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Division 6AA and child maintenance trusts: there are advantages, but pitfalls too

Publication date: 10 Apr 15 | Source: WEEKLY TAX BULLETIN

Issue: Issue 11, 20 Mar 2015

Abstract:

In the context of deceased estates (and specifically with the use of testamentary trusts), the excepted trust income rules under Div 6AA of the ITAA 1936 are well known.

In particular, the rules allow income derived by infant children via distributions from a testamentary trust to be assessed at the normal, individual adult rates.  As a result, each infant beneficiary can receive over $20,000 of income tax-free and the balance is taxed at the adult marginal rates.  For most families, this can mean significant tax planning opportunities.

In the vast majority of cases, access to the excepted trust income concessions is only available following someone's death.  One key structure that falls outside this general position however is a "child maintenance trust" (CMT).

A CMT is another form of trust contemplated by Div 6AA that should be at least considered whenever there is a personal relationship (referred to as a "family") breakdown and either party is responsible for making child support payments.  This is because a validly established CMT can also create access to the excepted trust income provisions and the resulting tax concessions.

Given the significant percentage of personal relationships that breakdown irretrievably, many of which then result in child maintenance obligations being imposed, it is important that practitioners are aware of the planning opportunities afforded by CMTs.

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Author profiles

Patrick Ellwood FTI
Patrick holds a Bachelor of Laws and Bachelor of Information Technology from the University of Queensland, a Graduate Diploma in Legal Practice, Skills and Ethics from Griffith University and has been admitted as a Solicitor of the Supreme Court of Queensland. He has extensive experience as a speaker and is a regular presenter for a range of professional organisations. - Current at 11 September 2015
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Matthew Burgess CTA
Photo of author, Matthew BURGESS Matthew co-founded specialist firm View Legal in 2014, having been a lawyer and partner of one of Australia’s leading independent law firms for over 17 years. Matthew’s passion is helping clients successfully achieve their goals. Matthew specialises in tax, and estate and succession planning, providing strategic advice to business owners and high net worth individuals. He has been recognised in the Best Lawyers list since 2014 in relation to trusts and estates and either personally or as part of View Legal in Doyles since 2015 in relation to taxation, and since 2017 in relation to wills, estates and succession planning. In part leveraging off the skills he has developed working in the SME market space, Matthew has been the catalyst for a number of innovative legal solutions for advisers and their clients, including establishing Australia’s first virtual law firm. - Current at 13 August 2018
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