Treasury Laws Amendment (2019 Measures No. 3) Act 2019 (Cth) received assent on 22 June 2020. It amends section 102AG of the Income Tax Assessment Act 1936 in relation to taxation of minors in receipt of income from a testamentary trust. The purpose of the amendment was to reduce revenue leakage through testamentary trusts.
Apparently some taxpayers were injecting income earning assets, or income, which was not owned by the deceased who established the trust, into a testamentary trust (TT) and then taking advantage of the special taxation rules. Essentially, minors in receipt of income from a TT are taxed as adults and can use the usual adult tax thresholds.
The new section reads as follows:
(2AA) For the purposes of paragraph (2)(a), assessable income of a trust estate is of a kind covered by this subsection if:
(a) the assessable income is derived by the trustee of the trust estate from property; and
(b) the property satisfies any of the following requirements:
(i) the property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person concerned, as a result of the will, codicil, intestacy or order of a court mentioned in paragraph (2)(a);
(ii) the property represents accumulations of income or capital from property that satisfies the requirement in subparagraph (i);
(iii) the property represents accumulations of income or capital from property that satisfies the requirement in subparagraph (ii), or (because of a previous operation of this subparagraph) the requirement in this subparagraph.
The question has arisen – how does this new section affect life insurance and death benefits, which are not part of the estate of deceased at the date of death? g. the deceased has a life insurance policy and a superannuation account. On her death, the policy is paid to her estate, as is her superannuation. From there the amounts are paid into a TT for her minor children. Does sub-section (i) exclude these amounts because they not from the estate of a deceased person or as a result of her will?
There is no guidance from the Australian Taxation Office as to how this section will be applied to life insurance and superannuation death benefits in this scenario.
Our view of the amended section is that superannuation death benefits and life insurance, which pass into a deceased estate, and from there pursuant to a provision of the will, to a TT, will be included as property of the TT which can produce excepted income. A plain reading of the section allows this.
The section is not an anti-injection test for the deceased estate, but instead for the TT. Superannuation death benefits are not paid directly to the TT, but to the estate, and then it forms part of the pool of assets which comprises the deceased estate. The amendment is aimed at people who are distributing money from family trusts or other sources into the TT. The examples in the Explanatory Memorandum (EM) which accompanied the Bill are of this nature. The policy context of the amendment is explained in the EM:
The existing law does not specify that the assessable income of the testamentary trust be derived from assets of the deceased estate (or assets representing assets of the deceased estate). As a result, assets unrelated to a deceased estate that are injected into a testamentary trust may, subject to anti-avoidance rules, generate excepted trust income that is not subject to the higher tax rates on minors. This is an unintended consequence, which allows some taxpayers to inappropriately obtain the benefit of concessional tax treatment.
Superannuation death benefits and life insurance are considered (somewhat incorrectly) by the deceased as their property and on their death the usual proper course is for these amounts to be paid into the estate.
Some commentators have argued a strict reading of the section will prevent superannuation and life insurance from being included. We think there is some small room for argument on the point. This is because there is reference to the property being as a result of the will, codicil, intestacy or order of a court. Super death benefits do not arise under a will, but instead from a super fund. However they are regularly and properly transferred to an estate, which then passes pursuant to the will. The Superannuation Industry (Supervision) Act 1993 envisages that super death benefits will often pass under a will, because the LPR is one of the limited number of beneficiaries allowed under superannuation law.
There is no specific ATO guidance (at the time of writing) on how the ATO will apply this amended law to superannuation and life insurance. However the examples on the ATO website are aimed at injection type situations.
As such Paxton-Hall Lawyers are proceeding on the basis that the section is an ‘anti-injection’ test for TTs (not the estate) aimed at capital or income injections. We do not have a concern at this stage that this will catch superannuation or life insurance which passes through an estate. That said, one should not try to use their family trust distributions to inflate a deceased estate – that would invite close scrutiny from the ATO. We are monitoring caselaw and published ATO guidance and will revisit the issue if anything changes.
This section is a useful reminder that estate planning and estate administration must be done in a planned and considered manner. For example, if superannuation was paid directly to a trustee of a TT, then it would be caught and would no longer produce excepted income and so would need to be partitioned within accounts. If life insurance or superannuation was paid to a child or spouse, those funds could not then be paid to the TT.