans are often highly relevant in the context of estate planning and asset protection exercises.
In particular, amounts that have often built up over many years can in theory become unrecoverable automatically six years after they were initially made.
In a practical sense, so long as all parties to the arrangement are aware of the automatic forgiveness, steps can normally be taken to ensure that there are no unintended consequences triggered.
For example:
If the existence of the loan is acknowledged at any point, this automatically restarts the 6-year period.
Acknowledgement can be achieved simply by making even a nominal repayment of the loan or charging of interest.
There is also the likelihood that if the parties to the loan have signed the financial statements where the loan is evidenced, this will be sufficient to create the requisite acknowledgement.
Care must however be taken in relation to the previous point, for example, if there is a loan between a trust and a beneficiary, and that beneficiary is also a director of the corporate trustee of the trust, then there would appear to be a valid argument that notification has been given.
In contrast, if the loan is between the trust and a beneficiary, who is not otherwise in any way involved in the trust, then proving that they were aware of the loan and acknowledged its existence may be impossible.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the David Bowie song ‘It’s no Game (Part 2)’. View hear (sic):
