Edited version of administratively binding advice

Authorisation Number: 1012521597580

Advice

Subject: Taxation rates for trust distributions to a minor

Question 1

Will the assessable income derived by the proposed Trust, be treated as 'excepted trust income' under paragraph 102AG(2)(d)(i) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will income of the Trust distributed to a beneficiary be assessed under section 98 of the ITAA 1936 at the individual marginal rates of tax?

Answer

Yes.

This written binding advice applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2012

Relevant facts

The financial guardian of the minor is the proposed trustee of the trust.

The minor is an orphan and only child of the deceased.

Their parent died intestate, leaving a sum of money. The financial guardian has the money in a bank account in their name on behalf of and as trustee for the minor. It is the intention to transfer the property to the proposed discretionary trust and it will be invested by the trustee of the trust.

A draft of the proposed trust deed is provided. The minor is the only listed 'Specified Beneficiary'.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 102AC

Income Tax Assessment Act 1936 Subsection 102AC(2)

Income Tax Assessment Act 1936 Subsection 102AG(2)

Income Tax Assessment Act 1936 Subparagraph 102AG(2)(a)(ii)

Income Tax Assessment Act 1936 Subparagraph 102AG(2)(d)(i)

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

Income Tax Assessment Act 1936 Subsection 102AG(3)

Income Tax Assessment Act 1936 Subsection 102AG(4)

Income Tax Assessment Act 1936 Subsection 102AG(8)

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Application of Division 6AA of the ITAA 1936

Division 6AA of the ITAA 1936 taxes income of certain minors at higher rates, subject to any exceptions applying. The application of the Division to trust income is set out in subsection 102AG(1) of the ITAA 1936.

The minor will be a 'prescribed person' (as defined in section 102AC of the ITAA 1936) in relation to the relevant years, as they will be under the age of 18 and will not be an 'excepted person' as defined in subsection 102AC(2) of the ITAA 1936.

Subsection 102AG(2) of the ITAA 1936 sets out the situations where an amount in the assessable income of the trust estate is 'excepted trust income' in relation to the beneficiary of the trust estate.

The minor's parent died intestate and is the only child and beneficiary of the estate. The money has passed from the deceased estate and held in a bank account with the financial guardian as trustee for the minor. Sub-paragraph 102AG(2)(a)(ii) of the ITAA 1936 would mean that the interest income derived in this 'trust' would be treated as excepted trust income in relation to the minor, who would be presently entitled to this income.

It is planned to transfer the money from the bank account to a discretionary trust for which the minor is a specified beneficiary. A proposed trust deed has been supplied. The money is to be invested by the trustee of this trust for the benefit of the minor who is the 'Specified Beneficiary'.

Sub-paragraph 102AG(2)(d)(i) of the ITAA 1936 would mean that the investment income derived in this trust would be treated as excepted trust income in relation to the minor, who would be presently entitled to any income distributed to them by the trustee. The money invested in this trust had devolved for the minor's benefit from the deceased estate of their parent.

Subsection 102AG(2A) of the ITAA 1936, which stipulates that under the terms of the trust, the beneficiary must acquire the trust property when the trust ends does not apply in this situation. It only applies to paragraph (2)(c) and subparagraph (2)(d)(ii). There is nothing in the facts to indicate that subsections 102AG(3) or 102AG(4) of the ITAA 1936 would apply.

Subsection 102AG(8) of the ITAA 1936 will have application as the property (money) will be transferred to a discretionary trust. It provides that, for the purposes of section 102AG, where any property is transferred to the trustee and the trustee has a discretion to pay or apply the income derived from the property to or for the benefit of a specified beneficiary or beneficiaries included in a specified class of beneficiaries, the property is to be taken to have been transferred to the trustee for the benefit of each of those specified beneficiaries, or for each of the beneficiaries in that specified class of beneficiaries, as the case may be.

It is arguable that subsection 102AG(8) of the ITAA 1936 would have no application where property has devolved upon the trustee of a discretionary trust. There does not appear to be any detrimental affect of the subsection in this case.

Also, amounts which are included in the assessable income of the trust estate is excepted trust income in relation to the minor, to the extent that the amount is derived from the investment of the accumulations of assessable income that was treated as excepted trust income (subparagraph 102AG(2)(e)(i) of the ITAA 1936)

Therefore the assessable income that is derived by the trust from the investment of the property from the deceased estate and distributed to the minor will be treated as 'excepted trust income' in the relevant years. The income that is distributed to the minor will be assessed under section 98 of the ITAA 1936 at the individual marginal rates of tax for these years.