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Authorisation Number: 1012023622102

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Ruling

Subject: Deceased estate

1. Is your child (a minor) under a legal disability?

Yes

2. Will the income from the Estate to which your child is presently entitled, be excepted income, and taxed at marginal rates?

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are the trustee for your late spouse's estate.

Your spouse passed away in 20XX. They passed away intestate, leaving behind a spouse (yourself) and a young child under the age of 18.

Your late spouse's estate has not yet been fully administered.

The estate consists of two properties, Property A and Property B. Property B was your spouse's main residence and Property A was used to produce income. Now both properties generate income.

According to the Administration Act (1903), you are entitled to the first $50,000 plus one half of the estate. Your child is entitled to the remaining half when they reach the age of 18.

You have advised that you use the net trust income which your child is entitled to receive, for their education and maintenance.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA.

Income Tax Assessment Act 1936 Section 102AC.

Income Tax Assessment Act 1936 Section 102AE.

Income Tax Assessment Act 1936 Section 102AG.

Income Tax Assessment Act 1936 Section 95.

Income Tax Assessment Act 1936 Section 97.

Income Tax Assessment Act 1936 Section 98.

Reasons for decision

Liability for taxation on net income of trust

The liability to taxation on the net income of a trust is determined under the following sections of the Income Tax Assessment Act 1936 (ITAA 1936):

o section 97 applies where a beneficiary is presently entitled to a share of the net income and is not under a legal disability;

o sections 98 applies where a beneficiary is presently entitled but is under a legal disability or is a non-resident; and

o sections 99A and 99 apply where there is an absence of present entitlement of the beneficiary to all or some of the net income of a trust estate.

Legal disability

A beneficiary will be under a legal disability if they are not legally competent to give the trustee an immediate valid discharge in respect of the trust income.

Generally, a beneficiary is under a legal disability if they are a minor at general law, bankrupt or insane. Under the Age of Majority Act of each state, the age at which a minor will achieve legal competence is 18 years of age.

In your case as your child is under the age of 18, they are a minor and hence under a legal disability.

Presentment entitlement

There is no definition of the term 'presently entitled' in the income tax legislation; therefore, it is necessary to look at the meaning given to the term by the courts.

If a trustee has the discretion to pay or apply trust income to any beneficiary, and the trustee exercises that discretion to pay or apply on behalf of a beneficiary, then that beneficiary is deemed to be presently entitled to that income.

In your case you have advised that you use the funds for your child's education and maintenance and thus the child is presently entitled to that income.

Division 6AA

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), under 18 years of age at the end of the income year.

Your child is a 'prescribed person' for the purposes of Div 6AA of the ITAA 1936.

Division 6AA of the ITAA 1936 will apply, where the beneficiary of a trust is a prescribed person, 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).

Excepted income

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 a trust which resulted from an intestacy or an order of a court in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate, is listed as 'excepted trust income' (subparagraph 102AG(2)(a)(ii) of the ITAA 1936).

Therefore, the net income of the estate to which your child is presently entitled is 'excepted trust income' under subsection 102AG(2) of the ITAA 1936. This is based on the fact that the property devolved directly to your child under intestacy. Division 6AA of the ITAA 1936 does not apply.

Taxation of trust income

Subsection 98(1) of the ITAA 1936 provides that where a beneficiary who is under a legal disability is presently entitled to a share of trust income, the trustee is assessed and liable to pay tax on that share. 

Where a beneficiary is less than 18 years at the end of the taxation year, it is considered that they have been under a legal disability for that taxation year. As previously mentioned, your child is under a legal disability as they are under 18 years of age.

A beneficiary is presently entitled to the net income of the trust where that beneficiary has an absolute and indefeasible vested interest in the trust income (Taylor v. Federal Commissioner of Taxation (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582).

In your case you have advised that your child is presently entitled to a distribution of income from the estate which owns two dwellings. Accordingly, the trust is liable to be assessed and to pay tax pursuant to section 98 of the ITAA 1936 while your child is under 18 at the end of the income year.

When section 98 of the ITAA 1936 applies, the trustee is liable to pay tax at normal individual resident rates on the beneficiary's behalf. That is, the tax free threshold for excepted net income for a prescribed person is $6,000 for the 2010-11 and 2011-12 income years.

Where a trustee is assessed under subsection 98(1) of the ITAA 1936 and a beneficiary receives no other income apart from their share of trust income, the beneficiary is generally not required to lodge a personal income tax return as the trustee will pay tax on their behalf.

Section 98 of the ITAA 1936 - resident rates of tax

If Division 6AA does not apply, the following rates of tax for the year ending 30 June 20012 are used where a trustee is assessed under section 98 of the ITAA 1936:

Tax rates 2011-12

The following rates for 2011-12 apply from 1 July 2011.