Edited version of private ruling

Authorisation Number: 1011575510510

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Ruling

Subject: Trust income

Is the income distributed to your children from the discretionary trust regarded as excepted income?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2010

Relevant facts

Your spouse died.

You have three children under 18 years of age.

You were awarded worker's compensation.

You lodged a claim for loss of income and loss of parental support.

An amount for compensation for nervous shock and an amount for compensation to relatives was paid.

The compensation money is in a family discretionary trust.

You are the director of the trustee company of this trust.

You and your children are the beneficiaries of this trust. The trust does not contain any other sources of capital.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 102AC(1).

Income Tax Assessment Act 1936 Subsection 102AC(2).

Income Tax Assessment Act 1936 Subsection 102AG(1).

Income Tax Assessment Act 1936 Subsection 102AG(2).

Income Tax Assessment Act 1936 Paragraph 102AG(2)(c).

Reasons for decision

Detailed reasoning

Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) sets out special rules that apply in working out the income tax liability on the income of persons who are prescribed persons.

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.

Your children are prescribed persons for the purposes of Division 6AA of the ITAA 1936.

Under Division 6AA of the ITAA 1936 special rates of tax and a lower tax free threshold apply to taxable income, other than excepted income, derived by a prescribed person.

Where a beneficiary of a trust estate is under the age of 18 years at the end of the year, the whole of the beneficiary's share of the net income of the trust estate is subject to Division 6AA of the ITAA 1936 unless it is 'excepted trust income' (subsection 102AG(1) of the ITAA 1936).

Subsection 102AG(2) of the ITAA 1936 lists the various types of assessable income of a trust estate which are 'excepted trust income' in relation to the beneficiary of the trust estate.

Where a person under the age of 18 is entitled to damages in respect of loss by the beneficiary of parental support, the assessable income arising from the investment of property received, including money, from the settlement of such actions is 'excepted trust income' under subparagraph 102AG(2)(c)(i) of the ITAA 1936.

Similarly, assessable trust income arising from worker's compensation is also 'excepted trust income' under subparagraph 102AG(2)(c)(ii) of the ITAA 1936.

In your case, amounts of money in the trust came from different sources.

The amount from worker's compensation is considered to be excepted trust income under subparagraph 102AG(2)(c)(ii) of the ITAA 1936.

The other amounts were paid following your claim for damages in respect of the loss of parental support. Subparagraph 102AG(2)(c)(i) of the ITAA 1936 is satisfied in relation to this amount. The income derived from this source is therefore considered to be excepted trust income.

As such, Division 6AA of the ITAA 1936 does not apply in relation to the trust distributions to your children. The income will be taxed at general tax rates.

Taxation of Trust Income

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. Where a beneficiary is less than 18 years at the end of the tax year, they are considered to be under a legal disability for that year.

Where a trustee has discretion to pay or apply income of a trust estate for the benefit of a beneficiary (for example, by paying or using the income to pay the beneficiaries' school fees), section 101 of the ITAA 1936 deems a beneficiary to be presently entitled to the amount paid to them or applied for their benefit.

Therefore, if income is distributed from the trust to your children or used for their benefit, the amounts are assessable to the trustee under subsection 98(1) of the ITAA 1936. A trust tax return will need to be lodged by the trustee.

Where a trustee is assessed under subsection 98(1) of the ITAA 1936 and a beneficiary receives no other income apart from their share of trust income, the beneficiary is not required to lodge a personal income tax return as the trustee will pay tax on their behalf.

If the beneficiary receives income from other sources, for example, salary and wage income, the beneficiary will be required to lodge an income tax return and declare all income derived for the income year, including any trust income. To prevent double taxation, subsection 100(2) of the ITAA 1936 allows a credit for tax already paid by the trustee on behalf of the beneficiary.

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