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Edited version of private advice

Authorisation Number: 1051629264905

Date of advice: 22 January 2020

Ruling

Subject: Testamentary trust - Excepted trust income

Question

Will the proposed trust be treated as 'a trust that resulted from a will' so that an amount included in the assessable income of the trust is excepted trust income for the purposes of subsection 102AG(2) of the Income Tax assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June XXXX

Year ending 30 June XXXX

The scheme commences on:

17 January XXXX

Relevant facts and circumstances

The deceased died on XX January XXXX leaving a will.

The executors and trustees (the Trustee) of the deceased estate (the Estate) named in the Will are the relatives of the deceased.

Probate was granted to the Estate's Trustee.

Specific clauses in the Will provided for the creation of a testamentary trust to hold certain assets for the benefit of the children of the relatives of the deceased. The Trustee of the testamentary trust would be the parents of the children.

The beneficiaries of the trust are not excepted persons.

Relevant legislative provisions

Income Tax Assessment Act 1936

-                  Division 6AA

-                  subsection 102AC(1)

-                  subsection 102AC(2)

-                  section 102AG

-                  subparagraph 102AG(2)(a)(i)

Income Tax Rates Act 1986

Reasons for decision

Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the income of certain children. Trust income that is included in assessable income under Division 6AA of ITAA 1936 is taxed at special rates as set out in the Income Tax Rates Act 1986.

However, certain trust income derived by a 'prescribed person' is excluded from the special rates where the income is 'excepted trust income' (section 102AG of the ITAA 1936).

'Excepted trust income' is included in the assessable income of the beneficiary and taxed at normal rates.

A person is a 'prescribed person' if they are less than 18 years of age on the last day of the year of income and are not an 'excepted person' (subsection 102AC(1) of the ITAA 1936).

The meaning of 'excepted person' is defined in subsection 102AC(2) of the ITAA 1936.

Where the beneficiaries of the proposed trust are less than 18 years of age and are not 'excepted persons' as defined in subsection 102AC(2) of the ITAA 1936, they are a 'prescribed person' for the purposes of Division 6AA of the ITAA 1936.

Subsection 102AG(2) of the ITAA 1936 defines excepted trust income. Relevantly, it states:

Subject to this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount:

(a)   is assessable income of a trust estate that resulted from:

(i)               a will, codicil or an order of a court that varied or modified the provisions of a will or codicil;

(ii)              .....

The meaning of the phrase 'a trust estate that resulted from a will...' is explained in Re Trustee of the Estate of the Late AW Furse No. 5 Will Trust & Others v The Commissioner of Taxation [1990] FCA 470. The Court explained 'that all that is necessary to fall within paragraph.102AG(2)(a) is that the assessable income be assessable income of the trust estate, that trust estate being one of the forms of trust estate referred to in subparagraph 102AG(2)(a)(i) or (ii); that is to say not an inter vivos trust.'

Specific clauses in the Will provided for the creation of a testamentary trust to hold certain assets for the benefit of the children of the relatives of the deceased. As such the trust will be treated as 'a trust that resulted from a will' within the meaning of subparagraph 102AG(2)(a)(i) of the ITAA 1936.

Therefore, an amount included in the assessable income of the trust is excepted trust income for the purposes of section 102AG(2) of the ITAA 1936.

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