Testamentary trust what is exempted income?

Discussion in 'Accounting & Tax' started by Trainee, 27th Jun, 2019.

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  1. Trainee

    Trainee Well-Known Member

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    For a testamentary trust, if trust capital increases as a result of say dividend reinvestment or investing using borrowings, is the increased income still exempted income?

    Eg Smith testamentary trust starts with 1000 bhp shares from the deceased. It reinvests dividends. Will dividends from the drp purchases also be exempt income?

    Eg2 the trust borrows money (either from a bank or from a family member), buys shares and makes a profit. Is income from the increased assets exempt income?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    do you mean 'excepted trust income'?

    e.g. 1
    I am not sure it would because income of a trust must be distributed

    e.g. 2
    Depends on the terms of the loan. If on commercial terms then generally yes.

    see s102AG ITAA36
     
  3. Trainee

    Trainee Well-Known Member

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    Trust income has to be distributed, but can the trust hold the cash and credit loan from beneficiary?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, but money artificially injected into a trust wouldn't be able to generate excepted trust income. You would need to get a private ruling to confirm, but I would think the answer would be no.

    But the commissioner has the discretion to tax the trustee at the concessional rate of a beneficiary if there are minor children involved and nothing is distributed.
     
  5. Trainee

    Trainee Well-Known Member

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    So this is different from a non testamentary discretionary trust where UPE to individual (not corporate) beneficiaries is allowed. Because a UPE in a testamentary trust would be considered a non arms length loan to the testamentary trust. Unless a commercial rate of interest was charged to the trust? (Interest is then NOT exempt trust income).

    How can testamentary trust assets be increased while preserving excepted trust income nature?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    a UPE will result if a beneficiary is made presently entitled to income of the trust but is not paid. Same as an intervivos discretionary trust. But there are different tax outcomes.

    A TDT can borrow on arms length terms and build up capital.

    The was an old case where a Mr Furse died and established 5 trusts with $1 each which were then added to after death, Not sure if he got away with it, but the laws have been amended since then anyway.