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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012997841779

Date of advice: 14 April 2016

Ruling

Subject: Excepted trust income

Question 1

Will the child maintenance trust (CMT) satisfy the conditions set out at subparagraph 102AG(2)(c)(viii) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will income from the CMT distributed to the children be excepted trust income under subsection 102AG(2) of the ITAA 1936?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2025

The scheme commences on

1 July 2016

Relevant facts and circumstances

A and B were married and had two children C and D.

A and B are now divorced and they do not expect to live together again on a genuine domestic basis.

Consent orders were made by the family court which obligated A to pay child support for both children.

A proposes the creation of a Child Maintenance Trust (CMT) for the benefit of the children.

The trustee of the trust will be an incorporated company.

A proposes to transfer cash into the CMT and that cash will be used by the trustee to invest in the purchase of units in a unit trust.

The unit trust will supply services to a business which is 50% owned by A.

Relevant legislative provisions

Division 6AA of the Income Tax Assessment Act 1936

Subsection 102AC(1) of the Income Tax Assessment Act 1936

Subsection 102AC(2) of the Income Tax Assessment Act 1936

Section 102AG of the Income Tax Assessment Act 1936

Subsection 102AG(2) of the Income Tax Assessment Act 1936

Subparagraph 102AG(2)(c)(viii) of the Income Tax Assessment Act 1936

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), who is under 18 years of age on the last day of the income year. 

In this case, both C and D are under 18 years of age, and are a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936.

Where the beneficiary of a trust is a prescribed person, Division 6AA of the ITAA 1936 will apply 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 the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary as the result of a family breakdown (subparagraph 102AG(2)(c)(viii) of the ITAA 1936).

Taxation Ruling 98/4 deals with child maintenance trusts. In particular paragraph 10 of the ruling provides income derived by the trustee of a CMT which is not excepted trust income under subparagraph 102AG(2)(c)(viii) of the ITAA 1936 in any one of these five situations:

In situation 1, income does not derive from the investment of property transferred beneficially to the child where, under terms of the trust, the child will not acquire the trust property, or will acquire it only as trustee, when the trust ends. Express provisions reinforce this rule with effect for income derived on or after 7 March 1994. Examples include cases where:

Parargraph 37 of TR 98/4 states:

In this case, as per the trust deed, the trustee has the discretion to sell the original asset, to which the beneficiary is entitled, and replace it with another asset which the beneficiary might not be entitled. Therefore, each beneficiary does not have an absolute vested interest in the property from the inception of the trust. The arrangement would fall under situation 1 of TR 98/4 as the trust property will or may (perhaps as a matter of discretion) go to someone other than the child.

Accordingly, income derived by the trustee of the CMT will not be excepted trust income under subparagraph 102AG(2)(c)(viii) of the ITAA 1936.

In this case, the trust does not meet the any of the requirements in subsection 102AG(2) of the ITAA 1936. Therefore, any income derived by the trustee of the CMT is not excepted trust income and will be taxed at the highest marginal rates.


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