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Edited version of your written advice
Authorisation Number: 1051491104236
Date of advice: 19 March 2019
Ruling
Subject: Excepted trust income
Question 1
Is the income of the Trust regarded as excepted trust income prior to the 2018-19 income year?
Answer
No.
Question 2
Is the income of the Trust derived from the investment of the money from the deceased’s employer regarded as excepted trust income for the 2018-19 to 2022-23 income years?
Answer
Yes.
Question 3
Is the remaining income of the Trust regarded as excepted trust income for the 2018-19 to 2022-23 income years?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
The scheme commenced on
1 July 2012
Relevant facts
Entity A and B were born some years ago. Entity A and B are under 18 years of age.
A parent of entity A and B died soon after.
A Trust was set up later that year. Various amounts have been deposited into the Trust including gifts from the deceased’s employer and money from birthday and Christmas presents.
The funds placed in the Trust are solely as a result of the death of the parent.
The funds have been placed in a bank account and term deposits and have earned interest income.
The perpetuity period under the Trust is xx years.
The Trust Deed outlines the relevant clauses. A clause of the Trust Deed was amended. The current Trust Deed satisfies subsection 102AG(2A) of the Income Tax Assessment Act 1936 (ITAA 1936).
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)
Income Tax Assessment Act 1936 Subsection 102AG(2A)
Reasons for decision
Division 6AA of the 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)), under 18 years of age at the end of the income year.
Entity A and B are under 18 and 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.
Excepted trust income includes income derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary directly as the result of the death of a person by an employer of the deceased person (subparagraph 102AG(2)(c)(vi) of the ITAA 1936).
However, subparagraph 102AG(2)(c)(vi) of the ITAA 1936 does not apply 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)) of the ITAA 1936). Alternatively, the property should pass to the beneficiary's estate should the beneficiary die before the end of the trust.
In this case, the money in the trust came from different sources.
The income derived from the investment of the money from the deceased’s employer is excepted trust income under subparagraph 102AG(2)(c)(vi) of the ITAA 1936.
However prior to the amended Trust Deed, the requirements of subsection 102AG(2A) of the ITAA 1936 were not met and therefore the income cannot be regarded as excepted trust income.
After the amended deed, as the conditions set out in subparagraph 102AG(2)(c)(vi) and subsection 102AG(2A) of the ITAA 1936 are all satisfied, the income derived from the investment of this money transferred into the Trust is excepted trust income.
That is, the interest income derived from the investment of the money is regarded as excepted trust income for the 2018-19 to 2022-23 income years. Such income is taxed at the ordinary marginal tax rates for individuals.
The remainder of the amounts in the Trust including money from birthday and Christmas presents will not give rise to excepted trust income under section 102AG of the ITAA 1936. Therefore, the income from those investments, are taxed at the special rates of tax under Division 6AA of the ITAA 1936.