What is considered ‘genuine testamentary purposes’?

While the announcement provides welcome updates, the Government has not yet defined what constitutes ‘genuine testamentary purposes’.

Further guidance is needed to determine whether the exclusion will apply broadly to all testamentary trusts established under a valid Will, or whether additional conditions will need to be satisfied. This will be an important area to monitor as consultation progresses.

Limitation to deceased estate assets

The Government has indicated that the exemption will be limited to income derived from assets of the deceased estate.

While the detail has not yet been released, this may be intended to prevent additional assets from being contributed to a testamentary trust and benefiting from the exemption.

Impact on trusts established on or after 1 July 2028

For discretionary testamentary trusts established on or after 1 July 2028, the exemption will only be available where beneficiaries are limited to individuals and income tax exempt entities.

This raises several practical questions for existing estate plans and testamentary trust structures, including:

• when is the testamentary trust established?
  • when the Will is executed
  • when the Will-maker dies
  • when probate is granted
  • when the assets are transferred to the testamentary trust.
• whether existing Wills will need to be updated to limit distributions from discretionary testamentary trusts to individuals and income tax exempt entities
• what happens if the Will-maker no longer has capacity to change their Will
• if an existing Will contains a discretionary testamentary trust and the person dies after 1 July 2028, can the discretionary testamentary trust still distribute to a company without the 30% tax?

How SW can help

We can assist in reviewing your existing Wills and testamentary trust structures in conjunction with your lawyers to assess the impact of the proposed changes and identify any required updates. We can also provide guidance on how the new rules may apply in practice, including the proposed post-1 July 2028 beneficiary restrictions, and support clients as further detail and legislation are released.

We encourage you to speak with your current SW advisor or contact our consultants, Heather Dyke and Taylah Cooke, if you would like to understand how these changes may impact your estate planning and testamentary trust arrangements.

Contributors

Heather Dyke | Associate Director, Business and Private Client Advisory

Taylah Cooke | Manager, Business and Private Client Advisory

The post Proposed testamentary trust rules: Understanding the 30% minimum tax exemption appeared first on SW Accountants & Advisors.

What the draft determination covers

Draft taxation determination (TD 2026/D1) outlines the Australian Tax Office’s (ATO’s) view on the meaning of right to occupy the dwelling under the deceased’s will, as set out in item 2(b) of Column 3 of Subsection 118-195(1) of the ITAA 1997.

The determination considers the right to occupy a dwelling which can have an impact on whether the capital gain or loss can be disregarded under the ‘main residence’ rules.

The right to occupy must be granted under the terms of the deceased will to an individual named in the Will or as a result of a court order.

When the main residence exemption may not apply

The CGT impact of the sale of the dwelling may not be disregarded if the right to occupy occurs through one of the following ways. Careful consideration needs to be given to the rules and examples outlined in the TD.

This includes situations where:

• right to occupy under a separate agreement
• right to occupy using broad trustee discretion
• right to occupy and testamentary trusts. The determination has raised issues that need to be carefully considered for testamentary trusts that affect life and remainder interests.

How SW can help

These rules can be complex, particularly where a right to occupy is intended but the conditions are not met. In those situations, there is a real risk of capital gains tax consequences on the sale of the deceased person’s main residence because the main residence exemption may not apply.

We regularly assist lawyers, administrators and executors of deceased estates to ensure that the estates tax obligations are met. Our Deceased Estate Consulting specialists, Heather Dyke and Taylah Cooke, also review the Estates income tax obligations under subsection 118-195 of ITAA 1997.

Contributors

Heather Dyke – Deceased Estate Consulting

Taylah Cooke – Deceased Estate Consulting

The post Loss of main residence exemption in deceased estates & right to occupy appeared first on SW Accountants & Advisors.