1011559938276 | Legal database

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Edited version of private ruling

Authorisation Number: 1011559938276

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Ruling

Subject: Trust income

Question:

Will the income from the Trust be considered as excepted assessable income?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

The Trust was established to provide for you as beneficiaries following the death of a family member.

You are under the age of 18.

The assets held by the trust have been wholly received from the proceeds of two life insurance policies following the death of a member of your family.

The trust deed sets out the following information:

The Trust Deed allows the Settlor at its absolute discretion to pay the death benefit of a deceased member as set out in that Rule.

The Settlor in exercising the discretion vested in it pursuant to a Rule of the Trust Deed has determined to vest and apply the Settled Sum for the benefit of a child of the Deceased member.

The Settlor on signing this Deed shall pay the Settled Sum to the Trustee to be held and used by the Trustee absolutely for the benefit of the Beneficiary in accordance with the Deed until the Beneficiary reaches 18 years of age.

The trust deed also states that when the Beneficiary reaches the age of 18, the trustee shall hold the trust fund for the beneficiary absolutely provided that if the beneficiary dies before reaching the age of 18 then the trustee shall hold the trust Fund for the estate of the Beneficiary.

The trustee resolution states that for the distribution of trust income, it was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2010 to or for the benefit of the beneficiaries in the manner and of the type allowed under the Trust Deed as follows:

Beneficiary A 50%

Beneficiary B 50%

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 Subsection 98(1)

Income Tax Assessment Act 1936 Subsection 100(1)

Income Tax Assessment Act 1936 Subsection 100(2)

Income Tax Assessment Act 1936 Subsection 102AC(1)

Income Tax Assessment Act 1936 Subsection 102AC(2)

Income Tax Assessment Act 1936 Subsection 102AE(1)

Income Tax Assessment Act 1936 Subsection 102AE(2)

Income Tax Assessment Act 1936 Paragraph 102AE(2)(a)

Income Tax Rates Act 1986 Schedule 7

Reasons for decision

Summary

The distribution of trust income to the minor beneficiaries are considered excepted assessable income as they are resulting from the investment of funds from a life assurance policy following the death of another person.

Detailed reasoning

Division 6AA of the Income Tax Assessment Act 1936 (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), who is under 18 years of age on the last day of the income year.

Based on the information submitted, the minor beneficiaries of the Trust do not qualify as excepted persons as defined in subsection 102AC(2) of the ITAA 1936, therefore they are prescribed persons for the purposes of Division 6AA of ITAA 1936.

Division 6AA of the ITAA 1936 will apply, where the eligible assessable income of a year of income of a person is so much of the assessable income of the person of the year of income as is not excepted assessable income (subsection 102AE(1) of the ITAA 1936).

Subsection 102AE(2) of the ITAA 1936 lists the various types of income of a person which are excepted assessable income. Assessable income derived by a person (referred to as the minor) which resulted from a death of another person and under the terms of a life assurance policy and out of a provident, benefit, superannuation or retirement fund, are listed as excepted assessable income (subparagraphs 102AE(2)(a)(iv) and (v) of the ITAA 1936).

In your case, the funds invested in the Trust have been distributed from a life insurance policy following the death of a family member. Therefore the distribution of income from the trust to the minor beneficiaries is excepted trust income and is not assessable under the special rules of Div 6AA of the ITAA 1936. The income is assessed as per normal tax rates set out in Schedule 7 of the Income Tax Rates Act 1986.
Additional information

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 your case, the beneficiaries have an absolute vested interest in the trust funds as the income will pass to the beneficiaries' estate if the beneficiaries die before the age of 18 years and the trustee has discretion to apply the income of the trust to the maintenance of the beneficiaries. Therefore, the beneficiaries are considered to be presently entitled to a share of the net income of the trust. Accordingly, in the absence of any other provisions, the trustee is liable to be assessed and to pay tax pursuant to section 98 of the ITAA 1936.

Where section 98 of the ITAA 1936 applies, the trustee is liable to pay tax at normal individual resident rates on behalf of the beneficiary.

In addition, subsection 100(1) of the ITAA 1936 provides that the minor beneficiary is also assessable on their share of the net trust income because the beneficiary was in receipt of income from other sources.

A credit for the tax payable by the trustee is allowed to the beneficiary under subsection 100(2) of the ITAA 1936.

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