Edited version of your written advice

Authorisation Number: 1012836916300

Date of advice: 10 July 2015

Ruling

Subject: Excepted Income

Question 1

Will the income derived from the investment of your inheritance be classed as excepted assessable income?

Answer

Yes.

Question 2

If the properties are disposed of, and your share of the net proceeds for the sale are re-invested to acquire X% of a rental property, with the other X% of the rental property held by your relative, will the rental income derived by you (ie X% of the total rental income) from leasing of the rental property be excepted assessable income?

Answer

Yes.

Question 3

If the properties are disposed of, and your share of the net proceeds for the sale are re-invested to acquire X% of a rental property, with the other X% of the rental property acquired in your name using borrowings obtained by or on behalf of you, will the rental income be excepted assessable income?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on

1 July 2014

Relevant facts and circumstances

You are a minor and were born on the XXXX.

Your relative passed away.

As per your relatives Will, you will receive a one-half share in the residue of the estate including:

• A one-third 'tenant in common' interest in a property

• A one-half 'tenant-in-common' interest in a property and

• Cash.

Your relative is an executor and trustee of the estate.

Your relative intends to sell your share of the properties and reinvest them into a new property.

Your relative is considering a few different options in regards to the reinvestment.

One option is to purchase the new property either completely from proceeds of sale, or from proceeds of sale and cash inheritance that you received. In this instance you would own a 100% of the property.

A second option is to purchase X% of the property with the proceeds of sale for your inheritance and the other X% be held by your relative.

A third option is to purchase X% of the property from the proceeds of sale for your inheritance and the remainder being financed through borrowings obtained on your behalf.

Your relative is also considering using your cash inheritance to acquire listed shares in your name or in your relatives name as trustee for you.

You are an Australian Resident.

Relevant legislative provisions

Division 6AA of the Income Tax Assessment Act 1936

Section 102AC(2) of the Income Tax Assessment Act 1936

Section 102AG of the Income Tax Assessment Act 1936

Subsection 102AG(2) of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Division 6AA of the Income Tax Assessment Act 1936 (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, we believe that a trust has been created as a result of the will.

Accordingly, you are a minor, under 18 years of age, and are a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936.

Where the beneficiary of a trust is a prescribed person, Division 6AA of the ITAA 1936 will apply to so much of the beneficiary's share of the net income of the trust that is not excepted trust income (subsection 102AG(1) of the ITAA 1936). 

Subsection 102AG(2) of the ITAA 1936 lists the various types of income of a trust estate which are excepted trust income in relation to the beneficiary of the trust estate. Assessable income derived by a trust estate that resulted from a will is listed as excepted trust income. (subparagraph 102AG(2)(a)(i) of the ITAA 1936.)

In this case, the trustee will acquire new property or listed shares on your behalf which are 100% owned by you. The new assets will be acquired either from the proceeds of sale of the properties from your inheritance or your cash inheritance or a combination of both. Any income received from these investments will be considered excepted assessable income under subsection 102AG(2) of the ITAA 1936.

Question 2

In this case, the trustee will acquire a new property on your behalf which is X% owned by you. The remainder X% interest will be held by your relative. The property will be acquired from the proceeds of sale of the properties from your inheritance. Your share (i.e X%) of the income received from the property will be considered excepted assessable income under subsection 102AG(2) of the ITAA 1936.

Question 3

Re Trustee of the Estate of the Late AW Furse; A/C Jessica N Delaney and A/C Skye Nea Delaney) v the Commissioner of Taxation [1990] FCA 470 (27 November 1990) (Furse) concerned a similar arrangement to the arrangement in this case.

In Furse, the taxpayer argued that the distributions were 'excepted trust income' in relation to each of the three minor beneficiaries for the purposes of subparagraph 102AG(2)(a)(i) of the ITAA 1936 - and therefore assessable at the individual income tax rates applicable to Australian residents.

Under subparagraph 102AG(2)(a)(i) of the ITAA 1936, an amount included in the assessable income of a trust estate is 'excepted trust income' in relation to the 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 Commissioner argued that the requirements of subparagraph 102AG(2)(a)(i) of the ITAA 1936 were not satisfied, on the basis that for the subsection to operate it was necessary that the assessable income of the trust estate be sourced in the will or property of the deceased.

The Commissioner's argument was not accepted by the court on the basis that the Commissioner's contention that it is only income from assets already held by the deceased at the time of his death which will be exempted from the provision of Division 6AA was too narrow. Judge Hill J stated (at paragraphs 57 and 58) that:

P 57. In my opinion all that is necessary to fall within s 102AG(2)(a) is that the assessable income be assessable income of the trust estate, that trust estate being one of the forms of trust estate referred to in s 102AG(2)(a)(i) or (ii) (that is to say not an inter vivos trust).

P 58. What happened in the present case is that the trustee borrowed funds and used the borrowed funds to invest in such a way as to derive assessable income from the investment. In my view the consequence of such an investment was that the assessable income was derived by the trust estate so that that income was "assessable income of the trust estate" and clearly enough the trust estate was one that resulted from the will of the late Mr Furse.

Consequently, if the properties are disposed of, and your share of the net proceeds for the sale are re-invested to acquire X% of a rental property with the other X% of the rental property acquired in your name using borrowings obtained by the trustee the rental income will be excepted assessable income.