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Proposed changes to the taxation of testamentary trusts

On 3 October 2019, Treasury released an exposure draft on proposed changes to the taxation of testamentary trusts.  This follows on from the 2018-19 Federal Government budget announcement concerning such changes and the taxation of income distributed to minors through testamentary trusts.

However, there is little cause for concern for most beneficiaries of testamentary trusts and the use of testamentary trusts as an estate planning tool will be largely unaffected by the proposed changes.

Background to the amendments

For many years, minors in receipt of income derived other than from employment have been subject to higher tax rates.  This was primarily a means of discouraging income splitting arrangements.  There has been an exception to income derived by minor beneficiaries from several sources, including deceased estates (referred to below as ‘excepted trust income’).

Some taxpayers were contributing additional assets that were unrelated to the estate of the deceased to the testamentary trust.  This was to take advantage of the concession that allows for income distributed to minor beneficiaries of a testamentary trust at adult tax rates.  These arrangements may have, subject to anti-avoidance rules, generated income within the testamentary trust that was not subject to the higher tax rates on minors.  The Federal Government’s position is that this was an unintended consequence of the excepted trust income provisions.

Proposed amendments

The proposed bill will amend the Income Tax Assessment Act 1936 to provide that only income that is transferred to the testamentary trust from the deceased estate or income derived from the accumulation of such income within the testamentary trust will be excepted trust income.  The explanatory materials also clarify the intention of the proposed bill that income derived from the investment of unpaid present entitlements to excepted trust income may also be excepted trust income.

Income that is therefore derived from assets transferred to the testamentary trust other than from the deceased estate will be taxed at higher tax rates.

Consequences for testamentary trusts

The proposed legislative amendments will have minimal, if any impact on the taxation consequences associated with the distribution of income from most testamentary trusts.  Testamentary trusts therefore remain a valuable estate planning tool.

If you have any questions in relation to testamentary trusts or any aspect of estate planning please contact the Burke & Associates Wills & Estates team


Meghan Warren


Meghan Warren

LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Rohani Bixler

Special Counsel

Rohani Bixler

Special Counsel
LL.B (Hons) BA (PSYCH)
Rohani holds a Bachelor of Arts (Psychology) and a Bachelor of Laws (Honours) from Monash University, and has practiced exclusively in the areas of estate planning, deceased estate administration and estate litigation and disputes since...

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