Edited version of your written advice

Authorisation Number: 1051187537572

Date of advice: 7 February 2017

Ruling

Subject: Trusts - Memorial trust - superannuation death benefit - excepted trust income

Question 1

Will the Trust satisfy the conditions set out in subparagraph 102AG(2)(d)(ii) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will income from the Trust distributed to the children be excepted trust income under subsection 102AG(2) of the ITAA 1936?

Answer

Yes, provided that:

● neither subsection 102AG(3) or 102AG(4) of the ITAA 1936 apply to any transactions, agreements or arrangements entered into by the Trust during the period this ruling applies to, and

● the limits imposed by subsection 102AG(7) on the amounts transferred into the Trust are not exceeded.

This ruling applies for the following period

Year ending 30 June 2017 to Year ending 30 June 2028

The scheme commences on

1 July 2016

Relevant facts and circumstances

The deceased died intestate.

The deceased and their spouse had two children (the children).

The deceased was a member of a superannuation fund (the Fund). The deceased had not given a binding death benefit nomination to the trustee of the Fund.

The trustee of the Fund paid the deceased's superannuation death benefit to the deceased's spouse.

A Memorial Trust has been created.

The trustee of the Trust is an incorporated company.

A copy of the settled trust deed for the Trust is included at attachment A of this ruling. The terms of the trust set out in the deed form part of the relevant facts upon which this ruling is made.

The deceased's spouse proposes to transfer part of the deceased's superannuation death benefit to the Trust for the benefit of the children within three years after the date of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 subsection 102AC(1)

Income Tax Assessment Act 1936 subsection 102AC(2)

Income Tax Assessment Act 1936 Section 102AG

Income Tax Assessment Act 1936 subsection 102AG(2)

Income Tax Assessment Act 1936 subparagraph 102AG(2)(d)(ii)

Income Tax Assessment Act 1936 subsection 102AG(2A)

Income Tax Assessment Act 1936 subsection 102AG(3)

Income Tax Assessment Act 1936 subsection 102AG(4)

Income Tax Assessment Act 1936 subsection 102AG(5)

Income Tax Assessment Act 1936 subsection 102AG(7)

Reasons for decision

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)), who is under 18 years of age on the last day of the income year. 

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)).

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 a trust estate.

Subparagraph 102AG(2)(d)(ii) of the ITAA 1936 potentially applies to income derived by a trustee of a trust estate from the investment of any property 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. For this subparagraph to apply, the property must have been transferred within three years after the date of death of the deceased person (subparagraph 102AG(2)(d)(ii) of the ITAA 1936).

The Commissioner also considers that subparagraph 102AG(2)(d)(ii) of the ITAA 1936 applies to situations where, on the death of the member of a superannuation fund, under the rules of the fund a superannuation death benefit is not paid directly to the members estate, but to his or her widow or widower. Consequently property transferred to a trust for the benefit of a minor out of such a superannuation death benefit paid to a person is treated as coming within subparagraph 102AG(2)(d)(ii).

The amount of income that is excepted trust income is limited to the amount of income that would have flowed to the child from property that would have devolved on the child from the estate of the deceased person if the child had received the benefit under the laws of intestacy (subsection 102AG(7) of the ITAA 1936). In applying subsection 102AG(7) to these cases, the superannuation death benefit is treated as if the benefit formed part of the estate of the deceased person.

Subparagraph 102AG(2)(d)(ii) of the ITAA 1936 does not apply to except income from the investment of property transferred to a trustee for the benefit of a beneficiary unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as a trustee) when the trust ends (subsection 102AG(2A)).

Where any parties to an act or transaction directly or indirectly connected to the derivation of the excepted trust income are not dealing with each other at arm's length, subsection 102AG(3) of the ITAA 1936 will apply. This subsection will reduce the excepted trust income of the Trust to so much (if any) of that income as would have been derived had the parties been dealing on an arm's length basis.

Subsection 102AG(4) of the ITAA 1936 provides that assessable income derived by a trustee is not excepted income if it is derived, directly or indirectly, under or as a result of an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that that assessable income would be excepted trust income. However, if the purpose of deriving excepted trust income is no more than merely incidental the agreement, then the purpose is disregarded and the income may still be excepted (subsection 102AG(5)).

Application to your circumstances - Question 1

The Trust will satisfy the conditions set out in subparagraph 102AG(2)(d)(ii) and subsection 102AG(2A) of the ITAA 1936 for the following reasons:

● the children are prescribed persons, and

● under the Trust deed:

● the purpose of the Trust is to provide for the maintenance, education and benefit of the children

● the children are the only specified beneficiaries of the Trust

● the power to appoint additional beneficiaries is limited such that any appointment will not cause the requirements of subparagraph 102AG(2)(d)(ii) and subsection 102AG(2A) of the ITAA 1936 to not be met

● the income of the Trust can only be accumulated for, or distributed to or for, the benefit of the children, and

● property transferred to the Trust for the benefit of each of the children will be held exclusively for each of the children and can be distributed to only that child during or at the end of the trust.

Application to your circumstances - Question 2

As the Trust satisfies the conditions set out in subparagraph 102AG(2)(d)(ii) and subsection 102AG(2A) of the ITAA 1936, the income derived from the investment of the money transferred into the Trust out of the superannuation death benefit will be excepted trust income provided the limits imposed by subsection 102AG(7) are not exceeded.

However, the income will not be excepted income if the anti-avoidance provisions in subsections 102AG(3) or 102AG(4) of the ITAA 1936 apply. The proposed transactions or agreements have not yet taken place or been entered into, therefore the Commissioner is unable to rule unequivocally that all of the income derived by the Trust will be excepted trust income. Additionally, to do so would depend on assumptions being made about those proposed transactions or agreements.