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Ruling

Subject: Trust income

Question 1:

1. Where a distribution is made to the beneficiary, will it be 'excepted assessable income' for the purposes of section 102AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes.

Question 2:

2. Will the trustees of the trust be taxed under section 99 of the ITAA 1936 in relation to the undistributed income of the trust?

Answer:

No.

Question 3:

3. Will the trustees of the trust be taxed under section 98 of the ITAA 1936 in relation to the undistributed income of the trust?

Answer:

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2010

Relevant facts

The trust was created by the Trustee of a Superannuation Plan. The trust was declared in the 2006 financial year.

The trust was created for the purposes of providing a death benefit for the beneficiary, as he/she was a minor at the time of receiving the death benefit in relation to his/her late parent's Superannuation plan. The parent died intestate.

The beneficiary was born in the mid 1990's.

The trust deed provides that:

· the beneficiary is not entitled to the trust funds until he/she attains the age of eighteen years

· until the beneficiary attains the age of eighteen years, the trustees may pay or apply any amount of the income or capital of the trust for the maintenance, education, advancement or benefit of the beneficiary; and

· if the beneficiary dies before attaining the age of eighteen years, the trust fund passes to his/her estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 - Section 99.

Income Tax Assessment Act 1936 - Section 98.

Income Tax Assessment Act 1936 - Section 97.

Income Tax Assessment Act 1936 - Section 99A.

Income Tax Assessment Act 1936 - Section 101.

Income Tax Assessment Act 1936 - Section 102AC.

Income Tax Assessment Act 1936 - Section 102AG.

Reasons for decision

Excepted assessable income

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

In this case, the beneficiary is a minor, under 18 years of age, and is a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936.

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) of the ITAA 1936). 

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, in relation to the estate of a deceased person, of the provisions of the law relating 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). 

In this case, the trust was created to providing a death benefit for the beneficiary in relation to his late parent's Superannuation plan when they died intestate.

Any distribution to the minor beneficiary as the result of the investment of these funds will be considered excepted assessable income under subsection 102AE(2) of the ITAA 1936.

Taxation of trust income

The taxation of the net income of a trust is determined under the following sections of the ITAA 1936:

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

· Section 98 applies where a beneficiary is presently entitled but is under a legal disability; and

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

The beneficiary, in this case, is under a legal disability as he/she is under 18 years of age.

Present 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 and further discussed in Taxation Ruling IT 319. In particular, in Taylor v. FCT (1970) 119 CLR 444; 1 ATR 582; 44 ALJR 148; 70 ATC 4026 (Taylor's Case) the meaning of present entitlement was considered for a beneficiary who was under a legal disability. Under the terms of the trust settlement in Taylor's case, the trust funds were to be used for the beneficiary's maintenance and education. Any excess income was to be accumulated and invested for the beneficiary until he/she attained 21 years of age or, if the beneficiary died before then, the funds would pass to the beneficiary's estate. In the relevant year the trustees did not exercise their discretion to pay out any part of the trust income and the whole amount was accumulated within the trust.

The court found that the beneficiary was presently entitled to trust income even though the beneficiary was under a legal disability because:

· the beneficiary had an absolutely vested interest in the accumulated income. That is, the beneficiary's interest was absolutely vested because the income passed to the beneficiary's estate if the beneficiary died before attaining 21 years of age and as such was indefeasible.

· the beneficiary would have succeeded in an action to recover the income from the trustees had it not been for the legal disability.

For a beneficiary to be presently entitled, therefore, they must have an absolute and indefeasible vested interest in the trust income. Where a beneficiary's interest in the trust income is contingent they will not be presently entitled.

Where a trustee has discretion to pay or apply income of a trust to or for the benefit of a specified beneficiary (for example, by using the income to pay the beneficiaries school fees), section 101 of the ITAA 1936 deems a beneficiary to be presently entitled to the amount paid to them or applied for their benefit.

In this case, the beneficiary has an absolutely vested interest in the trust funds as the income will pass to the beneficiary's estate if the beneficiary dies before the age of 18 years and the trustee has the discretion to apply the income of the trust to the maintenance of the beneficiary. Therefore, the beneficiary is considered to be presently entitled to a share of the net income of the trust.

Subsection 98(1) of the ITAA 1936 applies to assess the trustee on a beneficiary's share of income where a beneficiary is presently entitled and is under a legal disability.

In this case, the trustees shall be assessed and liable to pay tax on the net income of the trust, pursuant to section 98 of the ITAA 1936, as if it were the income of an individual at normal individual resident rates on behalf of the beneficiary.