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Edited version of private ruling
Authorisation Number: 1011796874984
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Ruling
Subject: Excepted Trust Income
Question
Is the income distributed (if any) to the minors from the investment of the trust property considered as excepted trust income under Section 102AG (2)(c)(iv) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer: Yes
Relevant facts
The trust was set up for the benefit and maintenance of children of the deceased. It took several years for the insurance company to finally pay out the life policy which the deceased owned.
As per the term of the policy, the spouse was entitled to 50% of the payout, and the children were entitled to the other 50% of the payout equally (some children are still minors as at present).
The total life policy payout was deposited to the solicitor's (who was involved in the life policy claim) trust account. In the meantime, the family has decided for the best preservation and protection of the policy payout received, as a consequence of the death of the deceased, two family trusts were created.
The children's 50% entitlement was transferred by way of gift to the second trust as trust capital, the amount was physically transferred from the solicitor's trust account directly to the trust's bank account.
As per the trust deed, all children are listed as income and capital beneficiaries of the trust and are presently entitled to any such distribution of income or appropriation of capital at the trustee's discretion for the benefit, maintenance education or advancement of the children. However, the distribution of the trust capital is restricted and subject to the children attaining certain age.
Detailed reasoning
Division 6AA of the 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.
Amounts derived by the trustee of a trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary directly as the result of the death of a person and under the terms of a policy of life insurance support is listed as excepted trust income (subparagraph 102AG(2)(c)(iv) of the ITAA 1936).
In your case, the minor 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. The trust capital in the family trust is the property transferred to the trustee for the benefit of the beneficiary directly as the result of the death of a person and under the terms of a policy insurance. The income derived from the investment of the trust property which was distributed to the minors is therefore excepted trust income under subparagraph 102AG(2)(c)(iv) of the ITAA 1936.
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