ATO Interpretative Decision

ATO ID 2004/264

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

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 income, derived from life insurance policy proceeds that devolved to the trust, that were applied to a beneficiary during the income year?

Decision

Yes. The trustee is liable to be assessed under Division 6AA of the ITAA 1936 in respect of income, derived from life insurance proceeds that devolved to the trust, that were applied to a beneficiary during the income year, as the income is not excepted trust income.

Facts

The taxpayer is the trustee of a trust that 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 discretion to accumulate income or to apply some or all of it for the benefit of the beneficiaries. The trustee applied the income derived for the year towards the maintenance of the beneficiaries.

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 the 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. Therefore, the trustee is liable to be assessed under Division 6AA of the ITAA 1936 if:

A.

the trustee is liable to be assessed and to pay tax in pursuance of section 98 of the ITAA 1936 in respect of each beneficiary's share of the net income of the trust; and

B.

each beneficiary's share of the net income of the trust is not excepted trust income

A. 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.

Section 101 provides that where a trustee has discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries (for example, by paying using the income to pay the beneficiaries' school fees), the beneficiary in whose favour the trustee exercises the trustee's discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary's benefit by the trustee in the exercise of that discretion. In the relevant income year, the trustee applied the income derived for the year towards the maintenance of the beneficiaries. Therefore, under section 101 of the ITAA 1936, each beneficiary is deemed to be presently entitled to the amount of income applied for their benefit.

All beneficiaries are under a legal disability as they are all less than 18 years of age in the relevant year of income.

Accordingly, in the absence of any other provisions, the trust is liable to be assessed and to pay tax pursuance to section 98 of the ITAA 1936.

B. Under subsection 102AG(2A) of the ITAA 1936, paragraph 102AG(2)(c) of the ITAA 1936 does not apply to make the income derived by the trustee 'excepted assessable income' unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as a trustee) when the trust ends.

Subsection 102AG(2A) of the ITAA 1936 was considered by the Commissioner in Taxation Ruling TR 98/4. Paragraph 33 states that subsection 102AG(2A) of the ITAA 1936 requires that the child must, under the terms of the trust, acquire the trust property other than as a trustee when the trust ends. Moreover, the property must pass into the child's estate, should the child die before the trust ends. Accordingly, it is considered that subsection 102AG(2A) of the ITAA 1936 cannot be satisfied where the terms of the trust allow a child's proportional interest in the trust fund to devolve to another beneficiary should the child fail to attain the age of 18.

As subsection 102AG(2A) of the ITAA 1936 is not satisfied, the income derived by the trustee from proceeds of the life insurance cannot be 'excepted trust income' for the purposes of subparagraph 102AG(2)(c)(iv) of the ITAA 1936. Therefore, the trustee is liable to be assessed under Division 6AA of the ITAA 1936 in respect of income derived from life insurance proceeds that devolved to the trust.

Amendment History

Year of income:  30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Division 6AA
   section 98
   subsection 98(1)
   section 101
   paragraph 102AA(3)(b)
   subsection 102AC(2)
   subsection 102AG(1)
   subsection 102AG(2)
   paragraph 102AG(2)(c)
   subparagraph 102AG(2)(c)(iv)
   subsection 102AG(2A)

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/4

Related ATO Interpretative Decisions
ATO ID 2004/263

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

Keywords
Trusts
Trust beneficiaries
Minor beneficiaries
Trust income

Siebel/TDMS Reference Number:  3824436; 1-B3AUKG8

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  26 March 2004
Date reviewed:  21 March 2017

ISSN: 1445-2782