From 1 July 2019, concessionally taxed income distributed from testamentary trusts to minors will be restricted to income derived from assets owned by the deceased at the time they died, or investment of the proceeds from the sale of such assets.
Tax Integrity Measures for Specific Trust Distribution Arrangements
While minors are ordinarily taxed at the highest marginal tax rate on distributions from trusts, distributions to minors from testamentary trusts may be ‘concessionally’ taxed at normal adult rates.
There are existing anti-avoidance rules that apply to non-arm's length income and agreements entered into for the purpose of gaining the benefit of the concessional tax rules – such as transactions to inject additional assets or income into a testamentary trust for the benefit of providing a distribution to minors at the lower tax rate. The introduction of this integrity measure appears to broaden the scope of those integrity measures.
Round robin distributions
This measure applies to closely held trusts that undertake circular trust distributions in a “round robin” manner that arguably does not give rise to a tax liability. From 1 July 2019, these types of arrangements will give rise to tax on such distributions at the top marginal tax rate plus Medicare Levy.
Our main concern with this announcement is that it could introduce a significant level of compliance for trusts to trace and report ultimate trust distributions where there is are no round-robin distributions.