Revenue aspects of testamentary trusts

Notwithstanding the prohibition on “income injections” into loss trusts generally, where a testamentary trust is one of a number of family entities, it is possible for those entities to make distributions to one another within limited circumstances if they become a members of a family group. For this to occur, the entities concerned must either be trusts which have made family trust elections nominating the same individual as the “primary individual” [25]or, alternatively, by making interposed entity elections. [26] The making of this election effectively ensures that when income or capital eventually emerges from the entities which make up the family group, it must flow to an individual who is a member of the primary individual’s family.

Once a family trust election or interposed entity election has been made, considerable care must be taken at all subsequent times to ensure that no distributions of income or capital are made to any beneficiary who falls outside the definition of the family group. [27] Where a distribution is made to any person outside the family group, the trust will be assessed to family trust distributions tax on the amount distributed.[28]  That tax is levied at the highest marginal tax rate.

Where elections have been made, particular care must be taken in any subsequent dealings between family group members and individuals or entities which have not elected to become members of the family group. Because of expanded statutory definitions of the word distributes applying to different types of entity,[29] there is the risk of inadvertently triggering family trust distributions tax.

4.8      Distributions to corporate beneficiaries – Division 7A and UPEs

Division 7A of the 36 Act contains measures which are directed primarily at private companies. However those provisions can indirectly impact on trusts (including testamentary trusts) which have unpaid amounts owing to private company beneficiaries arising out of income distributions made to those companies (called unpaid present entitlements or UPEs).

Put shortly, Division 7A is aimed at ensuring that income which has been derived by a company and taxed at the 30% rate cannot find its way to shareholders or their related parties without tax being paid on a dividend.

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