Australia: 2018 Federal Budget - Taxation of testamentary trusts

The 2018 Federal Budget was handed down by the Treasurer Scott Morrison on 8 May 2018. The 2018 Budget is widely seen as an "election budget" with a number of sweeteners in the form of tax cuts being proposed that will benefit lower to middle income earners with slightly delayed tax benefits for higher income earners and a return to surplus in the 2019/20 year.

One of the areas addressed in the Budget is an "integrity measure" in relation to the taxation of testamentary trusts. An "integrity measure" is a measure that is designed to assist with the efficient and appropriate operation of an existing law rather than the introduction of an entirely new law or the abolition of an existing law.

Many readers will be aware of the estate planning benefits of testamentary trusts (simply being a trust created under the Will of a person). Testamentary trusts are a critical part of many well structured estate plans because of the benefits that they offer to a family in terms of:

  • Protection of estate assets for the benefit of the generations of a family;
  • The ability to structure a set of rules around particular types of estate assets which can be useful for the succession planning for the family;
  • The financial benefits that exist by utilising an effective trust structure, including effective tax planning.

In short, while the measure announced in the Budget in relation to the taxation of testamentary trusts is very appropriate from a policy perspective, for the vast majority of families, it will have no adverse impact on the way in which testamentary trusts are used for effective estate and succession planning.

To briefly remind readers, under the Australian tax laws, "unearned income" of a minor (including distributions to a minor of trust income from a family trust or a discretionary trust) is subject to penalty tax rates of tax. Under this penalty tax regime the tax-free threshold is only $416 with a flat rate of tax of 66% on additional income up to $1,307 and a flat rate of tax equal to the top marginal tax rate on amounts above $1,308.

Subject to certain anti-avoidance rules that already exist in the tax laws these penalty rates of tax do not apply to income derived by a minor as a result of a distribution of income from a testamentary trust. The income (known as "excepted trust income") is an exception to the penalty tax regime and is taxed at the normal adult tax rates that exist from time to time.

In the Budget Papers the following measure was announced:

"From 1 July 2019, the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.

Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. However, some taxpayers are able to inappropriately obtain the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust. This measure will clarify that minors will be taxed at adult marginal tax rates only in respect of income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).

This measure is estimated to have a small unquantifiable gain to revenue over the forward estimates."

This proposal is, in essence, an anti-avoidance measure that will ensure that the normal adult tax rates will only apply to testamentary trust income that is generated on assets that are deceased estate assets or income derived from assets that have their genesis from the deceased estate assets. Assets that a family might own that are outside of the deceased estate and that are transferred to the testamentary trust will not generate "excepted trust income", rather, this income will be subject to the penalty tax rates.

In many ways this measure seeks to make clear in the legislation what already exists in complex anti-avoidance rules. The Division 6AA of the Income Tax Assessment Act 1936 contains the provisions that impose the penalty tax regime referred to above and also contain the exceptions to those penalty taxes. This Division already contains anti-avoidance rules that, in summary, apply the penalty tax regime to income derived by a minor beneficiary from a testamentary trust in circumstances where:

  • The income is derived from an arrangement or transaction that is not "arms length"; or
  • The income is derived from an arrangement that was entered into or carried out for a purpose of securing "excepted trust income" (ie the concessional tax treatment). For the application of this anti-avoidance rule the 'purpose test' is not a 'dominant purpose test' but is merely an 'anything but an incidental purpose test' (ie a very low hurdle to trip over).

The proposed amendment is, in our view, appropriate from a policy perspective to maintain the integrity of the tax system in ensuring that concession applies in the manner intended. Importantly, the new measure will, hopefully, apply the law very clearly without having to rely on the application of the existing anti-avoidance rules which, like many tax laws, are complex in their application.

For the vast majority of families, this Budget measure will have no impact whatsoever on the effective use of testamentary trusts for estate and succession planning because:

  • The existing anti-avoidance rules already deal with the mischief identified in the Budget announcement and, as a consequence, the vast majority of families do not use their testamentary trusts in a way that would cause any concerns for the Revenue Authorities; and
  • All of the other significant benefits of the testamentary trust structure including protection planning and achieving of longer term family objectives are not affected.

Interestingly also, with the proposed tax cuts announced in the Budget (both in the immediate term and the slightly longer term) the tax planning benefits arising from the proper use of testamentary trusts will only be enhanced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions