Edited version of your written advice

Authorisation Number: 1012806498473

Ruling

Subject: Excepted income

Question

Will the assessable income be "assessable income of a trust estate from a will" within the meaning of section 102AG(2)(a) of the Income Tax Assessment Act 1936?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Trust is a discretionary trading trust.

The trustee of the Trust is Company A. The current directors are X and Y. X (the testator) is Company A's sole shareholder.

The will of X establishes a number of testamentary trusts in favour of their children.

The will leaves X's shares in Company A to the executor of the estate with a direction they use the voting power attaching to the shares to cause the trust to distribute the whole of your corpus to the testamentary trusts.

The testamentary trusts, each being a trust in which one of the beneficiaries is a beneficiary of the trust, are themselves beneficiaries of the Trust and any distribution to the testamentary trusts will not breach the terms of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subdivision 272-D

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 Section 102AG

Reasons for decision

Subdivision 272-D of the Income Tax Assessment Act 1936 (ITAA 1936) is about family trusts, in which subsection 272-95(2) states:

A person does not cease to be a family member merely because of the death of any other family member.

In addition, subsection 272-90(9) states:

If the primary individual and all of the members of his or her family are dead when the conferral takes place or the distribution is made, the estates of the individual and of the members are members of the primary individual's family group in relation to the conferral or distribution.

In other words, the death of the primary individual of a family trust, alone, does not end a family trust.

Division 6AA of the ITAA 1936 is about income of certain children, which is taxed at higher rates, unless the income is 'excepted income'.

Sub paragraph 102AG(2)(a)(i) therein states, subject to this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount is assessable income of a trust estate that resulted from a will.

The Explanatory Memorandum to the INCOME TAX ASSESSMENT AMENDMENT BILL (NO. 6) 1979 explained about Paragraph 102AG(2)(a)(i):

… the new system is to apply to the income of minors…derived…through a trust estate. Where a trust estate is involved, the income is treated as income of a beneficiary if the beneficiary is, or is deemed by new sub-section 95A(2) or by section 101 to be, "presently entitled" to it.

Paragraph (a) excludes from the operation of Division 6AA the assessable income of a deceased estate…resulting from a will…. Generally, a share of a minor beneficiary in the net income of a deceased estate will be taxed at ordinary personal rates of tax….

Section 102AG also includes sub paragraph 102AG(2)(c)(viii), which is about where the assessable income of a trust estate is excepted trust income to the extent to which the amount is derived as the result of a family breakdown.

Section 102AG(2)(c)(viii)) of the ITAA 1936 (before its amendment) was considered in Case U202,87 ATC 1129, where a divorced couple agreed an existing family trust would pay each year out of the trust fund certain amounts by way of maintenance for the children. The Administrative Appeals Tribunal held that there had been no transfer of property in terms of subsection 102AG(2)(c). All that had happened was that the trustee's discretion to advance income in favour of the children had changed.

In your case, the situation would be the same as in Case U202, namely, the relevant distribution to the testamentary trusts would be from a trust rather than resulting from a will. It appears clear from the EM that the intention of the legislation is for the relevant trust income to be derived from a trust that is a deceased estate (rather than a trust that is a family trust).

Under Subdivision 272-D of the ITAA 1936, when a person named in a trust dies, the trust continues to exist, even if that person was the trustee or the appointor (controller position). While under the control of the appointor, the assets of the trust actually are held for the benefit of all the named beneficiaries of the trust. Although, in reality, the deceased may have controlled the trust assets, by being the appointor, by law, the trust assets did not belong to the deceased. Your point made that a trustee is bound to act in accordance with the deed or will is accepted, however in this instance the duties of the executor of the will and the trustee of the family trust are discrete. The executor is bound to administer the assets of the deceased in accordance with their will, however the assets of the deceased do not include the family trust's assets as they are held for the benefit of all beneficiaries.

Additionally, the trust deed provides that upon the death of a primary beneficiary, the income, capital and corpus of the trust is held for the surviving primary beneficiaries. It follows the trust's estate cannot be disposed of according to a will, but if disposed of, would be disposed of according to its own trust deed.