Critical SMSF issues surface from new trust income rules
Recent legislation passed by Parliament last week relating to the distribution of income from testamentary trusts may have significant implications for SMSF estate planning, warns an industry lawyer.
Last week, both houses of Parliament passed Treasury Laws Amendment (2019 Measures No. 3) Bill 2019. The bill provides advisers with additional time to complete the FASEA exam and qualification requirements and also rectifies two anomalies arising from the super reform measures implemented from 1 July 2017.
View Legal director Matthew Burgess said the bill also implements a measure announced in the 2018 federal budget.
The measure announced in the 2018 federal budget, he said, meant that the “the concessional tax rates available for minors receiving income from testamentary trusts would be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets”.
“Historically, pursuant to Div 6AA of the ITAA 36 and, in particular, subs 102AG(2)(a)(i), excepted trust income is the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil,” he explained.
“Where income is excepted trust income and it is distributed to minors (i.e. persons under 18 years of age), those minors are taxed as adults, instead of the normal penalty rates that otherwise apply to unearned income.”
With retrospective effect from 1 July 2019, he said, the new rules were crafted 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, in the opinion of the Commissioner, represents accumulations of income or capital from property that satisfies the requirement in subparagraph (i);
(iii) The property, in the opinion of the Commissioner, 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.
“As seems to be increasingly the case, the changes see a simple and discrete tax leakage issue on announcement morph during the legislative drafting process into rules that will have far-reaching implications,” Mr Burgess warned.
While there are many wider estate planning concerns with the new rules, he said, there is a particular issue for superannuation generally and particularly SMSFs.
He said: “As noted above, the amendments refer to property which was ‘transferred to the trustee of the trust estate… from the estate of a deceased person’.
“The new rules do not, however, address how assets that are acquired by a testamentary trust as a consequence of the willmaker’s death, but are not directly from the willmaker personally, will be treated.”
This raises an important question in regards to super death benefit payments. Mr Burgess said it is unclear whether superannuation death benefit payments and insurance policy payouts to an estate will be considered legitimate capital amounts from which to source excepted trust income.
“Furthermore, even if super death benefits can be considered on original receipt by a testamentary trust to give rise to excepted trust income, the second and third limbs of the eligibility test in section (2AA)(b) will be relevant on an ongoing basis. This is despite the fact that the provisions in that had, given they referred to ‘the opinion of the Commissioner’, been removed in the final version of the legislation passed,” he said.
“That is, as assets are acquired by a testamentary trust funded by the superannuation death benefit proceeds, a tracing exercise will need to be performed, and the commissioner’s opinion potentially sought if there is a dispute, to confirm ongoing access to the concession taxation regime.”
In a self-assessment tax system, this approach creates “significant uncertainty” for the taxpayer and, in turn, tax and superannuation advisers, he said.
“It also makes it almost impossible (at least until substantive case law is developed) for a taxpayer to challenge knowing what the commissioner’s opinion is likely to be, where they objectively believe the commissioner has formed an incorrect or unjust opinion,” he warned.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.