This appendix outlines the application of the special taxation provisions relating to trust income to which beneficiaries under 18 years of age are, or are deemed to be, presently entitled. It will help you complete O item 14 and Excepted net income at item 14.
Basis of the minor beneficiaries system
Special taxation provisions apply to certain trust income, including capital gains, derived during the income year to which specified beneficiaries under 18 years of age at the end of the income year (minors) are presently entitled.
This includes income of a trust estate to which a beneficiary is deemed to be presently entitled.
Unless the minor beneficiary is an excepted person or the distribution is excepted income, income of the trust estate to which a minor is presently entitled generally is taxed at the highest marginal tax rate, plus the Medicare levy. The tax rates that apply are in appendix 11.
In some cases, it is unreasonable for the full amount of the additional tax under the system to be payable on income, for example, in cases of serious hardship. For more information on details of special measures under which release from the obligation to pay some or all of the additional tax may be granted, see appendix 11.
If the trustee considers that the system and the consequential higher tax rates are not applicable for any reason to the whole or part of the trust income to which any minor beneficiary is presently entitled, keep the information set out in the questions with the trust’s tax records. Some circumstances in which a trustee can ignore these details are set out in Completing the questions. If the trustee fails to consider and keep the information in the questions, where this is necessary, together with any additional information, the income to the trustee could be assessed at the highest marginal tax rate provided under the system.
Effect of the minor beneficiaries system on trust income
The system has no effect on ascertaining the trust's net income.
The system can affect an assessment issued to the trustee where a minor beneficiary is presently entitled to share of the income of the trust estate, but only if the minor is a ‘prescribed person’ and to the extent that income of the trust estate to which that beneficiary is presently entitled is eligible income.
The system applies to a prescribed person, who is a beneficiary under 18 years of age at the end of the income year and is not an excepted person.
A person is an ‘excepted person’ if, on the last day of the income year, any of the following circumstances applied to them:
- they were engaged in a full-time occupation (see below)
- they were entitled to a disability support pension or rehabilitation allowance, or someone was entitled to a carer allowance to care for them
- they had a medical certificate (or a previous medical certificate for a disability they had that existed on the last day of the income year) that certified that:
- they were disabled and were likely to suffer from that disability permanently or for an extended period
- they had a physical or mental disability that prevents them from working in the next two years and either the disability prevents them from undertaking educational, vocational or on-the-job training in the next two years or they are able to undertake educational, vocational or on-the-job training, but it is unlikely the training will enable them to work within the next two years, or
- they were permanently blind
- they were a person who received little or no financial support from relatives and were:
- entitled to a double orphan’s pension, or
- unable to engage in a full-time occupation because of a permanent mental or physical disability
- they are the principal beneficiary of a special disability trust.
A person is regarded as dependent for support on a relative if they live with the relative, unless it can be established that they were not dependent on that relative for financial support.
Meaning of full-time occupation
Occupation includes an office, employment, trade, business, profession, vocation or calling, but does not include a course of education at a school, college, university or similar institution. A beneficiary is accepted as being engaged in a full-time occupation on the last day of the income year if they were engaged in full-time employment or business:
- on the last day of the income year, or
- for three months or more during the income year (ignoring any period of full-time employment or business that was followed by full-time study) and on the last day of the income year:
- they had the intention of continuing in that, or engaging in another, full-time occupation during the whole or most of the following income year, and
- they had no intention of returning to full-time education at any time during the following income year.
A period during which a person receives youth allowance does not constitute a period of engagement in full-time occupation.
If the minor beneficiary is a prescribed person, part of the income of the trust estate might be:
- subject to the system, this is referred to as ‘eligible income’
- excluded, this part is referred to as ‘excepted income’.
Income of the trust estate to which a minor beneficiary, who is a prescribed person, is presently entitled, is eligible income except to the extent that the income can be classified as excepted income for the beneficiary. Eligible income is subject to higher tax rates, plus the Medicare levy in the hands of both the trustee and the beneficiary. The beneficiary will receive a credit for the tax paid by the trustee.
An amount included in the assessable income of a trust is excepted income only to the extent that the assessable trust income would, if derived by the minor beneficiary, be excepted income.
The amount of excepted income is based on the facts of each individual case.
Income derived by the trust is excepted income to the extent that it is:
- employment income
- income from the estate of a deceased person, either as a result of a will or an intestacy, or a court order modifying a will or the distribution of an intestate estate
- income derived from the investment of any property transferred to the trustee for the benefit of the beneficiary:
- to satisfy a claim for damages to the beneficiary for loss of parental support, for personal injury, for disease or for a physical or mental condition, or as a settlement made otherwise than by a court order, to the extent that the income is considered to be at a fair and reasonable level
- as workers compensation or compensation for criminal injury
- directly as a result of another person’s death and being, under the terms of a life assurance policy, out of a superannuation, provident, benefit or retirement fund, or from an employer of the deceased person
- out of a public fund established and maintained exclusively for the relief of persons in necessitous circumstances
- under a decree or order of dissolution or annulment of marriage having effect in Australia by the Family Law Act 1975External Link, or recognised as valid in Australia, or an order as the result of a family breakdown, as defined in section 102AGA of the ITAA 1936
- as a verifiable prize beneficially owned by the minor in a legally authorised and conducted lottery
- as an entitlement from a deceased estate
- by transfer from another person, out of property that devolved upon that other person from a deceased estate, and that person transferred it to the trustee within three years of the date of death of the deceased, subject to limitations based on what would have passed to the beneficiary under laws of intestacy
- income derived from the investment of any property representing accumulations of income not subject to the system, being from sources indicated above (including where those accumulations were made from income of a prior year) or being savings from exempt income which, if it had not been exempt, would similarly have been excepted income.
Income from an investment made from sources as described above is excepted income and is taxed at normal individual rates. If such an investment is sold or otherwise realised, and the proceeds invested in a different form that represents that earlier property, income from the new investment keeps the character of excepted income.
Exceptions are not available if an arrangement is entered into so that the income is not subject to the system.
In addition, if an arrangement is entered into between persons who are not dealing with each other at arm’s length, and this results in an amount of excepted income greater than the amount which would have resulted had the parties been dealing at arm’s length, only an amount equal to that arm’s length amount is excepted from the higher rates of tax.
Business income derived by a trust cannot be excepted income as such, but it may constitute excepted income on some other basis, for example, business income of a deceased estate.
If any part of the trust income is considered to be excepted income, see Completing the questions and consider Part B of the questions at table 10.1 following. Irrespective of these questions, you must include the income on the trust tax return so that the tax return discloses the total trust income from all sources in the normal way.
Each beneficiary’s excepted income component must bear the same percentage to the total trust income as that beneficiary’s share of net income bears to the total trust net income. If the trustee considers, for any reason, that there are circumstances that warrant a different determination, provide a statement on a separate sheet of paper setting out the facts and the reasons why. Attach the statement to the tax return and print X in the Yes box at Have you attached any ‘other attachments’? at the top of page 1 of the tax return.
Normally, employment income is derived directly by a minor and is excepted income. However, occasionally, superannuation pensions and similar payments, which are employment income, are paid to a trustee on behalf of a minor. Payments of this kind are excepted income in the hands of the trustee.
Allocation of deductions between eligible and excepted income
In determining the trust income on which a minor has to pay tax, deductions are applied against eligible assessable income of the trust as follows:
- any deductions that relate exclusively to that eligible assessable income, these are indicated on the trust tax return
- so much of any other deductions (other than apportionable deductions) as may appropriately be related to that eligible assessable income
- a proportionate share of any apportionable deductions, most commonly gifts. The formula for calculating this amount is:
E x A
E is net eligible income, before apportionable deductions
A is apportionable deductions
N isnet income, before apportionable deductions.
Changes to low income tax offset for minors
From 1 July 2011, children under 18 will no longer be able to use the low income tax offset to reduce the tax payable on their eligible income (unearned income), such as trust distributions, dividends, interest and rent.
The low income tax offset can still be used to reduce the tax payable on excepted income, such as employment income or income from a deceased person's estate.
Minors who are excepted persons will not be affected by the changes.
Completing the questions
Read all this appendix to find out whether you need to answer the questions. Do not include the questions with the trust tax return, keep them with the trust’s tax records.
The questions are divided into:
- Part A relating to the eligibility of the minor beneficiary to be treated as an excepted person, and
- Part B relating to the nature of the trust income.
Some of the questions need to be answered if the trustee claims that all or any part of the share of the trust income to which a beneficiary is presently entitled is excepted income, that is, income not subject to tax at the higher rate applicable to a minor.
The questions need not be answered by a trustee if:
- no beneficiary is under 18 years of age on the last day of the income year
- the trust is the estate of a deceased person, or
- all of the following apply:
- the share of trust income to which each resident beneficiary under 18 years of age is presently entitled does not exceed $416
- there is no non-resident beneficiary under 18 years of age on the last day of the income year
- no beneficiary is also a beneficiary in another estate that derives income
- the trustee is able to certify for each beneficiary that the beneficiary does not need to furnish an individual tax return, or if the beneficiary is required to furnish an individual tax return, the only income on that tax return, other than the share of trust income, is from salary, wages or payment for services rendered.
If the trust does not fall within the exceptions listed above, the following applies:
- Read and answer Part A for
- any resident beneficiary who is an excepted person unless the trust income to which the beneficiary is presently entitled is less than $416
- any non-resident beneficiary who is an excepted person.
- Do not answer Part B if all the beneficiaries of the trust are excepted persons and you answered Part A. Answer Part B where
- any resident minor beneficiary (being a prescribed person) is presently entitled to trust income in excess of $416
- the share of net trust income of any resident minor beneficiary, being a prescribed person, is $416 or less and the beneficiary is also the beneficiary in another trust, or
- any non-resident minor beneficiary, being a prescribed person, is presently entitled to $1 or more of trust income.
The minor beneficiary may be entitled to a release from some or all of the tax charged at the higher rate if they face serious hardship, see appendix 11.
If one or more minor beneficiaries of the trust are excepted persons or a distribution includes excepted income, attach a statement to the tax return with the information requested at Excepted net income under Other Australian income. Show the amount of excepted income at both O item 14 and Excepted net income item 14.
Read and answer these questions if it is claimed that the beneficiary was an excepted person on the last day of the income year (30 June). If the answer to any question in Part A is yes, there is no need to answer any more questions in Part A or Part B.
Yes or no
Is it claimed that the beneficiary was an excepted person on any of the following grounds?
Read these questions if it is claimed that all or part of the trust income during the income year was excepted unless all beneficiaries are excepted persons.
Amount of income
Is it claimed that any part of the trust income is excepted income because it is:
Total net excepted income
If any excepted income includes a capital gain subject to CGT, show the amount of the capital gain here.
Net excepted income here means the sum of the gross amounts of excepted income of all prescribed beneficiaries, less deductions applicable to those amounts.
Unless adjustments are made, the assessable eligible income of the prescribed beneficiaries is the difference between the total net excepted income of the trust, as calculated above, and the amount of the net income of the trust, as shown at item 26 Total net income or loss, less any share of the income in respect of which non-prescribed person beneficiaries are presently entitled and any income to which no beneficiary is presently entitled.