Legislation passed on 17 June 2020 has amended the ITAA36 to change the taxation treatment of distributions of income from testamentary trusts to minors.

Taxation of unearned income of minors

Trust estates are taxed under Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) (ITAA36). While taxpayers often seek to establish testamentary trusts in their wills with the objective of achieving asset protection for beneficiaries who are exposed to business/creditor risks or family law risks (such as marital or relationship breakdown), an ancillary tax benefit that arises from establishing a testamentary trust is the effect on the taxation of distributions to persons who are under 18 years of age.

Division 6AA ITAA36 provides special rules for determining the tax payable on the eligible assessable income of a minor. The special rules provide that a lower tax-free threshold and special rates of tax apply to the taxable income (other than excepted income) derived by the minor.

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