Revenue aspects of testamentary trusts

In the case of inter vivos trusts, this concession may be of dubious benefit in many cases because of the operation of section 99A (which automatically assesses the trustee at the highest marginal rate and denies it the benefit of the 50% CGT discount and the 50% small business reduction concessions[57]).

However, as discussed above, section 99A does not apply to trusts established under a will, in those circumstances where the Commissioner is of the opinion that it would be unreasonable for the section to apply.

As a general observation, the Commissioner will apply 99 to testamentary trusts consistently with other trusts established under deceased estates.

However two notes of caution need to be sounded when seeking to accumulate income in a testamentary trust:

First, as was pointed out above, the trustee of a testamentary trust will not get the benefit of any minimum tax threshold. The rate is therefore higher than it would be if it were assessed to an individual beneficiary. The tax effect will vary depending on the amount which is being accumulated. (Nevertheless, it will necessarily be less than the application of a “flat” rate 46.5% under section 99A).

Secondly, as discussed above the non-application of section 99A requires a positive determination by the Commissioner to exercise his discretion not to apply that section on the basis that “it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income”.[58]  As also indicated above, care should be taken in assuming that section 99A will not be applied in  circumstances where assets have been added to a testamentary trust from external sources.

In this regard, care should be taken to distinguish between the considerations which are relevant to funding testamentary trusts for the purposes of satisfying section 102AG(2) as considered by the Federal Court  in  Furse[59], on the one hand, and those which may be relevant to the taxation of an accumulation by the trustee of a testamentary trust for the purposes of section 99A, on the other.

5.13  The role of the trust deed in making a beneficiary specifically entitled – including an express streaming power.

It should be noted that the new provisions do not enable the streaming of capital gains and franked distributions to beneficiaries, they merely facilitate the process. If streaming is not available to the trustee under the trust deed or as a matter of law, it will not be available under Subdivisions 115-C or 207-B.

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