In light of recent laws passed this month, many clients will need to review their estate planning to ensure their will adequately explains how superannuation and insurance payments should be dealt with.
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DBA Lawyers director Daniel Butler said there was a recent change to the tax treatment of income from super in a testamentary trust. Subsection 102AG(2AA) was added to the Income Tax Assessment Act 1936 in Treasury Laws Amendment (2019 Measures No. 3) Act 2019, which was passed on 23 June 2020.
Mr Butler said the measure was first announced in the 2018–19 federal budget in order to clarify that minors should only be taxed at adult marginal tax rates in respect of “income a testamentary trust generates from assets of the deceased estate”.
The budget papers for 2018–19 federal budget explained that 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,” the budget papers stated.
The explanatory memorandum (EM) states that the requirements under the new subsection will ensure “there is a connection between the property from which excepted trust income is derived and the deceased estate that gave rise to the testamentary trust”, Mr Butler said.
Mr Butler clarified that a superannuation death benefit relating to a deceased member’s interest in a superannuation fund is very different from the types of schemes being contemplated by the new subsection.
“While this is an interest under a trust, the deceased member was entitled to that payment prior to their death and the payment can either be paid to their executors (or legal personal representative) or to a dependant,” he explained.
“Similarly, insurance proceeds paid to a person’s executors that form part of their deceased estate, from a life insurance policy on their life following their death, has a relevant connection to the contractual entitlement to insurance cover.”
Both superannuation death benefit payments and insurance proceeds paid to their executors following a person’s death that forms part of their deceased estate have a relevant connection to that person’s membership interest or contractual entitlement, he stated.
These amounts, he said, can be contrasted to the example in the EM where a related family trust makes a capital distribution of $1,000,000 to the testamentary trust.
However, clients may still need to review their estate plans and wills to make sure they are appropriate in view of this new law, he cautioned.
“Wills moving forward should be more carefully drafted as many wills do not provide sufficient guidance on how superannuation and insurance payments should be dealt with,” he warned.
“Some, for instance, seek to transfer these amounts directly to a testamentary trust rather than being paid a deceased estate which then converts to a testamentary trust following the finalisation of the administration of a deceased estate.”
Mr Butler said the deceased estate generally progresses into a testamentary trust once the “date of assent” is arrived at.
“The date of assent is, broadly, where the assets and liabilities of the estate can be established and the estate can now be dealt with certainty. Prior to this stage, a potential beneficiary generally has no interest in an unadministered estate,” he explained.
Mr Butler also noted that there is opportunity for the Commissioner of Taxation to exercise some discretion where he considers the income from superannuation death benefit payments and insurance amounts do not relate to the property in question.
“This aspect can give rise to some degree of uncertainty if there is not a sufficient connection between the proceeds and the deceased person or the appropriate documentation such as a suitably drafted will is not in place,” he said.
Miranda Brownlee
29 June 2020
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