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Testamentary Trusts and Capital Gains Tax (CGT)

Posted on August 02, 2014

Although not expressly stated in the income tax legislation, for many years the Australian Taxation Office has adopted the practice of treating the trustee of a testamentary trust in the same way that the executors are treated when transferring the assets of a deceased to a beneficiary. Put another way, for CGT purposes death does not constitute a disposal of an asset and a roll over applies when transferring to a beneficiary.

Even under a long term testamentary trust created or established under the will of a deceased, assets of the deceased held in that trust do not attract CGT when transferred to a beneficiary of a trust many years later. Law Administration Practice Statement PS LA 2003/12 confirms this practice.

Some years ago the Gillard government announced the capital gains tax laws would be changed to legislate the current ATO practice mentioned above. It was also announced that the income tax law for deceased estates would be re-written using a principle based format and minor technical issues for deceased estates would be fixed. Late last year the Assistant Treasurer announced that these amendments to the law will not be proceeding. However, legislation has been enacted that provides protection for taxpayers who have under assessed their tax position on the basis of previously announced changes that are no longer proceeding. This enactment is Tax and Superannuation Laws Amendment (2014 measures No. 2) Act 2014. It is significant in that it provides protection to taxpayers who rely on government announcements in relation to taxation for a broad range of matters that do not end up as law.

So, although nothing much has changed to the taxation of testamentary trusts, taxpayers have greater protection when relying on government announcements that do not end up as law.

In our estate planning work we often advise on the tremendous advantages of testamentary trusts, one of the main ones being the use of tax free and low tax rate tax scales applicable to beneficiaries under 18 years of age. We will be running a series of presentations on effective use of trusts in estate planning.

If you would like any more information please contact Joe Subic.

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