Edited version of private advice

Authorisation Number: 1051727712544

Date of advice: 28 July 2020

Ruling

Subject: Trusts - child maintenance trust - excepted trust income

Question

Will income from the child maintenance trust (CMT) distributed to the children be excepted trust income under subsection 102AG(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes, provided that neither subsection 102AG(3) or 102AG(4) of the ITAA 1936 apply to any transactions, agreements or arrangements entered into during the period this ruling applies to.

This ruling applies for the following periods

Year ending 30 June 2021 to year ending 30 June 2025

The scheme commenced on

1 July 2019

Relevant facts and circumstances

The parents were married and are now divorced.

There is no reasonable likelihood of cohabitation being resumed.

They have two children (the children) who are minors.

The parents entered into a Financial Agreement pursuant to section 90C of the Family Law Act 1975 (CTH).

The CMT was constituted by Deed, as per the Financial Agreement, for the benefit of the children until they attain the age of 18.

The Trustee amended the Trust Deed.

Relevantly the Trust Deed post amendment reflects:

·        the purpose of the CMT is to provide for the maintenance, support and benefit of the children as a result of family breakdown

·        the children are the only Primary Beneficiaries

·        the income of the CMT can only be accumulated for, or distributed to or for, the benefit of the children, and

·        property transferred to the CMT for the benefit of each of the children as a result of the family breakdown will be held exclusively for each of the children and can be distributed to only that child during or at the end of the trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 subsection 102AC(1)

Income Tax Assessment Act 1936 subsection 102AC(2)

Income Tax Assessment Act 1936 section 102AG(1)

Income Tax Assessment Act 1936 subsection 102AG(2)

Income Tax Assessment Act 1936 subparagraph 102AG(2)(c)(viii)

Income Tax Assessment Act 1936 subsection 102AG(2A)

Income Tax Assessment Act 1936 subsection 102AG(3)

Income Tax Assessment Act 1936 subsection 102AG(4)

Reasons for decision

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

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)).

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 a trust estate. Relevantly for this ruling, 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 is 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)).

The Commissioner has set out his view of the requirements for a child maintenance trust to be productive of excepted trust income in Taxation Ruling 98/4 Income tax: child maintenance trust arrangements.

Subparagraph 102AG(2)(c)(viii) of the ITAA 1936 does not apply to except income from the investment of property transferred to a trustee for the benefit of a beneficiary unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as a trustee) when the trust ends (subsection 102AG(2A)). Alternatively, the property should pass to the beneficiary's estate should the beneficiary die before the end of the trust.

Where any parties to an act or transaction directly or indirectly connected to the derivation of the excepted trust income are not dealing with each other at arm's length, subsection 102AG(3) of the ITAA 1936 will apply. This subsection will reduce the excepted trust income of the CMT to so much (if any) of that income as would have been derived had the parties been dealing on an arm's length basis.

Subsection 102AG(4) of the ITAA 1936 provides that assessable income derived by a trustee is not excepted income if it results, directly or indirectly, under or as a result of an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that that assessable income would be excepted trust income. However, if the purpose of deriving excepted trust income is no more than merely incidental to setting up legitimate arrangements to satisfy an obligation to provide for the maintenance of a child, then the purpose is disregarded and the income may still be excepted (subsection 102AG(5)).

Application to your circumstances

The CMT will satisfy the conditions set out in subparagraph 102AG(2)(c)(viii) and subsection 102AG(2A) of the ITAA 1936 for the following reasons:

·        the children are prescribed persons, and

·        under the amended Trust Deed:

˗        the purpose of the CMT is to provide for the maintenance, support and benefit of the children as a result of family breakdown

˗        the children are the only Primary beneficiaries of the trust

˗        the income of the trust can only be accumulated for, or distributed to or for, the benefit of the children, and

˗        property transferred to the trust for the benefit of each of the children as a result of the family breakdown will be held exclusively for each of the children and can be distributed to only that child during or at the end of the trust.

As the CMT satisfies the conditions set out in subparagraph 102AG(2)(c)(viii) and subsection 102AG(2A) of the ITAA 1936, the income derived from the investment of the property transferred to the trust for the benefit of each child due to the family breakdown will be excepted trust income where that income is distributed to either of the children unless the anti-avoidance provisions in subsections 102AG(3) or 102AG(4) apply.

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