Uncertainty as to ATO practice with regard to the CGT treatment of testamentary trusts now resolved
Late last year the Abbott Government announced that it would not be proceeding with a number of tax measures which had been proposed by the former Labor Government. One such measure included legislating to confirm the ATO practice that there is no CGT event when as asset passes from the trustee of a testamentary trust to a beneficiary.
The Abbott Government’s decision created some uncertainty about the ATO’s ongoing practice, as it had long relied on provisions in the Income Tax Assessment Act 1997 (Cth) (namely in Division 128) which refer to “legal personal representatives” but not to trustees of testamentary trusts.
Confirmation by ATO of existing practice
On 10 April 2014, the ATO reissued PS LA 2003/12 which confirmed that, subject to the operation of CGT Event K3 (in relation to assets passing to tax-advantaged entities – for example to non-residents), any capital gain or capital loss that arises when an asset owned by a deceased person passes to the ultimate beneficiary of a trust created under a deceased’s will (i.e. a testamentary trust) will be disregarded. In this way, Division 128 operates for testamentary trusts as a form of CGT “roll-over”.
The practice means that legal personal representatives (for example executors) and trustees of testamentary trusts are treated in the same way for CGT purposes. In other words, there will be no taxing point on the disposal of the asset by either of them to the ultimate beneficiary. It is only when that beneficiary disposes of the asset that CGT will arise.
Benefits to clients
In addition to the other benefits that testamentary trusts offer such as:
(a) asset protection for beneficiaries who are “at-risk” e.g. of insolvency or being sued (i.e. generally, creditors pursuing a beneficiary of a testamentary trust will not be able to access the assets of the testamentary trust as those assets are not personally owned by the beneficiary); and
(b) tax treatment for minors (i.e. beneficiaries under 18 years are taxed at normal adult rates, and not at the top marginal rate, on testamentary trust income distributed to them),
testamentary trusts will continue to be appealing to clients from a CGT perspective as:
(c) a trustee of a testamentary trust can effectively hold an asset for up to 80 years prior to disposition to an ultimate beneficiary and, on that disposition, there will be no CGT taxing point; and
(d) depending on when the asset was acquired, the first element of the ultimate beneficiary’s cost base will be either:
(i) the market value of the asset on the day the deceased died (assets acquired by the deceased prior to 20 September 1985); or
(ii) the deceased person’s cost base (and reduced cost base) of the asset on the day the deceased died (assets acquired by the deceased after 20 September 1985).
What to do next
Pointon Partners has a wide breadth of experience in regard to all elements of estate planning, including in respect of advising clients of the tax advantages and disadvantages of planning their affairs.
(a) you do not have a Will; or
(b) you have a Will but are interested in updating it to include the use of testamentary trusts; or
(c) you have any queries in regard to estate planning or taxation in general,
then please feel free to contact us on 03 9614 7707