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Tax Benefits & Tax Obligation Of Testamentary Trust


Testamentary trusts are an important tool for estate planning. In NSW, they can provide significant tax benefits to individuals and families. However, testamentary trusts also bring with them a number of tax obligations that must be met in order to enjoy the full range of benefits. This article explains some of the key tax considerations associated with testamentary trusts.

Understanding Testamentary Trust Income

The first thing to understand is that testamentary trust income is taxed differently than other types of income such as salary or investment returns. Generally speaking, this type of income (including capital gains) is taxed at a lower rate than regular income or capital gains. This means that testamentary trusts can provide significant tax savings for individuals and families.

In addition to the lower rate of income tax, testamentary trusts also benefit from a range of other concessions and deductions. For example, there is no stamp duty payable on assets transferred into a testamentary trust from the estate of a deceased person. If the trust is used to care for family members who are financially dependent on the deceased, they may be able to access certain special tax concessions such as exemptions from capital gains tax or reduced rates of income tax.

However, it’s important to remember that testamentary trusts are not completely exempt from taxation; they do have some obligations that must be met in order to enjoy these benefits. In NSW, trusts are required to lodge a tax return each year and pay income tax on any income that has been generated by the trust during the year. If the trust pays any distributions to beneficiaries, it must also pay withholding tax at a rate of 46.5% (including Medicare levy).

Testamentary Trusts & Tax Obligations

Testamentary trusts are also subject to capital gains tax when assets are sold or transferred from one trust to another. This applies regardless of whether the transfer was for profit or not. In addition, if an asset is held for more than 12 months before being sold, there may be certain exemptions and concessions available depending on the circumstances–such as those relating to primary production businesses or collectables and personal use assets.

There are various other obligations that must be met in order to ensure the smooth running of a testamentary trust. These include filing annual returns, keeping records and accounts up-to-date, paying taxes on time, distributing assets in accordance with the terms of the trust and ensuring that beneficiaries are aware of their rights.

Testamentary trusts can provide many advantages for individuals and families in NSW – but they also come with a number of tax obligations. It’s important to understand these obligations before setting up a testamentary trust so that you can make an informed decision about how best to manage your estate.

Overview of Tax Benefits of Testamentary Trusts

  1. CGT Discount: Testamentary trusts are eligible to receive the 50% CGT discount. This can be a significant tax benefit as it reduces the amount of capital gains tax paid on any investment asset sales by half.
  2. Taxpayer Eligibility: A testamentary trust may qualify for a lower marginal tax rate than an individual or company, depending on the circumstances, making it a desirable option for many taxpayers.
  3. Changes to Income Splitting: Testamentary trusts allow income-splitting between family members to minimise their overall tax burden over time. For instance, adult children may be able to access lower marginal tax rates by receiving their share of income via a Testamentary Trust rather than as direct beneficiaries.
  4. Estate Planning: Testamentary Trusts can be used to provide financial security for future generations and allow flexibility in estate planning. It is also possible to use a testamentary trust as an alternative or in addition to an existing will, helping ensure that assets are distributed according to the wishes of the deceased person.
  5. Tax Exemptions: Testamentary trusts may qualify for tax exemptions on certain capital gains, income and other taxes, depending on the individual circumstances of each case.

Your Local Trust Accountants

At Blue Orchid Accounting, we provide invaluable assistance for all trust accounts – including discretionary, family, decreased estate trusts, as well as (of course) testamentary trusts. We will tailor our taxation services for your unique needs, demystifying your obligations and helping you enjoy peace of mind. You can call us on 1800 008 664.