Income splitting is a tax reduction strategy which often involves one family member, who earns greater income (and is therefore in a higher income tax bracket), "splitting" off their income to a spouse or child in a lower income tax bracket.
Various tax integrity provisions already exist in the tax law which prevent this practice, as this is regarded as an inappropriate means of obtaining beneficial tax treatment. The Treasury Laws Amendment (2019 Measures No 3) Bill 2019 introduces a further measure which trustees of testamentary trusts should be cognisant of when distributing to minors.Ari Armstrong, Maddocks
The policy reason for this is to discourage the diversion of income away from a higher income earning adult beneficiary, and there are limited exceptions - for instance for minors who work full time.
Section 102AG of the Income Tax Assessment Act 1936 (Act) allows for prescribed persons" who receive income generated from the assets of a deceased estate to have that income assessed at their applicable marginal rate (as opposed to the highest marginal rate). This income is known as excepted income" in the Act.
The exception at section 102AG of the Act has led to the practice of injecting" assets from a discretionary trust into a testamentary trust, the subsequent profits of which are distributed out to a minor who has the benefit of being assessed at their marginal tax rate. In this way, discretionary trusts can avoid having the minor assessed at the highest tax rate, by distributing assets to the testamentary trust, with the testamentary trust distributing profits from those assets as "excepted income".
Here?s how it would work in practice:
This practice was regarded as artificially inflating the corpus of the testamentary trust in order to get the benefit of "excepted income" pursuant to section 102AG of the Act.
The Treasury Laws Amendment (2019 Measures No 3) Bill 2019 (Bill) which is making its way through federal Parliament, includes further measures to address certain income splitting schemes.
From 1 July 2019, minors will no longer be taxed at normal marginal rates for income generated from assets which are unrelated to a deceased estate, i.e. assets which have been injected into the trust, nor income generated from disposal of these assets.
This is achieved by amending division 6AA of the Act and section 13 of the Income Tax Rates Act 1986. In particular, the Bill limits the extent to which income is excepted such that in order for income to be excepted under paragraph 102AG(2)(a) of the Act:
Those three requirements are as follows:
These measures ensure that only income from assets which have organically accumulated within the corpus of the testamentary trust can be excepted trust income in the hands of a receiving "prescribed person". Where funds have been injected post-1 July 2019, and all the funds of the testamentary trust have subsequently been invested in income-producing assets, the tax treatments of the income from those assets will be apportioned accordingly.
The changes will apply retrospectively in relation to assets acquired by or transferred to the trustee of the trust on or after 1 July 2019. The changes should be noted by customers who are considering ordering a "Will with a Testamentary Trust" offered through Cleardocs.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.
You can read earlier ClearLaw article on a range of matters.
 See Division 6AA of the Income Tax Assessment Act 1936 and the Income Tax Rates Act 1986. Division 6AA will apply to minors who fit the definition of a ?prescribed person?. A ?prescribed person? is defined at section 102AC as a person who is less than 18 years of age on the last day of the year of income year and is not an "excepted person".
 An "excepted person" includes a minor that is engaged in a full-time occupation on the last day of the income year, is the recipient of a disability support pension, is the primary beneficiary of a special disability trust or has been certified to be, by reason of a permanent disability, unlikely to be able to engage in a full-time occupation.
 For example, if a "prescribed person" receives income from shares which were acquired with 50% injected capital and 50% capital from the deceased estate transferred via will, then only 50% of the income will be "excepted income".
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.