Edited version of your written advice

Authorisation Number: 1012939714451

Date of advice: 20 January 2016

Ruling

Subject: Excepted trust income

Question 1

Will the income derived by the Trustee of the, (yet to be established), Trust be excepted income for the purposes of section 102AG(2)(c)(v)?

Answer

Yes

Question 2

Will the Trustee of the, (yet to be established), Trust be assessable on income earned by the Trust under Section 98 of the Income Tax Assessment Act 1936?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You plan to establish a discretionary trust for your two children, who are both minors.

The money to be invested in the trust is as a result of a superannuation death benefit received from the children's late parent.

You will be trustee of the trust.

You provided a copy of the proposed Trust Deed.

You will hold the Trust Fund upon trust: 50% to Child A upon them attaining 18 years of age absolutely; and 50% to Child B upon them attaining 18 years of age absolutely.

Clause 1(a) of the draft trust deed provides that if either of the two beneficiaries should fail to attain 18 years of age then his or her beneficiary share of the Trust Fund will form part of the estate of that deceased beneficiary. The draft trust deed further provides that the Trustee agrees to hold each beneficiary's share in a separate and identifiable account or record and shall not apply the whole or any part of a beneficiary's share of one beneficiary in the trust for the benefit of the other beneficiary under this trust.

Relevant legislative provisions

Section 98 Income Tax Assessment Act 1936

Section 102AG Income Tax Assessment Act 1936

Reasons for decision

Question 1

Summary

The trust income of the yet to be established Trust will be excepted trust income for the purposes of section 102AG(2)(c)(v).

Detailed reasoning

Special rules apply in calculating the tax payable on income of a minor. Division 6AA Income Tax Assessment Act 1936 (ITAA 1936) was introduced to discourage some income splitting by means of the diversion of income to children under 18 years of age. Section 102AG ITAA 1936 defines excepted trust income and specifies what categories of income are excluded from the special rules. The exclusions include trust income which is paid directly as a result of the death of another person under the terms of a policy of life insurance, or out of a provident, benefit, superannuation or retirement fund. Excepted assessable income is taxed at normal rates.

For paragraph 103AG(2)(c) ITAA 1936 to apply, subsection 102AG(2A) provides the beneficiary of the trust must acquire the trust property (other than as a trustee), when the trust ends.

In your case the money to be invested in the trust is as a result of a superannuation death benefit received from the beneficiary's late parent and will be excepted income. The draft trust deed provides that the beneficiaries will, under the terms of the trust, acquire the trust property when the trust ends and the property will pass into their estate should the child die before the trust ends.

Question 2

Summary

Section 98 ITAA 1936 will apply and as trustee you will be assessable at the same rate as an individual resident taxpayer.

Detailed reasoning

Subsection 98(1) ITAA 1936 assesses the trustee on behalf of the beneficiary where the beneficiary is presently entitled and under a legal disability. A beneficiary is presently entitled to the net income of the trust where that beneficiary has an absolute and indefeasible vested interest in the trust income.

In Taxation Ruling IT 319, the Commissioner decided to accept the decision in the High Court of Australia case of Taylor v Deputy Federal Commissioner of Taxation (1969) 123 CLR 206 (Taylor), where it was decided the beneficiary, a minor, was presently entitled to income arising under a trust for accumulation, which directed the trust income to be accumulated and paid to the beneficiary when he reached 21 years of age or to pass to his personal representatives as part of his estate in the event of his earlier death.

In that case, his Honour said that "presently entitled" refers to an interest in possession in an amount of income that is legally ready for distribution so that the beneficiary would have a right to demand payment of it if he were not under a disability. Here, immediately upon the making of the settlement, the beneficiary became absolutely entitled to the income arising during his minority, although his personal enjoyment of it was postponed. Accordingly, he was presently entitled to the income accumulated in the subject year.

In your case the beneficiaries are both presently entitled to the net income of the trust as they have an absolute and indefeasible vested interest in the trust income. Further, the draft trust deed provides that the beneficiaries will, under the terms of the trust, acquire the trust property when the trust ends and the property will pass into the beneficiary's estate should the child die before the trust ends.

In your case the beneficiaries are both under a legal disability and are presently entitled to a share of the income of the trust estate. The trustee will be assessed under section 98 ITAA 1936 at the individual marginal tax rates.

ATO view documents

Taxation Ruling No. IT 319 Presently entitled: The effect of the decision in Taylor v FC of T [(1969) 123 CLR 206] upon the interpretation of the phrase presently entitled in section 98.