ATO Interpretative Decision
ATO ID 2002/1006
Income Tax
Trust Income - excepted trust income - trust established with proceeds of an intestate estateFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is income to which the taxpayer (a prescribed person), is presently entitled as a beneficiary under a trust established with the proceeds of an intestate estate, 'excepted trust income' under subsection 102AG(2) of the Income Tax Assessment Act 1936 (ITAA 1936) where no property devolved directly to the taxpayer under intestacy?
Decision
No. Income to which the taxpayer (a prescribed person), is presently entitled as a beneficiary under a trust established with the proceeds of an intestate estate, is not 'excepted trust income' under subsection 102AG(2) of the ITAA 1936 where no property devolved directly to the taxpayer under intestacy.
Facts
The taxpayer is under 18 years of age as at the end of the income year. They are not an 'excepted person'.
A relative of the taxpayer died intestate.
Under the laws of intestacy in the State in which the deceased was domiciled, the estate of the deceased devolved entirely to the deceased's father.
The deceased's father used part of the proceeds of the estate of the deceased to establish a trust for the taxpayer.
The trust derives income to which the taxpayer is presently entitled.
Reasons for Decision
Division 6AA of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person.
A 'prescribed person' is defined in subsection 102AC(1) of the ITAA 1936 to include any person, other than an 'excepted person' (as defined in subsection 102AC(2) of the ITAA 1936), under 18 years of age at the end of the income year.
The taxpayer is a 'prescribed person' for the purposes of Division 6AA of the ITAA 1936.
Division 6AA of the ITAA 1936 will apply, where the beneficiary of a trust is a 'prescribed person', to so much of the beneficiary's share of the net income of the trust that is not 'excepted trust income' (subsection 102AG(1) of the ITAA 1936).
Subsection 102AG(2) of the ITAA 1936 lists the various types of income of a trust estate which are 'excepted trust income' in relation to the beneficiary of the trust estate. Specifically, income of a trust estate is 'excepted trust income' where the income was derived from property transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person from the estate of a deceased person (subparagraph 102AG(2)(d)(ii) of the ITAA 1936).
However, subsection 102AG(7) of the ITAA 1936 restricts the amount of income which will be treated as 'excepted trust income' to the amount that in the opinion of the Commissioner would have devolved directly upon the beneficiary if the deceased had died intestate.
In this case, the deceased did die intestate and under the relevant laws of intestacy no property devolved directly to the taxpayer. Therefore as a result of the operation of subsection 102AG(7) of the ITAA 1936 none of the income can be treated as 'excepted trust income'.
Accordingly, the income to which the taxpayer (a prescribed person) is presently entitled as a beneficiary of the trust, is not 'excepted trust income' under subsection 102AG(2) of the ITAA 1936. The special rates of tax under Division 6AA of the ITAA 1936 will therefore apply to the income.
Date of decision: 10 October 2002Year of income: Year ending 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
Division 6AA
subsection 102AC(1)
subsection 102AC(2)
subsection 102AG(1)
subsection 102AG(2)
subparagraph 102AG(2)(d)(ii)
subsection 102AG(7)
Keywords
Children's income
Minor beneficiaries
Deceased estates
Trust beneficiaries
Trustees
Prescribed person issues
Date reviewed: 11 November 2016
ISSN: 1445-2782