Death and taxes: ATO clarifies its position on testamentary trust trustees and capital gains tax

Posted on May 26, 2014 by Terry Morgan   |   Categories: Trusts, Wills & Estates

Trustees can breathe easier following recent clarification by the ATO as to whether or not trustees of testamentary trusts are like executors of estates and therefore whether the estate’s assets may be subject to Capital Gains Tax.

Many people now establish a Testamentary Trust in their wills in order to preserve flexibility, asset protection and tax minimisation for those who benefit from their estate.

It is a trust that is activated on the death of the person making the will, and gives the testamentary trustee discretion to distribute capital and income between the beneficiaries nominated in the will.

The good news for trustees is that on 10 April 2014, the Australian Taxation Office (ATO) confirmed that it will continue its longstanding administrative practice of treating a testamentary trustee like an executor, i.e. in the same way that a ‘legal personal representative’ is treated for the purposes of Division 128 of the Income Tax Assessment Act 1997.

The impact of this is that there is no Capital Gains Tax (CGT) payable from:

  • the deceased to the executor or testamentary trustee;
  • the testamentary trustee to the beneficiary (unless it is a sale).

Please note, these concessions only apply to assets owned at the date of death. Assets acquired by an executor after the date of death do not qualify, and this can be an issue for life interests.

The issue of CGT and testamentary trustees arose following the former Labor Government’s announcement in the 2011-12 Budget that it would amend the CGT provisions in order to provide greater certainty for taxpayers by fixing technical deficiencies, removing anomalies and addressing unintended outcomes in the law. However, the current Government has so far indicated that this amendment will not be proceeding.

The result of this ATO clarification is that the taxation advantages of testamentary trusts are preserved for the time being.

In addition to taxation benefits, there are a number of protections in a testamentary trust for people whose beneficiaries may be facing increasingly common problems or potential disputes in our society, such as:

  • Divorce/breakdown in relationship of a beneficiary
  • Bankruptcy and creditor protection
  • Contested wills
  • High-risk beneficiaries
  • Vulnerable beneficiaries

If you would like to discuss a testamentary trust in your will, contact one of our Estate Planning team. Call (02) 4944 3322.