Edited version of private advice

Authorisation Number: 1051856524754

Date of advice: 28 June 2021

Ruling

Subject: Excepted trust income

Question

Is the income of the Trust regarded as excepted trust income?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20XX to year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Entity A passed away on xxxx. Entity A died intestate.

Entity A's child, entity B, born xxxx, is entitled to a share of the parent's estate as per the relevant court as per the Deed pursuant to the relevant legislation.

The Deed was made on xxxx.

The trustees for the Trust are entity C and entity D. Entity C is the parent of entity B. Entity D is a professional, who is not related to entity B and is not involved in their day to day care. The Trust will hold the funds for entity B until they attain the age of 18 which will be xxxx.

The Trust was set up as per the Deed.

The Trust has invested money and the income of the Trust has earned interest and trust distribution only from the investments.

The Trust and beneficiary are Australian residents.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 102AA(1).

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)(a).

Income Tax Assessment Act 1936 Subsection 102AG(2AA).

Reasons for decision

Division 6AA of the Income Tax Assessment Act 1936 (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) of the ITAA 1936), under 18 years of age at the end of the income year.

Therefore, generally a person under 18 is a prescribed person for the purposes of Division 6AA of the ITAA 1936. In this case, entity B is a prescribed person.

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 assessable income, of a kind covered by subsection (2AA), of a trust estate that resulted from an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate (subparagraph 102AG(2)(a)(ii) of the ITAA 1936).

Under subsection 102AG(2AA) of the ITAA 1936, for the purposes of paragraph (2)(a), assessable income of a trust estate is of a kind covered by this subsection if the assessable income is derived by the trustee of the trust estate from property and the property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person concerned, as a result of the will, codicil, intestacy or order of a court mentioned in paragraph (2)(a) (subparagraph 102AG(2AA)(b)(i) of the ITAA 1936).

Under subsection 102AA(1) of the ITAA 1936 property means property whether real or personal, and includes money.

After examining the specific circumstances of the Trust, the Commissioner considers that the Trust satisfies the conditions set out in subparagraph 102AG(2)(a)(ii) of the ITAA 1936. Therefore, the income derived from the investment of the money transferred into the Trust from the deceased estate is excepted trust income.

Such income is taxed at the ordinary marginal tax rates for individuals.