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Edited version of private ruling
Authorisation Number: 1011749728208
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Ruling
Subject: Income - beneficial interest
Question and answer:
Is the interest income from investments that you hold on behalf of your sibling assessable to you as an individual?
No.
This ruling applies for the following periods:
Year ended 30 June 2009
Year ended 30 June 2010
Year ending 30 June 2011
Year ending 30 June 2012
The scheme commenced on:
1 July 2008
Relevant facts:
Your sibling had an accident in a previous financial year and since that time has remained in a coma and requires fulltime care.
An insurance company paid you an amount of money to hold in trust for your sibling.
You received another sum of money from public fundraising for your sibling.
The total monies received were deposited into a bank account set up in your name with the sole purpose of paying your sibling's expenses.
The money in this account has only been used for your sibling's medical expenses and ongoing care.
The investment account derived interest income.
Relevant legislative provisions:
Income Tax Assessment Act 1936 Division 6
Income Tax Assessment Act 1936 Section 98
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Ordinary Income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Ordinary income has generally been held to include interest income.
In your case, the investments you hold for your sibling earned interest income and this is assessable.
Existence of Trust
In order to determine who is liable to pay the tax on the interest income it is first necessary to determine whether a trust relationship exists.
The essential elements of a trust are:
· the trustee holds a legal or equitable interest in the trust property
· the trust property must be property capable of being held on trust (this includes a chose in action)
· one or more beneficiaries other than the trustee, and
· a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.
In your case, the property is the sum of money and it is legally held by you in a bank account in your name. This property is capable of being held in trust. The property is being held for the benefit of your sibling. You are under a personal obligation to deal with the trust property for the benefit of your sibling.
Therefore, all the elements of a trust have been met. You are the trustee holding the legal interest in the investment, which is the trust property, for the benefit of your sibling, the beneficiary.
Taxation of Trust
Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the law in regards to the taxation of trust income. Section 98 of the ITAA 1936 states that the trustee of the trust estate shall be assessed and liable to pay tax on the net income of the trust estate where the beneficiary of the trust estate is under a legal disability and presently entitled to the income.
The term "legal disability" is not defined in the legislation but it is generally accepted that it refers to a person who is unable to give a trustee an immediate valid discharge in respect of a distribution of trust income.
Your sibling is under legal disability because as they are in a coma they are unable to communicate with you as the trustee, and cannot acknowledge or demand receipt of trust income.
A beneficiary is "presently entitled" to a share of the income of the trust if the beneficiary has an indefeasible, absolutely vested, beneficial interest in possession in the trust income. A legal disability does not affect present entitlement. The interest must be such that the beneficiary would have been able to demand immediate payment of the income had there been no disability or incapacity. For a beneficiary to be presently entitled, the income must be legally available for distribution to the beneficiary.
In your case, your sibling is presently entitled to the trust income because they have a beneficial interest and would be able to demand payment if they were not incapacitated. The income is also legally available for distribution.
As you are the trustee of the trust estate and your sibling is under a legal disability and presently entitled to the income, section 98 of the ITAA 1936 applies.
Under section 98 of the ITAA 1936, the trustee is taxed at individual resident marginal tax rates and is entitled to any tax offsets to which the beneficiary is entitled.
Therefore, in your case, you are assessable as trustee on the interest income earned from the investment account, on behalf of your sibling, the beneficiary. You are not personally assessable on the interest income as an individual.