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Ruling

Subject: Assessment of income of trust under Division 6AA of the ITAA 1936

Question

Will the taxable income derived by Trust be excepted trust income for the purposes of Division 6AA of the Income Tax Assessment Act 1936?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2011.

The scheme commences on:

30 March 2011.

Relevant facts and circumstances

A person died and probate on the will was granted shortly after to the spouse, who was also executor of the will.

The certificate of probate shows the gross and net values of the estate.

The will set out the details of the beneficiaries of the estate and the apportionment of the residual estate.

The inventory of property supplied with the certificate of probate disclosed the property owned solely and jointly.

A notation to the inventory identifies a superannuation account and a life cover policy held by the deceased.

Trust Deed

The trust deed was made prior to the grant of probate, but after the death of the deceased.

The trustee is a corporate trustee.

Insurance Policy

The decease had recorded a beneficiary nomination for the insurance policy.

A schedule of benefits issued to the deceased soon after the policy was taken out advised that, if the member dies while the policy is in force, the insurer will pay the benefit to the trustee of the superannuation scheme.

The insurer paid the whole of the benefit to the surviving spouse.

The benefit was allocated 100 percent to the surviving spouse, in their capacity as the spouse of the deceased and in the status of a dependant.

Superannuation

After joining the superannuation scheme the deceased was asked to complete a "Binding death nomination form".

It nominates the spouse and sets the percentage of benefit receivable by the spouse as 100 percent.

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 99A(2)

Income Tax Assessment Act 1936, subsection 102AC(2)

Income Tax Assessment Act 1936, subsection 102AG(1)

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

Income Tax Assessment Act 1936, sub-paragraph 102AG(2)(c)(iv)

Income Tax Assessment Act 1936, sub-paragraph 102AG(2)(c)(v)

Income Tax Assessment Act 1936, paragraph 102AG(2)(d)(ii)

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

Income Tax Assessment Act 1936, subsection 102AG(7)

Subsection 359-25(4) of Schedule 1 to the Taxation Administration Act 1953.

Reasons for decision

Summary

The trust property that will generate income is sourced from two distinct types of receipts, neither of which were sourced in the estate of the deceased. The property passed directly to the beneficiary of the superannuation and insurance policies held by the deceased, in accordance with the deceased's nominations. The subsequent transfer of that property into the trust is a discretionary action made by the deceased's spouse.

We consider that the income of the Trust will not be "excepted trust income".

Distributions made to the child beneficiaries will therefore be assessed to the trustee under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

The trust property that will generate income is sourced from two distinct types of receipts - the deceased's insurance payout and the superannuation benefit - both of which were paid out to the spouse upon the death of the deceased, and under the terms of the respective policies. The spouse was nominated as a 100 percent beneficiary in both policies.

Neither of these policies were included in the estate of the deceased. The probate statement provided excludes these policies and payouts from the property for which probate was granted.

Both policies specified a sole beneficiary - the spouse - as being entitled to 100 percent of the payout. The evidence provided shows that the payments were made directly to the spouse without passing through the estate of the deceased.

The crucial issue is whether the income derived from this property will be "excepted trust income" in terms of paragraph 102AG(2)(d)(ii) of the ITAA 1936. This provision essentially states that trust income may be "excepted trust income" where the income is derived by the trustee from the investment of any property

...that was transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person from the estate of a deceased person and was so transferred within 3 years after the date of the death of the deceased person;.

In such cases, the income derived from the investment of such amount is "excepted trust income", subject to subsection 102AG(7) of the ITAA 1936.

There are two stages in this process;

(a) the devolution of property to a person (in this case, the spouse from the estate of a deceased person, and

(b) the transfer of that property from the spouse to the trustee of the trust within the statutory time frame of within three years from the date of death of the deceased.

Although a transfer of property has occurred (or may occur) from the spouse to the trustee of the trust [thereby meeting the basic requirement of stage (b)], the property so transferred to the trust did not devolve to the surviving spouse from the estate of a deceased person, as required for stage (a). Hence, the conditions of paragraph 102AG(2)(d)(ii) have not been met.

The transfer was a discretionary action of the nominated beneficiary (the surviving spouse) concerning property that was transferred to them from outside the estate; i.e., under the terms of the superannuation and insurance policies held by the deceased.

Subsection 102AG(7) of the ITAA 1936 applies to restrict the amount of income which will be treated as 'excepted trust income' to the amount that in the opinion of the Commissioner would have devolved directly upon the beneficiary if the deceased had died intestate.

The relevant laws of intestacy in the state of New South Wales are contained in the Successions Act 2006 (NSW).

Section 112 of the Successions Act 2006 applies in cases where a person dies intestate and leaves a spouse and issue and the issue are also issue of the spouse. In such cases, the spouse is entitled to the whole of the intestate estate.

Accordingly, had the deceased died intestate, section 112 of the Successions Act 2006 would apply so that the surviving spouse would have been entitled to the whole of the estate.

Therefore, the capital beneficiaries of the trust estate, being their children, would not have been entitled to any property under the relevant laws of intestacy.

Consequently, as a result of the operation of subsection 102AG(7) of the ITAA 1936, the investment earnings on the property to be contributed by the surviving spouse will not be "excepted trust income" as defined in subsection 102AG(2) of the ITAA 1936.

The trust property did not devolve upon the spouse for the benefit of the children. There is no mention of such property in the will, for the reason being that the payments were excluded from the operation of the will. Since the deceased had lodged beneficiary nominations with the trustees of the funds the amounts did not come under the control of the executor of the will.

Nor did the will set out any requirement to establish a trust in respect of the children.

Other provisions

The ruling application did not specifically raise the application of sub-paragraphs 102AG(2)(c)(iv) and 102AG(2)(c)(v) of the ITAA 1936.

Both of these sub-paragraphs apply where property is transferred to the trustee of a trust for the benefit of a beneficiary directly as a result of the death of a person and under the terms of a policy of life insurance or out of a provident, benefit, superannuation or retirement fund.

In this case, the trustee of the Trust (the spouse, in their capacity of trustee of that trust) did not directly receive this property from the insurer or fund. The property was transferred to the trustee of the Trust by the surviving spouse (in their individual capacity as the nominated beneficiary of the policies and as being beneficially entitled to those amounts). Consequently paragraph 102AG(2)(c) of the ITAA 1936 does not apply.