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Edited version of private advice
Authorisation Number: 1012653223282
Ruling
Subject: Excepted income of a minor
Question
Will any income received from the investment of monies ultimately left to your two minor children in the will of the deceased be 'excepted assessable income' for the purposes of section 102AE of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer:
Yes.
This ruling applies for the following period(s)
Year ended 30 June 2014
Year ending 30 June 2015
The scheme commences on
1 July 2013
Relevant facts and circumstances
The deceased passed away in the 2013-14 after a short illness.
In the months before his/her passing, the deceased was hospitalised and was unable to make financial or estate planning decisions.
The deceased's will was executed several years earlier along with his/her spouse. The wills were simple, with each leaving 100% of their estate to the other, and no provision was made for their children, unless both were deceased.
The deceased held three super funds at the time of death. All funds had binding nominations of beneficiary in favour of his/her spouse. However, the trustee of one of the super funds has accepted a request from the spouse of the deceased to make payment in favour of deceased's Estate, with the children to become the ultimate beneficiaries.
Apart from this, the deceased's estate contained very little, with most other financial assets held in joint names, or other super proceeds which bypassed the estate.
The proceeds received from insurance policy claims as a result of his/her illness meant that the deceased's financial holdings at the time of death were substantially larger than anticipated at the time his/her will was drafted.
The spouse has received legal advice that if he/she lodges a Deed of Disclaimer, to disclaim his/her entire interest in the estate, the entitlement to the estate will result in the funds being held in trust for the children.
The spouse may enter into a new relationship in the future and wants to protect these funds for the children.
Relevant legislative provisions
Income Tax Assessment Act 1936 - Division 6AA
Income Tax Assessment Act 1936 - Section 102AC
Income Tax Assessment Act 1936 - Section 102AE
Reasons for decision
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 children are both minors, under 18 years of age, and a prescribed persons for the purposes of subsection 102AC(1) of the ITAA 1936.
As a 'prescribed person', Division 6AA of the ITAA 1936 will apply to so much of their assessable income that is not excepted income (subsection 102AE(1) of the ITAA 1936).
Subsection 102AE(2) of the ITAA 1936 lists the various types of assessable income of a minor which is excepted assessable income. Under this subsection, assessable income derived by a minor from the investment of any property that devolved upon the minor from the estate of a deceased person, is listed as excepted income. (subparagraph 102AE(2)(c)(i) of the ITAA 1936).
In this case, the children will receive an interest in the deceased's estate as a result of the spouse's disclaimer. Any interest income received from of the investment of these funds will be considered excepted assessable income under subsection 102AE(2) of the ITAA 1936. Therefore, Division 6AA of the ITAA 1936 will not apply to the interest income and it will be taxed at ordinary marginal (adult) rates.
We have not fully considered the application of Part IVA of the Income Tax Assessment Act 1936 to the arrangement as you asked us only to rule on the section 102AE aspect.
Part IVA is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies, the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.