2018: The biggest year in estate planning in a generation

In light of ongoing changes to the taxation regime and the expanding wealth of Australia’s aging population, there has for many years been a growing need for estate planning to utilise appropriate structuring.

Estate planning related areas have largely been outliers from radical simultaneous rule overhauls and changes in the framework of the specific laws have stayed largely unchanged for over 30 years. 2018 however will likely be seen as an exception to this position, at least in recent years.

Indeed, arguably 2018 saw more changes in key estate planning areas in a single year than each of the previous 30 years combined.

With the post baby boomer intergenerational wealth transfer wave gathering pace, it is argued that the 2018 changes mean it is critical for tax and estate planning advisers to fully understand the impact of the changes and invest to monitor their ongoing impact.

Potentially fundamentally important shifts in approaches across the following areas made headline news in the tax and estate planning arena in 2018:

1      Trust vesting;

2      Trust splitting;

3      Testamentary trusts and excepted trust income; and

4      Capital gains tax (“CGT”) rollovers on relationship breakdown.

Each of the above areas are addressed in turn below.

Final Trust Vesting Ruling

In August 2018, the Australian Tax Office (“ATO”) issued its ruling in relation to trust vesting with Draft Taxation Ruling (“TR”) 2017/D10 finalised as TR 2018/6.

The ATO also published details of its administrative approach.

In theory, the combination of these publications, after what is understood to be the extensive industry consultation, should be the definitive statement of all key issues with trust vesting. Arguably for many trust specialists however, it is difficult to instead not be asking “is that it” from the ATO on trust vesting?

Arguably there are a range of important trust vesting questions that remain unanswered.

In particular, TR 2018/6 does not attempt to even acknowledge (nor address) issues such as:

1. In what situations will a power of variation be deemed to be too narrow to allow an extension of a vesting date?
2. If a power of variation expressly permits retrospective amendments, why will this not allow a vesting date to be extended after it has passed (TR 2018/6 is blunt in its view that a trust vesting date can never be extended once it has passed)?
3. Can a trustee resolve to amend the jurisdiction of a trust to South Australia, and thus have any vesting date essentially abolished?

Trust splitting

The ATO released its views on trust splitting in Draft Taxation Determination (“TD”) 2018/D3 in July 2018.

There are a range of concerns with TD 2018/D3 for all trust advisers. A summary of the key issues is have been set out in earlier articles – please contact me if you do not easily have access to these.

2018 Federal Budget attack on excepted trust income

The announcement in the 2018 Federal Budget that “the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets” was for many a surprise.

As is usually the case with Budget announcements attacking perceived arbitrage revenue opportunities, the exact impact of the changes will revolve almost entirely around how the legislation is crafted - the 2017 Budget changes to the small business CGT concessions being a recent a high-profile example of what appeared at announcement to be a narrowly focused change that in fact has proven to be significantly wider.

Thus, advisers in the estate planning industry should likely be concerned as to what the Government means by suggesting that the mischief to be addressed is “that some taxpayers are able to inappropriately obtain the benefit of (a) lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts.’’

In turn, the Budget statement that the “measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceeds of the disposal or investment of these assets)’’ also has the distinct prospect of having much wider consequences than might otherwise be expected.

Family law CGT rollovers

The decision in Ellison v Sandini Pty Ltd provides clarity for tax practitioners assisting clients involved in a relationship breakdown.

In particular, the split decision of the Full Federal Court has reconfirmed the generally accepted historical position in relation to CGT rollover relief on marriage breakdowns. 

While perhaps not directly related to estate planning, given that the majority of family groups endure at least one relationship breakdown, it is an area specialist estate planning advisers must have a working knowledge of.

Amongst a range of technical issues, the case explored the requirements to access the CGT rollover relief contained in Subdiv 126-A of the ITAA 1997 for relationship breakdowns.

In unwinding the original Court decision, which held that the rollover relief was available for assets transferred to a family trust controlled by one of the parties, the Full Federal Court confirmed that relief is only available where the asset is being transferred to the spouse personally.

++++++++++++++

Parts of this article are based on material that originally appeared in the Weekly tax Bulletin and the monthly ‘’Blue Journal’’ published by The Taxation Institute.

The image today: the annual photo of the Burgo Babes looking out across the Southern Gold Coast. Same shot taken every year for many years now.