Testamentary trusts are created by a Will to provide a greater level of control over the distribution of assets to beneficiaries with the main benefit of a testamentary trust is its ability to protect assets and to reduce tax paid by beneficiaries from income earned from their inheritance.
The trustee of a testamentary trust is required to obtain its own tax file number (TFN). It is dangerous for a trustee not to apply for a separate TFN and to continue the use of the TFN of the deceased estate. Testamentary trusts are subject to a Medicare Levy, whereas deceased estates are not. The Australian Taxation Office (ATO) can view the practice of not applying for a TFN for a testamentary trust as tax avoidance by the trustee.
Under section 128 (Income Tax Assessment Act 1997), CGT rollover relief is available with respect to an asset transferred between a deceased, the executor and the beneficiaries without incurring a CGT event. Technically, section 128 ITAA) does not apply to rollover of assets to a testamentary trust. The ATO has addressed this in its practice statement PSLA 2003/12 by stating that they will treat the rollover of assets to a testamentary trust in the same manner as they currently treat deceased estates.
The Commissioner recently made some minor adjustments to this statement and reaffirmed his commitment to the use of this administration practice. However, as any ATO practice statement, it operates solely at the Commissioner’s discretion and could arguably be withdrawn at any time, although this is believed to be unlikely.
While one of the advantages of a testamentary trust is the tax regime under which the trust and the beneficiaries operate, the overall tax affairs of a testamentary trust can be complex and confusing, as it could result in multiple Tax Assessment Notices within a given income tax year.
For that reason it is essential for trustees to obtain and consider the advice of someone who is experienced and knowledgeable in financial and investment planning, and where appropriate is also a member of the Institute of Chartered Accountants, the Australian Society of Certified Practising Accountants, the National Institute of Accountants, the Australian Stock Exchange of the Financial Planning Association of Australia Limited or recognised credited tax expert with the Law Society of NSW.
For more information or advice concerning Testamentary Trusts, contact the experienced team at Rockliffs Lawyers today.