Testamentary Trust Super Tax Trap

2 Aug 2022

Written by

David Busoli, Principal

Private binding ruling [PBR 1051920326857] dealt with a circumstance where a super death benefit was paid, via the estate, into a testamentary trust. The beneficiaries of the testamentary trust included beneficiaries who would be classed as super death benefit dependents so the ruling considered whether the lump sum death benefits should be free of tax or if the payment to the testamentary trust rendered the benefits taxable.

The testamentary trust beneficiaries were defined as:

  • the deceased’s spouse and lineal descendants (i.e., “primary beneficiaries”), and
  • the trustee of any trust in which the primary beneficiaries were named as beneficiary, and any proprietary company in which any primary beneficiary is a director or beneficial owner of any type of shares.

For super death benefits to be tax free, there needs to be certainty that only death benefit dependants will benefit from them but, under the terms of the testamentary trust, beneficiaries could be a range of individuals, including:

  • the deceased’s spouse (a death benefits dependant of the Deceased),
  • her lineal descendants – including people not yet born (not death benefits dependant of the Deceased), and
  • certain entities – including those not in existence yet (not death benefits dependant of the Deceased).

As a consequence the death benefits were subject to tax as if they were paid to a non-death benefit dependants. This would not have been the case if the terms of the testamentary trust had been restricted benefits to SIS tax dependants.

Existing testamentary trusts, intended to be used in this way, need to be checked.

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