Edited version of your written advice

Authorisation Number: 1012994963374

Date of advice: 14 April 2016

Ruling

Subject: Excepted Income

Question 1

Will the assessable income of the Trust constitute 'excepted trust income' in relation to the child, under subparagraph 102AG(2)(d)(ii) of the Income Tax Assessment Act 1936 (ITAA 1936) with respect to amounts transferred to the Trust by the spouse representing the superannuation death benefits of the deceased?

Answer

Yes.

Question 2

For the purposes of subsection 102AG(7) of the ITAA 1936, will the property that, in the opinion of the Commissioner, would have devolved directly upon the child if the deceased had died intestate, be calculated as two thirds of the net value of the assets in the Estate plus the superannuation death benefits?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2030

The scheme commences on

1 July 2014

Relevant facts and circumstances

The Deceased was the spouse of A.

They had a child in XXXX, B.

The Deceased passed away on the XXXX.

The Deceased superannuation death benefit was paid to A in accordance with a binding death benefit nomination.

A is the sole executor and sole beneficiary under the deceased's will.

A intends to transfer the super death benefit amount to a discretionary trust (the Trust) within three years of the deceased's death.

Additional money from the residuary of the estate may also be transferred to the Trust within three years of the deceased's death.

The Trust Deed will stipulate:

• The trust will have a corporate trustee

• The income beneficiaries will be A and B

• The sole capital beneficiary of the trust will be B

• Income will be generated in the Trust from the investment of the trust fund and will be distributed to the income beneficiaries or accumulated at the discretion of the trustee of the trust. Should the trustee fail to exercise its discretion, the default beneficiary is B

• The capital of the trust can only be provided to B

• On vesting of the Trust, the trust fund will be held by B absolutely. If they die before the trust vests, their death will trigger vesting and the trust fund will then be held by B's legal personal representative absolutely

Relevant legislative provisions

Division 6AA of the Income Tax Assessment Act 1936

Subsection 102AC(1) of the Income Tax Assessment Act 1936

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

Subsection 102AG(1)of the Income Tax Assessment Act 1936

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

Subparagraph 102AG(2)(d)(ii) of the Income Tax Assessment Act 1936

Subparagraph 102AE(2)(c)(ii) of the Income Tax Assessment Act 1936

Subsection 102AG(7) of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Division 6AA of the 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, B is a minor, under 18 years of age, and is 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 that derived by a trust estate that was transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person from the estate of a deceased person and was so transferred within three years after the date of death of the deceased person is listed as excepted trust income (subparagraph 102AG(2)(d)(ii) of the ITAA 1936).

In the case of the superannuation, if a strict literal interpretation were applied the answer to the question would be 'no'. However, subparagraph 102AG(2)(c)(v) of the ITAA 1936 states that excepted trust income includes an amount that is transferred 'directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund'. In addition CITCM 884, which issued in May 1981, and includes in its contents an explanation of the operation of Division 6AA of the ITAA 1936, provides guidance on this point. In particular, paragraphs 189 to 190 discuss the application of subparagraph 102AE(2)(c)(ii) of the ITAA 1936:

As per subsection 102AE(2) of the ITAA 1936 an amount included in the assessable income of a person is excepted trust income to the extent to which the amount:

(c) is derived by minor from the investment of any property:

(ii) that was transferred to the minor by another person out of property that devolved upon that other person from the estate of a deceased person and was so transferred within 3 years after the date of the death of the deceased person

Although looking at amounts derived by minors from the investment of property, this subparagraph uses the same terminology as subparagraph 102AG(2)(d)(ii) of the ITAA 1936. Note the wording of the subparagraph and the comments from CITCM 884 which address its application:

Paragraphs 189 to 191 of CITCM 884 state:

'189. Subparagraph (ii) of paragraph (c) covers certain cases where property comes indirectly to a child as a result of a person's death, e.g., where a husband does not make provision for his children in his will, but dies leaving all of his estate to his widow, who shortly after makes provision for the children by transferring to them all or part of property she has acquired from the estate. By this subparagraph, income from property transferred to a minor by another person out of property that devolved upon the later from a deceased estate is excepted assessable income, provided that the property was transferred within 3 years after the date of death..'

190. This subparagraph should also be applied to situations in which, on the premature death of the member of a superannuation fund, under the rules of the fund benefits are not paid direct to the members estate, but to his or her widow or widower. Property transferred to a minor by the widow or widower (within the specified time period) out of such superannuation moneys paid to the widow or widower, is to be treated as coming with subparagraph 102AE(2)(c)(ii).

191. In applying subsection (10) to these cases, the superannuation monies are to be treated as if they formed part of the estate of the deceased person.'

In this case, A has advised that they will transfer the property within three years of the deceased date of death. Accordingly, we accept that the arrangement meets the requirement set out in subparagraph 102AG(2)(d)(ii) of the ITAA 1936 and that the assessable income of the Trust will be excepted trust income provided it meets the requirements of subsection 102AG(7) of the ITAA 1936.

Question 2

Subsection 102AG(7) of the ITAA 1936 restricts the amount of income which will be treated as 'excepted trust income' to the amount that in the opinion of the Commissioner would have devolved directly upon the beneficiary if the deceased had died intestate.

In applying the Victorian laws of intestacy (Section 52 of the Administration and Probate Act 1958 VIC) A would have been entitled to one third of the residuary estate. As B is the deceased's only child they would have been entitled to the remaining two-thirds of the estate including the superannuation death benefits.

Therefore, the assessable income of the trust will only constitute excepted trust income under subparagraph 102AG(2)(d)(ii) of the ITAA 1936 and subsection 102AG(7) of the ITAA 1936 to the extent that the assessable income is derived on two thirds of the residue of the deceased's estate including the superannuation death benefit.