Tuesday, May 16, 2023

Sometimes** - in days gone by - you may have been able to use an inter vivos trust to access excepted trust income

One of the advantages of testamentary trusts is the ability to access the 'excepted' trust income rules and therefore ensure infant recipients are taxed as adults.

The Tax Act only allows excepted trust income in relation the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.

Importantly, historically the legislation did not appear to expressly exclude an indirect interest as being a beneficiary for the purpose of the provisions.

This meant that as one example, any income received by an infant beneficiary derived from assets of a testamentary trust created under a deceased estate that may have been transferred to an interposed inter vivos trust may be able to be treated as excepted trust income.

It should be noted however that there are rules that provide that an amount will not be treated as excepted trust income if it was derived by a trustee ‘as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income’.

However arguably, historically this prohibition was thought not apply to income derived via an interposed inter vivos trust as the income would have in fact been excepted trust income in the testamentary trust the assets were sourced from.

The Private Rulings mentioned in recent posts provide some support for the above interpretation.

Since the 2018 budget changes however (featured in many previous posts), the rules are now clear that access to excepted trust income is only possible while the assets of the deceased are owned via the testamentary trust under that person’s will. Once the assets are removed from the testamentary trust, for example, to an inter vivos trust, the ability to benefit from the excepted trust income regime ends.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the John Butler Trio song 'Sometimes'.

Listen here: