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Edited version of private ruling
Authorisation Number: 1011529985038
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Ruling
Subject: Minor beneficiary
1. Is your child liable to pay tax on income derived from the investment of proceeds of a deceased estate?
Yes.
2. Is income derived from the investment of proceeds of a deceased estate excepted income?
Yes.
This ruling applies for the following period:
1 July 2009 to 30 June 2014
Relevant facts:
Your child received a distribution from a deceased estate. Your child is a minor.
Your spouse is the nephew of the deceased.
A clause in the Will provides that money invested in Australia including investments and assets representing that money be gifted to the children of your spouse. The bequest was to be distributed equally if there was more than one child at the time of death.
The clause does not make provision for a testamentary trust.
The money has been placed in a bank account in your child's name.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Interest income is generally considered to be ordinary income.
Taxation Ruling IT 2486 considers the question of who should pay tax on the interest earned in a child's bank account.
IT 2486 explains that the essential question to be asked in relation to interest earned in a child's bank account is 'whose money is it?' The answer to this question is based on the specific facts of each case. If the account is made up of money the child has received as birthday or Christmas presents or pocket money, then the money in the account should be regarded as that of the child.
However, if the money really belongs to the parent, in the sense that they provided the money and may spend it as he or she likes, any interest should be included in the parent's return.
As a general rule, where the Tax Office is satisfied that the money in the account really belongs to the child, it will not insist on a strict application of the trust provisions of the Income Tax Assessment Act. Where the interest is shown in a tax return lodged by a child, a trust tax return will not be necessary.
A clause in the Will of the deceased specifies the distribution of assets to the beneficiaries. However, the clause does not contain provisions or restrictions as to the use of the funds by the beneficiary. Therefore, no trust has been established.
In these circumstances, in accordance with IT 2486, the money in the account is considered to belong to your child. Therefore, the interest income earned on this money is assessable to your child.
Tax payable by a minor
At law, a minor is a person under the age of 18, this being one form of legal disability. A minor does not have full legal competence to do all that the law requires them to do.
Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) sets out special rules that apply in working out the basic income tax liability on the income of minors.
Prescribed Person
Subsection 102AC(1) of the ITAA 1936 states that a prescribed person is any person under 18 years of age at the end of the income year, except:
a) a person who is classed as being in a full time occupation
b) an incapacitated child in respect of whom a carer allowance or a disability support pension was paid or would, but for eligibility tests, be payable, and
c) a double orphan or a permanently disabled person, provided they are not dependant on a relative for support.
Your child does not satisfy any of the exceptions, therefore they are considered to be a prescribed person.
Excepted Income
However, there are several categories of income, referred to as excepted income, which are excluded from these special rules.
Subparagraph 102AE(2)(c)(i) of the ITAA 1936 includes as 'excepted assessable income' any income received from the investment of property from a deceased estate.
In your child's case, any income earned from the investment of the distributed amount from the Will is income to which subparagraph 102AE(2)(c)(i) of the ITAA 1936 applies, and is excluded from being taxed at the special rates under Division 6AA of the ITAA 1936. Therefore, the income earned from the distributed amount will be subject to the normal taxation rates that apply to individuals resident in Australia.
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