ATO Interpretative Decision

ATO ID 2004/263

Income Tax

Trust income: beneficial interest in trust property held for certain children - accumulated income
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the taxpayer, a trustee of a trust, created for the benefit of certain children who will be entitled to a proportional interest in the trust fund only if they attain 18 years of age, liable to be assessed under Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of accumulated income derived from life insurance policy proceeds that devolved to the trust?

Decision

No. The trustee is not liable to be assessed under Division 6AA of the ITAA 1936 in respect of accumulated income derived from life insurance proceeds that devolved to the trust. The trustee is liable to be assessed under section 99A or section 99 of the ITAA 1936.

Facts

The taxpayer is a trustee of a trust was created for the benefit of certain children of a deceased parent. The proceeds of a life insurance policy were paid into the trust as a result of the death of the parent. The trustee invested these proceeds and derived income.

The children will be entitled to a proportional interest in the trust fund only if they attain 18 years of age. The trust deed contains a clause that, if any child does not attain 18 years of age, that child's interest will devolve to other beneficiaries when those beneficiaries attain the age of 18.

In the relevant income year, all the children are under 18 years of age. Under the trust, the trustee has a discretion to accumulate income or to apply some or all of it for the benefit of the beneficiaries. No income was applied to any of the beneficiaries during the income year.

The beneficiaries of the trust are not 'excepted persons' as defined in subsection 102AC(2) of the ITAA 1936. As the beneficiaries are under 18 years of age, they are prescribed persons for the purposes of subsection 102AC(1) of the ITAA 1936.

Reasons for Decision

Division 6AA of the ITAA 1936 sets out special rules that apply in working out the basic income tax liability on the income of persons who are prescribed persons. A person is a prescribed person if they are not an 'excepted person' as defined by subsection 102AC(2) of the ITAA 1936 and they are under 18 years of age.

Subsection 102AG(1) of the ITAA 1936 provides that Division 6AA of the ITAA 1936 applies to 'so much of the share of the beneficiary of the net income of the trust estate of the year of income' as, in the opinion of the Commissioner, is attributable to the assessable income of a trust estate that is not, in relation to that beneficiary, excepted trust income.

Paragraph 102AA(3)(b) of the ITAA 1936 states that a reference to the 'share of a beneficiary of the net income of a trust estate' shall be read as a reference to a share of a beneficiary of the net income of a trust estate 'in respect of which the trustee of the trust estate is liable to be assessed and to pay tax in pursuance of section 98 of the ITAA 1936'.

Subsection 98(1) of the ITAA 1936 applies to assess the trustee on a beneficiary's share of income where a beneficiary is presently entitled and is under a legal disability. In this case, all the beneficiaries of the trust are under a legal disability as they are all less than 18 years of age.

A beneficiary is presently entitled to the net income of the trust where that beneficiary has an absolute and indefeasible vested interest in the trust income (Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 (Taylor's case)). The High Court held that a beneficiary that is under a legal disability has an absolute and indefeasible vested interest in the trust income, where the terms of trust specify that the accumulated income of the trust is held for the beneficiary until reaching the age of 18 or, if the beneficiary dies earlier, for their estate. However, where the terms of the trust provide for the income to go to another person in the event of the beneficiary's death before reaching the age of 18, the beneficiary is not presently entitled as the beneficiary's interest is considered contingent, and therefore defeasible.

In this case, the trust deed contains a clause that if any child does not attain 18 years of age, that child's interest will devolve to other beneficiaries when those beneficiaries attain the age of 18. In the relevant income year, all the children are under 18 years of age. Therefore, there is no beneficiary that is presently entitled in the relevant year and the trustee is not liable to be assessed and to pay tax under section 98 of the ITAA 1936. Accordingly, the trustee taxpayer is not liable to be assessed under Division 6AA of the ITAA 1936 in respect of accumulated income derived from life insurance proceeds that devolved to the trust.

As no beneficiary is presently entitled in the relevant year of income, the trustee taxpayer is liable to be assessed under section 99A of the ITAA 1936, unless the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply. If the Commissioner forms the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply, the taxpayer trustee will be assessed under section 99 of the ITAA 1936.

Date of decision:  8 December 2003

Year of income:  30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Division 6AA
   section 98
   subsection 98(1)
   section 99
   section 99A
   subsection 102AC(2)
   subsection 102AG(1)
   paragraph 102AA(3)(b)

Case References:
Taylor v. FC of T
   (1970) 119 CLR 444
   70 ATC 4026
   1 ATR 582

Related ATO Interpretative Decisions
ATO ID 2004/264

ATO Interpretative Decisions overturned by this decision
ATO ID 2001/70

Keywords
Trusts
Trust beneficiaries
Minor beneficiaries
Trust income
Present entitlement

Siebel/TDMS Reference Number:  3824436

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  26 March 2004

ISSN: 1445-2782

history
  Date: Version:
You are here 8 December 2003 Original statement
  8 August 2014 Updated statement

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