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Edited version of private advice
Authorisation Number: 1012636029719
Ruling
Subject: Children's trust income from deceased estate
Question
Will you, the trustee, be assessable on income earned by your trust estate under section 98 of the Income Tax Assessment Act 1936 (ITAA 1936) at the same rate as an individual resident taxpayer?
Answer: Yes
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The deceased died during the year ended 30 June 2011. Their will states the trustees shall hold trust property for their grandchildren towards their education needs and until they reach the age of 18. The will explicitly states the above children are "absolutely" entitled to their share of the estate.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 98
Income Tax Assessment Act 1936 Section 102AG
Income Tax Rates Act 1986 Section 12
Reasons for decision
Subsection 98(1) of the ITAA 1936 assesses the trustee on behalf of the beneficiary where the beneficiary is presently entitled and under a legal disability.
In Taxation Ruling IT 319, the Commissioner accepted the decision in the High Court of Australia case of Taylor v Deputy Federal Commissioner of Taxation (1969) 123 CLR 206 (Taylor), where it was decided the beneficiary, a minor, was presently entitled to income arising in the subject year under a trust for accumulation that directed the trust income to be accumulated and paid to the beneficiary when he reached 21 years of age or to pass to his personal representatives as part of his estate in the event of his earlier death. In this case, his Honour said that "presently entitled" refers to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to demand payment of it if he were not under a disability.
Division 6AA of Part III of the ITAA 1936 applies to tax the income of minors at higher rates, except where the minor is an 'excepted person' or receives 'excepted assessable income'.
Subsection 102AG(2) in Division 6AA of Part III of the ITAA 1936 is about 'excepted trust income' and provides assessable income of a trust estate (for the benefit of minors) that resulted directly from a will or directly from the estate of a deceased person is not to be taxed at a higher rate.
Where a trustee of a trust estate is liable to be assessed to pay tax under section 98 and where Division 6AA of Part III of that Act also applies, Schedule 12 of the Income Tax Rates Act 1986 provides the "eligible part" (i.e., the excepted trust income) is taxed as if one were an individual.
In your case, your facts are the same as those in IT 319. It follows you, as trustee, will be assessed on income earned by your trust estate (on behalf of the relevant minor beneficiaries) under section 98 of the ITAA 1936. In addition, because the relevant trust income resulted directly from the will or the estate of a deceased person, it will be excepted trust income under section 102AG of the ITAA 1936. As a result, you, as trustee, will be assessable at the same rate as an individual resident taxpayer.