Tuesday, October 19, 2021

Avoiding complexities** with testamentary trusts (part II)

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:
  1. 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.
  2. 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).
  3. 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.

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 Smiths song ‘This charming man’. View hear (sic):