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Edited version of your written advice
Authorisation Number: 1051373526303
Date of advice: 15 May 2018
Ruling
Subject: Deceased estate – testamentary trust – excepted trust income – minor beneficiaries
Question:
Will any distribution made to a minor beneficiary of the Trust be ‘excepted trust income’ for the purposes of section 102AG of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer:
Yes.
This ruling applies for the following period:
Income year ending 30 June 20XX
The scheme commences on:
Relevant facts and circumstances
The Deceased passed away after 20 September 1985.
The Deceased’s will made the following provisions:
● the executors and Trustee of the Deceased’s estate would be a number of the Deceased’s children;
● the Trustee of the Deceased’s estate would collect all income of the Deceased’s Trust Fund and pay out of it all expenses of administration;
● a number of trusts would be set up in accordance with the Deceased’s will, including you being the Trust; and
● The Trust’s beneficiaries included a child of the Deceased, their children and grandchildren, and the spouses of the children and grandchildren.
Probate on the Deceased’s estate was granted a number of months after the Deceased passed away.
The Trust was created in accordance with the Deceased’s will.
A number of months later, the executors of the Deceased’s estate retired as trustees of the Trust and a new trustee of the Trust was appointed.
The Trust’s 201X-1X income tax return includes the following:
● $XXX,XXX - income of the Trust;
● distributions made to the following persons:
● $XX,XXX – Person A – less than 18 years of age; and
● $XXX,XXX – Person B – less than 18 years of age.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 6AA
Income Tax Assessment Act 1936 Section 102AC
Income Tax Assessment Act 1936 Section 102AD
Income Tax Assessment Act 1936 Section 102AE
Income Tax Assessment Act 1936 Subsection 102AG
Reasons for decision
Excepted income
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 minor will be a prescribed person under subsection 102AC(1) of the ITAA 1997 if, in relation to an income year they are:
● less than 18 years of age on the last day of the income year; and
● not an excepted person in relation to the income year (as defined in subsection).
Division 6AA of the ITAA 1936 will apply, where the beneficiary of a trust is a prescribed person, to so much of the beneficiary's share of the net income of the trust that is not excepted trust income.
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. Under this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount is assessable income of a trust estate that resulted from a will under subparagraph 102AG(2)(a)(i) of the ITAA 1936.
Application to your situation
In this case, the Trust was set up in accordance with the Deceased’s will which satisfies subparagraph 102AG(2)(i) of the ITAA 1936. Property from the Deceased’s estate has devolved to the Trust.
In the 201X-1X income year, the Trust made distributions to Persons A and B, who are both minors and are not excepted persons. As such, Persons A and B are prescribed persons under Division 6AA of the ITAA 1936 and the special rules will apply to so much of their share in the net income of the Trust that is not excepted trust income.
However, based on the information provided the income distributed from the Trust to Person A and B will be excepted trust income. Therefore, Division 6AA of the ITAA 1936 does not apply.
Accordingly, the Trust’s distributions to Persons A and B while they are under the age of 18 years of age are excepted trust income and will be:
○ taxed at the same rates as an adult's net income; and
○ reduced by any low income tax offset they are eligible for.