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Edited version of your written advice

Authorisation Number: 1012978686998

Date of advice: 1 March 2016

Ruling

Subject: Trust income of minors

Question 1

Will income distributed from Trust B to minors be assessed at adult marginal tax rates?

Answer

No

Question 2

Will distributed income be excepted trust income under subsection 102AG(2) Income Tax Assessment Act 1936?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2017

Income year ending 30 June 2018

Income year ending 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Taxpayer A passed away.

The will of the late Taxpayer A (the Will) was signed in XXXX.

Clause 3 of the Will provides that the whole of the estate be given to Taxpayer B as Trustee of Trust A.

Clause 3 further provides that a separate trust be established to be known as Trust B. No further information is provided in the Will regarding Trust B.

Taxpayer B is the trustee of Trust A.

The beneficiaries of Trust A are:

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 Section 102AC

Income Tax Assessment Act 1936 Section 102AG

Reasons for decision

Question 1

Will income distributed from Trust B to minors be assessed at adult marginal tax rates?

Division 6AA, Part III of the Income Tax Assessment Act 1936 (ITAA 1936) operates to tax certain income derived by minors at penalty rates.

A minor will be a prescribed person for the purposes of Division 6AA if, in relation to a year of income, they are:

Excepted persons are defined in subsection 102AC(2) ITAA 1936. From the information given, neither of the minors in this case will be excepted persons for the purposes of Division 6AA and will be prescribed persons.

Section 102AG ITAA 1936 specifies the circumstances in which Division 6AA will apply to trust income. Specifically, where a beneficiary of a trust estate is a prescribed person, Division 6AA will apply to so much of the beneficiary's share of the net income of the trust estate as, in the opinion of the Commissioner, is attributable to the assessable income of the trust estate that is not, in relation to the beneficiary, excepted trust income.

Subsection 102AG(2) ITAA 1936 specifies the types of trust income that will be 'excepted trust income'. In particular, subparagraph 102AG(2)(a)(i) provides that 'excepted trust income' includes an amount included in the assessable income of a trust estate to the extent to which the amount resulted from a will.

Taxpayer A's Will provides that the whole of the estate be given to Taxpayer B as Trustee of Trust A to be held with the same powers and discretions as contained in the Trust Deed. Trust income of Trust B distributed to minors will be income to which Division 6AA applies as the income will not be income given to the Trust under the Will.

Question 2

Will distributed income be excepted trust income under subsection 102AG(2) Income Tax assessment Act 1936?

As set out above, excepted trust income under subsection 102AG(2) ITAA 1936 includes an amount included in the assessable income of a trust estate to the extent to which the amount resulted from a will.

In this case under the Will, the whole of the estate is given to the Trustee of Trust A. Any funds distributed to Trust B from Trust A will be a distribution from Trust A and will not be excepted trust income under subsection 102AG(2).

The clause in the Will does not specify the distribution of assets to the minor beneficiaries through Trust B.

Summary

Income distributed by Trust B will be income to which Division 6AA applies and the minors will not be assessed at adult marginal tax rates.

Income distributed by Trust B would not be excepted trust income under subsection 102AG(2).

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