Testamentary Trusts: Tax Implications and Maximising Benefits

Testamentary Trusts: Tax Implications and Maximising Benefits CONTENTS PAGE 1 Tax & other Key Advantages of Testamentary Trusts 2 1.1 What is a Testamentary Trust? 2 1.2 What is a TDT? 2 1.3 Some other features of TDTs include: 2 1.4 Benefits of a TDT 2 2 How Testamentary Trusts Work within the Will Framework from a Tax Viewpoint 4 2.1 Overview of Division 6 4 2.2 Present Entitlement and Deceased Estates 5 3 Some Specific Tax Issues 7 3.1 The Streaming Rules 7 3.2 Exempt Entity Distributions 8 3.3 Capital Gains Tax ( CGT ) 8 3.4 Dividend Franking Credits and TDTs 11 3.5 Tax losses and TDTs 11 4 Maximising the Benefits to Grow Family Wealth 11 4.1 Having Assets in the TDT 11 4.2 Tax Treatment of Beneficiaries 11 4.3 Anti-Avoidance: Injection of Income and Capital 12 Ross Higgins 2014 Page 1 of 13

1 Tax & other Key Advantages of Testamentary Trusts 1.1 What is a Testamentary Trust? A testamentary trust is a trust established by a person s Will. It can be a fixed trust (such as a simple life estate), a discretionary trust, or a hybrid (combination of both fixed and discretionary entitlements). If a testamentary trust is being recommended as an option, they are generally referring to a testamentary discretionary trust ( TDT ). Accordingly, in this Paper I will focus on TDTs. 1.2 What is a TDT? Like a family discretionary trust set up during a person s lifetime (inter vivos trust), a TDT created by the terms of a person s Will, has a trustee, a range of potential discretionary beneficiaries (such as spouse, children and grandchildren, other relatives and charities) who are entitled to receive income and/ or capital of the trust at the trustee s discretion, and in many cases an Appointor who holds the power to appoint and remove the trustee. 1.3 Some other features of TDTs include: (c) (d) (e) As TDTs are established by a Will, the willmaker has absolute control over which terms form part of the testamentary trust; During the willmaker s lifetime, he or she can vary the terms of the TDT at any time; The TDT comes into existence on the willmaker s death so the willmaker can retain control and ownership of the assets up to and until their date of death; The TDT can continue for up to 80 years if required and it is also possible for the TDT to vest at any earlier date if authorised by the Will or if the trustee has the power to elect an earlier date; and It is possible to establish more than one TDT in a Will, for example one for each child. 1.4 Benefits of a TDT Many of the benefits of a TDT arise from the fact that while the assets of the trust may be controlled by the intended beneficiary, the assets held in the trust do not form part of the beneficiary s estate. There are also specific tax concessions that apply. Some of the benefits of a TDT include: Asset Protection (c) (d) Income Splitting Income Streaming Generational Wealth Management Asset Protection A TDT can protect the assets a beneficiary inherits under a Will should they: Find themselves in financial difficulties (bankrupt) Ross Higgins 2014 Page 2 of 13

(c) Run their own business, or Be going through a relationship breakdown and involved in a property settlement. A TDT can also protect the interests of a vulnerable beneficiary, for example, beneficiaries with a disability, or a gambling or drug addiction. The separation between the legal owner and beneficial owner of the trust assets allows for this protection to exist. Income Splitting The ability to split income makes this structure attractive to many willmakers leaving behind adult children with children of their own. Unlike family discretionary trusts, TDTs provide a favourable tax position when paying income distributions to a minor (child under 18). This is because a minor beneficiary of a TDT is taxed as an adult. This means that a minor beneficiary is entitled to receive the $18,200 tax free threshold (2014/2015 financial year) and the standard adult tax rates thereafter. This can be compared to a minor of an inter vivos discretionary trust (a trust created during one s lifetime) who is only entitled to $416 tax free and any income above this amount is taxed at penalty tax rates. Income Streaming Income streaming is the ability to allocate different classes of income to different beneficiaries. For example, paying the fully franked dividend received on BHP shares to Beneficiary A and paying a capital gain to Beneficiary B. This gives the trustee the greatest flexibility when it comes to distributing income to the beneficiaries and it also allows for a more tax effective trust. Generational Wealth Management Sometimes people want to ensure certain assets, such as family heirlooms or a family holiday house, remain in the family for years to come. Generational wealth management can be achieved by establishing a TDT in the Will. This type of trust can ensure future generations have the use and benefit of the assets for years to come. The class of beneficiaries of a TDT can be wide or restricted to include only bloodline relatives (sometimes referred to as a bloodline trust ). Case Study Example: Peter and Susan s Story Peter is 60 years of age and Susan is 62. They are both semiretired and are now concerned that they have neglected their estate planning for the past 10 years. Peter and Susan have 3 adult children, two are now married with young children of their own and the third is single. One child is currently experiencing marriage difficulties. They have a combined wealth of $3,000,000 (family home, superannuation, investment property and life insurance). Peter and Susan would like to ensure their children get the most out of their inheritance and this includes protecting it from falling into the hands of creditors or losing half of it through a relationship breakdown. Peter and Susan were advised to include TDTs in their Wills for the benefit of each of their children. Peter and Susan died in a car accident before they signed their updated Wills. At the time of their death, their daughter was in the process of separating from her husband and their single son was in financial difficulties after his business failed. Ross Higgins 2014 Page 3 of 13

Unfortunately because Peter and Susan left their estate to their children in their personal names, their son s inheritance fell into the hands of his creditors and their daughter s inheritance formed part of the matrimonial assets when she and her estranged husband finally sorted out their finances. Had Peter and Susan incorporated TDTs in their wills, their daughter would have retained her inheritance, their son s creditors would still be seeking repayment and their third son could have utilised the potential tax savings available to him and his wife and their two young children. 2 How Testamentary Trusts Work within the Will Framework from a Tax Viewpoint Let us assume a willmaker s husband died some years ago and now she has died. Apart from some minor bequests her estate is to be split 50/50 between two TDTs, one for each of her two children. Under the tax law the legal personal representatives or executors of the estate are treated as trustees and the deceased estate is treated as a trust estate under Division 6 of Part III of the Income Tax Assessment Act 1936 ( ITAA 36 ). The testamentary trusts will only be activated once there is trust property which forms part of the TDTs in accordance with the Will; this may not occur until the estate is fully administered, though income and/or capital may be distributed earlier at the discretion of the executors in appropriate circumstances. The Will effectively causes three trust estate taxpayers to come into being after death, the deceased estate and each of the TDTs. Each trust estate must register for tax purposes, apply the tax law to that trust estate and lodge tax returns. This is the responsibility of the trustee of each trust estate. 2.1 Overview of Division 6 Net income for tax purposes The tax law treats a trust estate as a separate taxpayer. Division 6 deals with the determination of net income of the trust estate for tax purposes and the extent to which the trustee and/or the beneficiaries of the trust estate are liable for tax. Net income for tax purposes (which I will call tax net income ) in relation to a trust estate is broadly based on the tax concept of assessable income calculated as if the trustee were a taxpayer in respect of that income and were a resident, less allowable deductions (section 95(1) ITAA36). Who is taxed: Present entitlement The general principle around whether the trustee and/or the beneficiaries or both are liable to tax relates to whether, in respect of a particular tax year (ending 30 June) there is present entitlement to the net income of the trust estate or not. Present entitlement is a trust law concept reflected in the tax law. Present entitlement relates to distributable net income as determined under the terms of the trust deed or Will for a testamentary trust: Bamford v FCT (2010) 75 ATR 1. Under the terms of a deed or a Will distributable net income may be defined or the Trustee may be given the discretion to choose to determine distributable net income as equating with tax net income or as equating with accounting net income or other alternatives. In the absence of any fixed definition or discretion to determine distributable net income, it will default to be trust law net income which would be income and related expenses determined on revenue account in contradiction to items of a capital nature (i.e. the classic income/capital dichotomy). Ross Higgins 2014 Page 4 of 13

If there is present entitlement to the net income of a trust estate then it is the presently entitled beneficiaries that are assessable on their share of tax net income which is proportional to their share of distributable net income: sections 97 and 98 ITAA 36, and on the proportional aspect refer to Bamford s case. Such beneficiaries are also assessable under sections 97 and 98 on franked dividends and capital gains to which they are specifically entitled : section 95 AAB ITAA36. Section 97 applies where the presently entitled beneficiary is not under a legal disability and the trustee is not assessable on that share of the tax net income. Section 98 applies where the presently entitled beneficiary is subject to a legal disability (e.g. a child under age 18) or is a non-resident, whereupon the beneficiary is assessable but in addition the trustee is assessable (in order to ensure accountability for the tax) with a credit for the tax paid by the trustee in the assessment of the beneficiary. If there is no present entitlement then a trustee of a trust estate is either assessable on the tax net income under section 99 or 99A. Section 99A will generally apply to inter vivos trusts to discourage accumulation of net income in trusts and the trustee will be subject to tax at the maximum personal rate of tax and further, any general 50% CGT discount on CGT assets held over 12 months is clawed back. However, the Commissioner will generally form the opinion (which may be self-assessed) that it would be unreasonable to apply section 99A to deceased estates which have not been fully administered. The Commissioner will generally apply section 99 instead whereby the trustee will be taxed concessionally as if it were a resident adult beneficiary. Further, if section 99 applies there is no clawback of the general 50% CGT discount. If at the end of the income year the deceased person died less than 3 years previously the trustee benefits in full from the lower tax brackets applicable including the tax free threshold of $18,200. Once more than 3 years have gone by at year end the tax-free threshold does not apply but otherwise the trustee continues to benefit from the lower tax brackets. 2.2 Present Entitlement and Deceased Estates On death of a Willmaker the beneficiaries of the estate have no interest in the assets of the estate; they have only a right in equity to see that the estate is properly administered. The leading Australian case on present entitlement under a trust arising during the course of administration of a deceased estate is the decision of the High Court of Australia in FCT. v. Whiting (1943) 68 CLR 199. The Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered. In their joint judgment, Latham C J and Williams J stated (CLR at 216; ATD at 184), that: "... until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries." And later their Honours added (CLR at 216; ATD at 184): "The only part of an estate which can be made available to satisfy the claims of the beneficiaries is that part which remains after the funeral and testamentary expenses, death duties and debts have been paid or provided for, if necessary out of the whole estate, including any income earned by the estate during the period of realisation." Accordingly, until the estate of a testator has been fully administered and the net residue ascertained, a residuary beneficiary has no proprietary interest in any specific investment forming part of the estate Ross Higgins 2014 Page 5 of 13

or in the income from any such investment. Both corpus and income are the property of the executors or administrators. In Victoria it may be necessary to wait at least 6 months after death before regarding the net residue as ascertained as this is the limitation period during which a disappointed beneficiary can bring action under Part IV of the Administration and Probate Act 1958. Present Entitlement to Income Actually Paid to Beneficiaries Even though an estate may not be fully administered, in Taxation Ruling IT 2622 the Commissioner accepts that, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income (and/or corpus) to, or on behalf of, the beneficiaries including to the trustees of the TDTs. The Commissioner rules that beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The trustees of the TDTs can then use this present entitlement from the deceased estate to exercise their discretion in turn to make their beneficiaries presently entitled. Where the Estate is Fully Administered during an Income Year The distributable net income of an estate and whether any beneficiary is presently entitled to a share of income of the estate are determined on the last day of the financial year. As Chief Justice Barwick said in Union Fidelity Trustee Co. of Australia v. F.C. of T. (1969) 119 CLR 177 at 182; 69 ATC 4084 at 4087; 1 ATR 200 at 202: "The time as at which to determine the assessable income of a taxpayer is in general the concluding day of the taxation year. There is no provision which takes the calculation under s.95 in that respect out of the general scheme of the Act." Nevertheless as confirmed in Taxation Ruling IT2622 it has also been the longstanding practice of the Commissioner to accept an apportionment in the income year in which the estate is fully administered. Where the executors and beneficiaries are able to demonstrate, through the striking of accounts at the completion of administration, the actual amounts of income derived in the periods before and after the day on which the estate was fully administered, an apportionment may be made as follows:. Income derived in the period between the beginning of the income year and the day administration was completed. - Assessed in the hands of the executors or administrators under section 99 of the ITAA 36.. Income derived in the period between the day administration was completed and the end of the income year. - Assessed to the beneficiaries presently entitled to the income in the manner required by section 97 or 98 of the ITAA 36. There must be evidence of the income derived during these periods and apportionment of the net income of the trust estate in this manner must be requested by the taxpayers concerned, i.e., the executor or administrator and the beneficiaries. The Commissioner would not accept an apportionment Ross Higgins 2014 Page 6 of 13

of the income derived by the estate for the whole income year concerned into the two periods merely on a time basis. An exception to this method of apportionment is that, if an executor or administrator does in fact pay part of the income of the estate to a beneficiary before the estate is fully administered (as mentioned above), the beneficiary would be assessed on the basis that he or she was presently entitled to that income. As stated above, where the beneficiaries of the estate are the TDTs, the amounts to which the TDTs are presently entitled form the basis in turn of distributable net income to which beneficiaries of the TDTs may become entitled at year end. Therefore there is some flexibility in deciding what approach is best from the viewpoint of the beneficiaries in terms of distributions and apportionments of net income prior to the time an estate is fully administered. 3 Some Specific Tax Issues 3.1 The Streaming Rules Applicable from the year ended 30 June 2011 measures have applied to trusts including deceased estates and TDTs dealing with the streaming of franked dividends and capital gains for tax purposes and introducing anti-avoidance rules for distributions to tax exempt entities. The terms of TDTs should not only include the ability for the trustee to determine distributable net income to include capital gains where appropriate, but should include the ability to stream capital gains and franked dividends. If capital gains cannot be included under distributable net income, it may be possible to stream capital gains pursuant to a capital advancement power. For effective streaming, trustees will need to record in the accounts or records of the trust (e.g. distribution resolution) that a beneficiary is specifically entitled to an amount of franked distribution on or before 30 June and on or before 31 August for capital gains. Importantly, while a two-month concession exists in the proposed law for capital gains, some terms of TDTs may require that the trustee make their resolutions by 30 June. A beneficiary will be specifically entitled to the extent they receive or can reasonably be expected to receive a financial benefit referable to the capital gain or franked distribution. Where there is no specifically entitled beneficiary to an amount representing a capital gain or franked distribution, the proportional approach applies across all beneficiaries entitled to a share of distributable net income. Importantly, only entitlement to the franked distribution amount is required (not the grossed-up amount) whereas entitlement to discount capital gains must be for the gross amount (pre-discount). If a grossed-up franked dividend amount is being streamed, the franking credits will be allocated based on the quantum of the whole entitlement applicable for each beneficiary. Capital gains may be streamed on a gain by gain basis. If a circumstance arises whereby an income beneficiary may be liable to pay tax on a capital gain included in the taxable income of the estate or a TDT but which it did not receive, the personal representative or trustee may choose to pay tax on the capital gain instead: section 115-230 ITAA97. Ross Higgins 2014 Page 7 of 13

3.2 Exempt Entity Distributions Anti-avoidance rules target the use of exempt entities to inappropriately reduce the tax otherwise payable on the taxable income of a trust. The first anti-avoidance measure treats an exempt beneficiary that has not been notified of or paid their present entitlement to income of the trust estate within two months of the end of the income year as not being and never having been presently entitled to that income. The second anti-avoidance measure treats an exempt entity as not being and never having been presently entitled to an amount of income that exceeds a prescribed benchmark percentage which is calculated by reference to the amount to which the exempt entity is purportedly made presently entitled and the trust estate s adjusted net income for the year. Under both anti-avoidance measures, the trustee will generally be assessed on the share of the trust's taxable income that corresponds to the income to which the exempt beneficiary is not entitled. 3.3 Capital Gains Tax ( CGT ) Avoiding date of death capital gains CGT provisions have various rules dealing with the effect of death. Generally the rule is that any capital gain or loss from a CGT event in relation to a CGT asset is disregarded on death (i.e. when the asset passes to the legal personal representatives) (s.128-10 ITAA 97). (c) (d) However, there is an exception if the CGT asset passes to a beneficiary in the estate who is: an exempt entity (though an exception applies for gifts of property that if made inter-vivos would be deductible under section 30-151 ITAA97: see section 118-60(1) ITAA97); the trustee of a complying superannuation entity; a foreign resident (but not regarding taxable Australian property including land in Australia and interests in entities a majority of whose assets comprise land in Australia) (s 104-215 ITAA 97). So if for example shares in Australian listed companies are left to a child of the deceased who is a nonresident at the time of death, there will be a CGT event and a possible capital gain (or capital loss) arising in the deceased s date of death tax return. With more people working overseas there may often be adult children that are tax non-residents at the time of their parent s death. If the non-resident child s share was distributed to a TDT with a resident trustee (e.g. a company incorporated in Australia) the deemed date of death CGT event would not arise. CGT Assets passing to a TDT and its Beneficiaries Where a CGT asset that formed part of the deceased estate passes from the legal personal representatives to a beneficiary, any capital gain or loss is disregarded: s 128-15(3) ITAA97. The beneficiary would include the trustee of a TDT where applicable. Further, the Commissioner has confirmed in ATO Practice Statement Law Administration PSLA 2003/12 that the ATO will not depart from its long-standing administrative practice of treating the trustee of a testamentary trust in the same Ross Higgins 2014 Page 8 of 13

way that a legal personal representative of a deceased estate is treated under Division 128 ITAA97 and in particular section 128-15(3). Accordingly, any capital gain or loss that arises when an asset owned by a deceased person passes to the ultimate beneficiary of a trust created under a deceased s Will (e.g. a TDT) is disregarded. This is an extremely valuable concession that does not apply to inter-vivos trusts. There are CGT cost base rules that apply on death, broadly as follows: If the CGT asset was acquired pre-cgt by the deceased (pre 20 September 1985) the asset will be taken to be a post-cgt asset acquired at date of death for its then market value (s 128-15(4) Item 4). An important consequence is that the asset must be held by the estate beneficiary for at least 12 months to qualify for the general 50% CGT discount; If the CGT asset was acquired post-cgt by the deceased, the beneficiary is taken to inherit the same cost base (s 128-15(4) Item 1). If the asset is disposed of, the holding period of the deceased counts towards the 12 month rule to qualify for the general 50% CGT discount (s 115-30(1) ITAA97). There are special rules in relation to the cost base of a dwelling which was the deceased main residence. CGT Main Residence Exemption Certain concessional treatment extends to individual beneficiaries of a deceased estate and to the personal representatives of a deceased estate whereby a capital gain or capital loss from a CGT event in relation to a dwelling is disregarded if either: The dwelling was acquired by the deceased pre-cgt; or The dwelling was acquired post-cgt and it was the deceased s main residence just before death and was not then being used to produce assessable income; and either: the sale or other CGT event occurs within 2 years of death; or the dwelling was, from the deceased s death until the sale or other CGT event, the main residence of one or more of: (i) (ii) (iii) the deceased s spouse (except a spouse who was living permanently separately and apart from the deceased); or an individual who had a right to occupy the dwelling under the deceased s Will; or the individual to whom the dwelling passed. The concessions are not available if a main residence becomes an asset of a TDT (confirmed in ATO Interpretative Decision ID 2006/34). The Commissioner s view is that once an estate is fully administered the beneficiaries, including trustees of TDTs, become the owners of the assets for CGT purposes (Taxation Determination TD Ross Higgins 2014 Page 9 of 13

2004/3). Accordingly it is important to utilise any concessions in the deceased estate itself before a main residence forms part of a TDT s assets. Small Business Concessions ( SBCs ) There are SBCs under the CGT rules where a capital gain arising from a CGT event can be reduced or eliminated if: the taxpayer is a small business entity (broadly annual turnover less than $2m) or has less than $6m of net assets (excluding main residence and superannuation); and the asset is an active asset of the taxpayer i.e. a business asset or an interest of at least 20% in an entity which carries on an active business. There are various SBCs including the 15 year exemption, the small business 50% reduction, the retirement exemption and the small business rollover. In general terms the SBCs are extended to apply to a CGT event that happens to an asset or interest within 2 years of death. This applies to the deceased estate, an individual beneficiary under the estate and to a trustee of a TDT. There are special provisions to facilitate the application of the SBCs such as excluding the requirement under the 15 year exemption for the deceased to have retired and the requirement under the retirement exemption for rollover of the concession amount into a superannuation fund if the taxpayer is under age 55. Varying a Will without Triggering CGT The disregarding of a capital gain or loss on assets passing from a deceased estate to a TDT (or any beneficiary) only applies if the CGT asset passes: (c) (d) under the Will, or that Will as varied by a court order; or by operation of an intestacy law, or such a law as varied by a court order; or because it is appropriated to the beneficiary by the legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the estate; or under a deed of arrangement if: (i) (ii) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate. If a Will is varied, care must be taken to ensure that one of the conditions are satisfied so that the passing of CGT assets from a deceased estate to a TDT (or any beneficiary) does not trigger CGT unintentionally. Ross Higgins 2014 Page 10 of 13

3.4 Dividend Franking Credits and TDTs TDTs are non-fixed trusts and in order to get franking credits of more than $5,000 to an individual beneficiary or any amount to a corporate beneficiary in an income year in respect of shares acquired by the TDT on or after 31 December 1997, a family trust election is required to be lodged (generally done once with the TDT s income tax return). Care must be taken to identify an appropriate nominated individual for the purpose of the election; from this viewpoint it would be preferable to have a separate TDT for each child so that each could be nominated separately. It had previously been announced on 20 March 2006 that the law would be changed to remove the requirement for TDTs to make a family trust election but the Government confirmed on 14 December 2013 that the announcement would not be enacted. Accordingly family trust elections must be considered for TDTs in order to pass through franking credits. 3.5 Tax losses and TDTs As stated above, a TDT is a non-fixed trust and if tax losses are incurred it will generally be necessary for the TDT to make a family trust election in order to carry forward the tax losses. 4 Maximising the Benefits to Grow Family Wealth 4.1 Having Assets in the TDT To get assets (including moneys) within a TDT, the assets need to be property of the deceased. The deceased may only have a main residence and some minor funds or loan accounts in their name, preferring to hold most assets in a superannuation fund or family trusts. If it is desired to use the benefits of a TDT then it is important to plan to get an appropriate amount into the estate. One obvious source of assets and moneys is the superannuation fund and a binding death benefit nomination can be a key way of ensuring this will occur without compromising the deceased s financial planning prior to death. A superannuation fund in pension mode can be ideal as once the reversionary pensioner dies the benefit must be paid out in a lump sum in any event and there will generally be no tax in the superannuation fund and concessional tax at only 15% (plus medicare levy) on the taxable component of the benefit directed into a TDT. 4.2 Tax Treatment of Beneficiaries Income distributed to minor beneficiaries (i.e. under age 18) of either a deceased estate or a TDT is taxed at adult rates. For inter vivos trusts any share of tax net income assessable to a minor beneficiary is taxed at penalty rates; under Division 6AA of ITAA36 a minor is a prescribed person and trust income will generally be eligible taxable income and as a result generally taxed at the top marginal rate. There is a tax-free threshold of $416, but there is a phase in rate of 66% for income from $417 to $1,307 such that the benefit of the threshold disappears for income above $1,307. However, tax net income of a deceased estate or TDT is excepted trust income under Division 6AA (section 102AG(2) ITAA36) and instead adult marginal rates of tax apply to such income distributed to minors. A TDT can continue for up to 80 years so it is possible to benefit from this concession for current and future generations of minor children in the family within the class of beneficiaries contemplated in the terms of the TDT. Ross Higgins 2014 Page 11 of 13

4.3 Anti-Avoidance: Injection of Income and Capital There are two anti-avoidance provisions designed to prevent the increase in excepted trust income by injection of income and capital into the TDT. The first rule limits excepted trust income to the income that would have been derived if all parties had been dealing with each other at arm s length in relation to the act or transaction (section 102A G(3) ITAA36). The second rule applies if income arises from an agreement entered into for a purpose, or for purposes that included the purpose, of securing that such income would be excepted trust income (section 102A G(4) ITAA36). The purpose must be more than an incidental purpose. In Taxation Ruling TR 98/4 in relation to Child Maintenance Trusts ( CMT ) the Commissioner observed: One illustration is provided by Case 44/95; AAT Case 10,321 where income from an existing discretionary trust was to be routed through new CMT arrangements to a child. As the discretionary trust already existed, it could have distributed income directly to the child or the trustee for the child; but had it done so, the income would not have been even arguably excepted and would have been taxed at the higher rates applicable under Division 6AA. It is best not to kill the golden goose and ensure that the anti-avoidance rules are not breached. Further, the Commissioner can apply section 99A if of the opinion that it would not be unreasonable that the section apply. In deciding this, section 99A(3) sets out various considerations in forming the opinion including for example having regard to the circumstances in which and the conditions upon which property was acquired by or lent to the trust estate, income was derived by the trust estate or benefits were conferred on the trust estate. Ross Higgins Partner, Chartered Tax Adviser Rigby Cooke Lawyers Level 11, Melbourne Central Tower, 360 Elizabeth Street, MELBOURNE, VIC 3000 rhiggins@rigbycooke.com.au Tel: +61 3 9321 7830 Further information Rigby Cooke Lawyers provides a comprehensive taxation advisory and legal service for all key taxes and has expertise in a wide variety of topical areas affecting businesses, business owners, superannuation funds, fund managers and investors. Disclaimer This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication. Ross Higgins 2014 Page 12 of 13

Reprint Permission Articles in this publication may be reproduced in whole or in part, provided that appropriate recognition is given to the author and the firm, and prior approval is obtained. To obtain approval, please contact Rigby Cooke on +61 3 9321 7888 or email marketing@rigbycooke.com.au. Ross Higgins 2014 Page 13 of 13