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Edited version of your written advice
Authorisation Number: 1012880758445
Date of advice: 18 September 2015
Ruling
Subject: Trust income
Question
Is the income distributed to your children under 18 from the discretionary trust regarded as excepted income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
Year ended 30 June 2021
The scheme commenced on
1 July 2016
Relevant facts
Your spouse died.
You have children under 18 years of age.
You were awarded compensation from entity A.
Entity B also paid an amount for compensation.
The compensation money is in a discretionary trust.
You and your children are the beneficiaries of this trust. The trust does not contain any other sources of capital.
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 102AC(1).
Income Tax Assessment Act 1936 Subsection 102AC(2).
Income Tax Assessment Act 1936 Subsection 102AG(1).
Income Tax Assessment Act 1936 Subsection 102AG(2).
Income Tax Assessment Act 1936 Paragraph 102AG(2)(c).
Reasons for decision
Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) sets out special rules that apply in working out the income tax liability on the income of persons who are prescribed persons.
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), under 18 years of age at the end of the income year.
Your children under 18 are prescribed persons for the purposes of Division 6AA of the ITAA 1936.
Under Division 6AA of the ITAA 1936 special rates of tax and a lower tax free threshold apply to taxable income, other than excepted income, derived by a prescribed person.
Where a beneficiary of a trust estate is under the age of 18 years at the end of the year, the whole of the beneficiary's share of the net income of the trust estate is subject to Division 6AA of the ITAA 1936 unless it is 'excepted trust income' (subsection 102AG(1) of the ITAA 1936).
Subsection 102AG(2) of the ITAA 1936 lists the various types of assessable income of a trust estate which are 'excepted trust income' in relation to the beneficiary of the trust estate.
Where a person under the age of 18 is entitled to damages in respect of loss by the beneficiary of parental support, the assessable income arising from the investment of property received, including money, from the settlement of such actions is 'excepted trust income' under subparagraph 102AG(2)(c)(i) of the ITAA 1936.
Similarly, assessable trust income arising from worker's compensation is also 'excepted trust income' under subparagraph 102AG(2)(c)(ii) of the ITAA 1936.
In your case, amounts of money in the trust came from different sources.
The amounts from entity A and entity B are considered to be excepted trust income under subsection 102AG(2) of the ITAA 1936.
As such, Division 6AA of the ITAA 1936 does not apply in relation to the trust distributions to your children. The income will be taxed at general tax rates.