1011647200581 | Legal database

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Edited version of private ruling

Authorisation Number: 1011647200581

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Ruling

Subject: Trust - deceased estate - minor

1. Is the interest income from the trust regarded as excepted trust income?

Yes.

2. Does the trust need to lodge a trust tax return when the excepted trust income is less than $6,000?

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

Relevant facts

You are the trustee for a trust.

The beneficiary is less than 18 years old.

The Will was challenged.

Following the court decision, a trust fund for the beneficiary was established with a commencing capital sum. The money was an adjustment of the bequests made in the will and is part of the proceeds of the deceased estate.

The trust is to exist until the beneficiary turns 21 years of age when the capital of the trust will vest in him.

Up to that time, the beneficiary's mother receives some of the income annually until the beneficiary turns 18. When the beneficiary is 18, he then takes that income until he turns 21.

The beneficiary is a prescribed person for the period of the private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6AA.

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)(a).

Income Tax Assessment Act 1936 Subsection 98(1).

Income Tax Assessment Act 1936 Section 101.

Reasons for Decision

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), under 18 years of age at the end of the income year.

Division 6AA of the ITAA 1936 will apply, where the beneficiary of a trust is a 'prescribed person', to so much of the beneficiary's share of the net income of the trust that is not 'excepted trust income' (subsection 102AG(1) of the ITAA 1936).

Subsection 102AG(2) of the ITAA 1936 lists the various types of income of a trust estate which are 'excepted trust income' in relation to the beneficiary of the trust estate. Assessable income derived by a trust which resulted from a will, codicil or on order of a court that varied or modified the provisions of a will or codicil, is listed as 'excepted trust income' (subparagraph 102AG(2)(a)(i) of the ITAA 1936).

In your case, you are a trustee of a trust where monies from a deceased estate have been invested on behalf of the beneficiary. The beneficiary of the trust is a 'prescribed person' for the purposes of Division 6AA of the ITAA 1936. The interest income from the trust is 'excepted trust income' under subsection 102AG(2) of the ITAA 1936. Therefore, Division 6AA of the ITAA 1936 does not apply.

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 trustee has discretion to pay or apply income of a trust estate to or for the benefit of a specified beneficiary (for example, by using the income to pay the beneficiary's 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.

In this case, some of the trust's income is applied towards the maintenance of the beneficiary. Therefore, under section 101 of the ITAA 1936, the beneficiary is deemed to be presently entitled to the income applied for his benefit.

The beneficiary is under a legal disability as he is less than 18 years of age.

Accordingly, in the absence of any other provisions, the trust 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. All trusts in receipt of income are required to lodge an income tax return. The tax free threshold for excepted net income for a prescribed person is $6,000. Where the excepted trust income is less than $6,000, there is no tax liability.

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