We update the ATO’s recent view of PSLA 2003/12 (regarding the trustee of testamentary trusts) – it’s good news!
We also consider ATOID 2014/3 where the ATO has confirmed that a deceased person cannot be nominated as a specified individual for making a family trust election.
Testamentary Trust Trustee to Beneficiary & CGT
In our March update, we referred to the uncertainty about the ongoing application of PSLA 2003/12 relating to the issue of whether trustees of testamentary trusts are like executors of estates for the purpose of CGT.
The good news is that on 10 April 2014, PSLA 2003/12 was updated by the ATO to confirm that they will continue the longstanding administrative practice of treating a testamentary trustee like an executor. The impact of this is that there is no CGT payable from:
- deceased to executor or testamentary trustee;
- testamentary trustee to beneficiary (unless it is a sale).
The revised PSLA 2013/12 however notes that the legislation itself is not clear so, as always, you need to keep abreast of any changes to the Tax Acts. In the meantime, the tips and traps from our prior update still apply:
TIP – check whether PSLA 2013/12 still stands before distributing from a testamentary trust, or when making a decision about the use of optional testamentary trusts.
TRAP – these concessions only apply to assets owned at date of death. Assets acquired by an executor after date of death do not qualify. This can be a big issue for life interests.
Life Interests & Family Trust Elections
Under ATOID 2014/3, the ATO has confirmed that a deceased person cannot be nominated as a specified individual for making a family trust election. For most estates, this will not be an issue because there is an exemption for making a family trust election in respect of the first 5 years under paragraph 272 100(c) of Schedule 2F to the Income Tax Assessment Act 1936.
This could be an issue however for life interests or estates with ongoing trusts beyond the 5 year period where a family trust election could be required to either access franking credits or carry forward income losses.
Life interests stand out as a possible problem as they are often used in blended families to provide an income stream for a second spouse, with the capital ultimately passing back to the children of the deceased (and step-children of the second spouse). This is an issue when you consider the impact of:
- a strict reading of the definition of “family group” for family trust election purposes;
- the common law position that upon the severance of a relationship, the step-relationship is also severed (see ATO view of this ATOID 2011/77 in the context of super death benefits).
- you cannot link step-parent and step-child in the same family group via the deceased parent as specified individual, under the recent ATOID;
with the result potentially being either loss of franking credits on dividend income payable to surviving spouse, or family trust distributions tax on distributions of capital and income to remainder beneficiaries.
Don’t forget that in addition to this issue, life interests throw up other complexities such as the often limited access to land tax exemption for non-principal resident properties, as well as specific entitlement issues around capital gains tax where a life tenant can end up taxed on capital gains to which they do not benefit.
Advisors need to use extreme care and provide full advice to clients on the pros and cons of this style of Will.
How we can help
If you require further information please feel free to contact us .