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Edited version of your written advice
Authorisation Number: 1013074147004
Date of advice: 17 August 2016
Ruling
Subject: Commissioners discretion
Question 1
Will the Commissioner his exercise discretion under section 99A of the ITAA 1936 for the 2014-15 and following financial years?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on:
The scheme has commenced
Relevant facts and circumstances
The trust was established by court order in 20XX.
The trust consists of property and superannuation proceeds that were transferred to the trustee for the benefit of the minor beneficiaries as a result of the death of a family member.
The trust is a discretionary trust to which no beneficiary is presently entitled.
According to a provision in the deed, the assets will be held until the beneficiaries reach a specified age.
The applicant requests the Commissioner exercise his discretion for the trust to be taxed at progressive individual rates of tax under section 99 of the ITAA 1936.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 99.
Income Tax Assessment Act 1936 Section 99A.
Income Tax Assessment Act 1936 Section 99A(2)
Reasons for decision
Sections 99 and 99A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.
Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion not to assess a trust using section 99A.
Section 99A of the ITAA 1936 assesses the income of a trust where no beneficiary is presently entitled at the top marginal rate of tax. If the Commissioners discretion under section 99A(2) is exercised, the trust's income is taxed at a concessional rate of tax.
Subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) gives the Commissioner a discretion to assess the trustee pursuant to section 99, rather than section 99A, where the following kinds of trust estates are involved:
(1) a trust estate that resulted from a will, a codicil, an intestacy or a court order varying the provisions of a will, a codicil or the operation of the intestacy provisions
(2) bankrupt estates, or
(3) trust estates that consist of property of a kind referred to in paragraph102AG(2)(c).
Application to your circumstances
In these circumstances the trust was created by the way of a court order, accordingly the Commissioner will exercise his discretion not to assess the trust under section 99A of the ITAA 1936, choosing instead to assess the trust under section 99 of the ITAA 1936.
Further issues for you to consider
The ruling has been limited to period of five years as the Commissioners discretion is applied in the future. The Commissioner is unable to apply his discretion for an indefinite period of time because legislation and facts may change in the future.
Special rates for children
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), who is under 18 years of age on the last day of the income year.
In this case, the beneficiary is a minor, under 18 years of age, and a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936.
As a prescribed person, Division 6AA of the ITAA 1936 will apply to so much of the assessable income that is not excepted income (subsection 102AE(1) of the ITAA 1936).
Subsection 102AE(2) of the ITAA 1936 lists the various types of assessable income of a minor which is excepted assessable income. Under this subsection, assessable income derived by a minor from the investment of any property that devolved upon the minor from the estate of a deceased person, is listed as excepted income. (subparagraph 102AE(2)(c)(i) of the ITAA 1936).
In this case, any income received from of the investment of the funds and applied for the benefit of the beneficiary would be considered excepted assessable income under subsection 102AE(2) of the ITAA 1936. Therefore, Division 6AA of the ITAA 1936 would not apply and these amounts and would be taxed at ordinary marginal (adult) rates.
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