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Edited version of private advice
Authorisation Number: 1012658482307
Ruling
Subject: Excepted trust income
Question
If the discretionary trust makes distributions to you of income derived from the investment of funds transferred from the testamentary trust, will that income be excepted trust income?
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 commenced on:
1 July 2013
Relevant facts and circumstances
You are the beneficiaries of a testamentary trust.
You are all under 18 years of age and do not fall within the definition of excepted persons.
The distributions you receive from the testamentary trust are disclosed in your respective tax returns as excepted income.
As you do not have your own separate bank accounts, the distributions paid to you from the testamentary trust are deposited into a discretionary trust.
You are all named beneficiaries of the discretionary trust, as are your parents.
To date, the only transactions to go through the discretionary trust is the receipt of the money you each received as distributions from the testamentary trust and the subsequent investment of this money.
The discretionary trust will only exist to hold the amounts received by you from the testamentary trust and the income earned from the investment of these amounts. The discretionary trust will not carry on a business or receive income from any sources other than described above.
To date, the profits of the discretionary trust have been distributed between you equally.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 100
Income Tax Assessment Act 1936 Division 6AA
Income Tax Assessment Act 1936 Section 102AC
Income Tax Assessment Act 1936 Subsection 102AA(3)
Income Tax Assessment Act 1936 Subsection 102AG(1)
Income Tax Assessment Act 1936 Subsection 102AG(2)
Income Tax Assessment Act 1936 Subparagraph 102AG(2)(a)(i)
Income Tax Assessment Act 1936 Subparagraph 102AG(2)(d)(i)
Reasons for decision
Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) applies higher rates of tax to the income of prescribed persons, subject to any exceptions applying.
You are all under the age of 18 and are not 'excepted persons' as defined subsection 102AC(2) of the ITAA 1936. Accordingly you are all 'prescribed persons' (as defined in section 102AC of the ITAA 1936).
Where a prescribed person is a beneficiary of a trust and they are assessed on an amount under section 97 or 100 of the ITAA 1936, Division 6AA of the ITAA 1936 will apply to that beneficiary's share of the net income of the trust, unless the income is 'excepted trust income' (subsection 102AA(3) and subsection 102AG(1) of the ITAA 1997).
Where a beneficiary is under a legal disability, they are required to include their share of the net income of the trust estate in their assessable income under section 100 of the ITAA 1936 where:
• they are a beneficiary of more than one trust; and/or
• they derive income from other sources.
In this case, you are all beneficiaries of more than one trust. Accordingly, any income distributions you receive from the discretionary will be included in your assessable income under section 100 of the ITAA 1936.
Excepted trust income is defined in subsection 102AG(2) of the ITAA 1936 and includes:
• an amount that is assessable income of a trust estate that resulted from a will, codicil or an order of a court that varied or modified the provisions of a will or codicil (subparagraph 102AG(2)(a)(i) of the ITAA 1936); and
• an amount that is derived by the trustee of a trust estate from the investment of any property that devolved for the benefit of the beneficiary from the estate of a deceased person (sub-paragraph 102AG(2)(d)(i) of the ITAA 1936).
You are the beneficiaries of a testamentary trust that resulted from a deceased estate. Sub-paragraph 102AG(2)(a)(i) of the ITAA 1936 would mean that income derived in the testamentary trust would be treated as excepted trust income.
It is planned to transfer the money you receive as distributions from the testamentary trust to a discretionary trust for which you are all specified beneficiaries.
Where this money is subsequently invested by the discretionary trust and you are presently entitled to the profits as a result of a distribution made to you, sub-paragraph 102AG(2)(d)(i) of the ITAA 1936 would apply to treat that as excepted trust income. The money invested devolved for your benefit from a deceased estate.
Accordingly, the income that is derived by the discretionary trust from the investment of the property from the testamentary trust and distributed to you will retain its character of excepted income.