How Testamentary Trusts can Save Heaps of Tax

Testamentary Discretionary Trusts (TDT) set up in a person’s will can save the family a fortune in tax as well as give other benefits.

These benefits include the general benefits of a discretionary trust such as the ability to stream the income to the lower tax payers in the family. The trust itself doesn’t pay any tax if the income of the trust is distributed. The recipients of the income will pay tax at their marginal tax rates.

But with trusts set up under a will there are extra tax benefits because the income can be distributed to minor children who are then taxed as adults would be. This benefit is not available with trust set up during a person’s lifetime because children will pay penalty tax rates of up to 66%.

The tax saving can be demonstrated by a simple example comparing 2 situations of a family – with a TDT and without a TDT in the will.


Bob dies with a large number of investment properties. Rental income is $80,000 per year after expenses. Bob is married and has 4 kids.

Situation A: Bob dies with a will giving everything to his spouse –

The spouse will receive the rental income going forward and it will be taxed by adding it to the other income of the spouse.

If the spouse was on the top rate of tax, the tax payable each year would be $37,600.

A huge amount of tax!

Situation B: Bob dies with a will leaving everything in a testamentary trust with Spouse in control –

The trustee of the TDT will receive the rental income going forward. This could be the spouse or a company controlled by the spouse.

The trustee could then distribute the income of the trust to the 4 kids – $20,000 each.

Each kid will be taxed as an adult would and can get the tax free threshold and the low income tax offset so no tax would be payable at all.

This family could save $37,600 per year in tax!

Not to mention the tax savings on CGT when or if a property is ever sold. Additionally there are great asset protection benefits if the spouse would re-partner and/or if any of the beneficiaries became bankrupt or incapacitated.

Written by Terry Waugh, solicitor at

Foreign Surcharge Exemption for Foreign Developers (NSW)

As you may be aware there are new stamp duty surcharges on ‘foreign persons’ who purchase land in NSW. There are also surcharges for land tax on land held by ‘foreign persons’.

However there are some concessions for ‘foreign persons who are developing new property for sale.

See –

  • Duty concession: section 104ZJA Duties Act 1997 (NSW)
  • Land Tax concession: section 5C Land Tax Act 1956 (NSW)

For more details see:

Revenue Ruling No. G 013  Exemption from Surcharge for New Home Development by Australian Based Developers that are Foreign Persons


Written by Terry Waugh, solicitor at

50% Spousal Transfer Strategy to Increase Deductions


I have mentioned the ‘Spousal Transfer Strategy’ in a few threads in the past on and but I don’t think I have outlined this strategy in detail with an example.

The strategy works by Spouse A selling a property, or part of a property they own to Spouse B. Spouse B borrows to acquire the property or part property and claims the interest on the loan, while the funds released from the sale are used to pay off the non-deductible main residence.

The stamp duty laws need to be carefully considered as an exemption is generally only available where the property is the main residence at the time of the transfer and the property is going from one name into 2 names either as joint tenants or tenants in common in equal shares. In some states the exemption is not available if the share of the property is purchased, as is the case in Queensland or Victoria. To be able to claim interest on the loan there must be ‘consideration’ given as you cannot borrow to make a gift and expect to claim the interest. On this see:

Tax Tip 15: Transfers for No Consideration and Deductibility of Interest


Homer and Marge have owned their home for about 20 years now. It is just in Marge’s name as she bought it before their marriage and the loan has long been paid off. The property is located in NSW and is worth approximately $1mil.

They want to buy a new home (House 2) to live in, but they don’t want to sell the existing home (House 1) just yet, because of the subdivision potential it has.

However if they don’t sell it they will need to pay a lot of interest on the loan used to acquire House 2. They estimate they will need to spend about $1.5mil but only have $700,000 as a deposit. That means they would need to borrow about $800,000 and pay about $40,000 in interest (at 5% pa) per year which would not be deductible.

Instead they decide to utilise the ‘Spousal Transfer Strategy, after seeking appropriate legal advice, where Marge would sell 50% of House 1 to Homer for $500,000. If they do this while still living in the property there may be no stamp duty at all. There would also be no CGT because the property has always been the main residence.

Marge and Homer go to the ABC Bank and borrow $500,000 so that Homer can pay Marge for her 50% share. Both names will need to be on the loan as they will be joint owners and joint mortgagors.

Marge will receive $500,000 from Homer from the sale. This $500,000 will sit in the offset account of the loan from ABC Bank until they need to use the money for the new purchase of House 2. No interest will be incurred while this happens as the offset account balance equals the loan balance.

After the transfer they would remain living in House 1 for a few months and then move out and into a new property, House 2, which will be purchased.

When they find House 2 they will arrange their finances so that $300,000 is borrowed, say from DEF Bank, and $1.2mil of cash is used for the remainder of the purchase monies (the $700,000 cash they have plus the $500,000 from Marge’s 50% sale to Homer).

After House 1 is available for rent Homer is able to claim the interest on the $500,000 loan.

Comparison – Strategy v No Strategy for Homer and Marge

Without using this strategy

Homer and Marg would have a loan of $800,000 on House 2 as they only have a $700,000 deposit on a $1.5mil purchase.

At 5% per year interest rate this would be approximately $40,000 in interest with none of it being deductible.

Using the Strategy

They will still have a debt of $800,000 in total, but as $500,000 of this relates to the purchase of House 1, the interest on this loan will be deductible to Homer.

At 5%pa interest rate this amount $25,000 p.a. in deductible interest.

They will also have $300,000 in non-deductible debt because this was used to acquire the new property which will be their main residence and therefore non-deductible.

Total $25,000 plus $15,000 = $40,000 in interest

But because Homer is on the top marginal tax rate his tax will reduce by 47% of $25,000 which is $11,750

So they will be better off, as a family, by $11,750 per year by doing this strategy. This extra money saved can be used to pay down the main residence and debt recycle into investments – saving even more interest and making ever more income.

Over the course of a life time these savings could add up to be hundreds of thousands of dollars.

Cost of implementing is very cheap because the only costs would be

  1. a)    Legal advice;
  2. b)    Taxation advice (on deductibility of interest and Part IVA)
  3. c)    Conveyancing;
  4. d)    Loan exit and entry fees.

All up it should come in at less than $3,000.

Note – Please do Not try this without legal advice as I have seen at least one person do the conveyance for no consideration which meant that none of the interest is deductible at all. They were left in a worse position than before doing it.

Do Not try this without tax advice as the loans need to be made to pay out the other party, and payment should be made. Also the Commissioner of the ATO can also deny the deductions, under Part IVA, if the sole and dominant purpose in doing this is to increase tax deductions.

Written by Terry Waugh, solicitor at


How to Set Up a Testamentary Trust

Firstly the downside – unfortunately someone has to die to set up a testamentary trust!

A testamentary trust is just a trust set up under a person’s will. It could be a unit trust, fixed trust, hybrid trust, bare trust or a discretionary trust.

The trust is set up as part of the will. The testator will instruct their executor to pass specified property to the trustee of the trust with the trustee nominated and the terms of the trust outlined in the will.

All of your property could be left to the trust or just specific property with other property going directly to people. Property here means not just houses, but any asset.


I give any vehicle that I own at my death to my children.

I leave the remainder of my estate to the trustee of the ABC trust to be held on the terms outlined in part B below.

The terms of the trust would run many pages and would outline who the appointor is, who the trustee is, who the primary beneficiaries are and who the other beneficiaries are. The powers of the trustee will be outlined and they can be broad or restrictive. The trustee could be restricted to invest only in certain areas and prohibited to invest in other areas – such options trading.

The first trustee of the trust would generally be the primary beneficiary. But the trust would be drafted so that the primary beneficiary should have the power to change the trustee to a company. This saves having to set up a company now and incur ASIC fees.

Since the trust is set up under the will, if the will is invalid for whatever reason, not properly witnessed for example, then the trust will not eventuate. Therefore it is of critical importance you set one up correctly.

Written by Terry Waugh, solicitor at

Who will look after your children if you die?

What happens when both parents die early and minor children are left behind?

The children must come under the care of a guardian. You can appoint such a guardian by your will. In NSW section 14 Guardianship of Infants Act 1916 (NSW) gives this power and there would be similar legislation in other states.

If there is no guardian appointed under a will then someone, perhaps grandparents or other relatives, will need to apply to a tribunal to be appointed guardians of the kids. Sometimes there may disputes between different family members about who will be guardians – two sides of a family fighting it out for example and this would necessitate the tribunal or court to make a decision.

Some of what to consider when appointing a guardian:

  • Will the guardians likely accept the role?
  • Where does the guardian live?
  • Should they be compensated (via your will)?
  • Is their accommodation suitable?
    • Should they be allowed to use some of the children’s money to extend their house? (a court has said yes and allowed renovations in at least one case under specific circumstances);
  • How old are they?
  • What If they die?
    • Before you, or
    • Before your kids become 18.
  • Do they get on with your children now?
  • Do they follow the wrong religion?
  • Could they handle all of your children’s care?
  • Are they connected with a circus? (considerations of lifestyle)

This is another reason to consider making a will even if you do not have any assets.

Written by Terry Waugh, solicitor at


Posted: 24 Jan 2018
Forum Discussion:
Topics: Minor Children; Death