Edited version of private advice

Authorisation Number: 1051988764926

Date of advice: 22 June 2022

Ruling

Subject: Assessable income

Question 1

Is the interest and dividend income derived by the trustee for the taxpayers excepted income under subparagraph 102AG(2)(d)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) to the extent that it is attributable to investment of each taxpayer's inheritance from the deceased estate of the grandparent?

Answer

Yes.

Question 2

Should each taxpayer be declaring the interest & dividend income in their personal tax return to the extent that it is attributable to investment of each taxpayer's inheritance from the deceased estate of the grandparent?

Answer

Yes.

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.

This includes income that have been derived from deceased estates in various circumstances:

•         Paragraph 102AG(2)(a) provides for circumstances where the trust estate has been created by a will, or court orders varying a will.

•         Subparagraph 102AG(2)(d)(i) provides for circumstances where property (including cash) which had devolved to the beneficiary from a deceased estate has derived income for the trust estate through investment.

•         Subparagraph 102AG(2)(d)(ii) provides for circumstances where property (including cash) which had devolved to another person from a deceased estate has derived income for the trust estate for the benefit of the beneficiary through investment.

However subsection 102AG(7) provides that any amount referred to by subparagraph 102AG(2)(d)(ii) is limited such that the total of the three amounts mentioned above cannot exceed the total the beneficiary of the trust estate would have received if the deceased had died intestate. Under Victorian intestacy laws (Administration and Probate Act 1958 (Victoria)), a grandchild will only receive a distribution from an intestate if their parent, the child of the deceased, predeceases their grandparent. As the parent did not predecease the grandparent, there can be no amount of excepted income covered by subparagraph 102AG(2)(d)(ii).

After examining the specific circumstances, the Commissioner considers that the investment of each child's inheritance by the parent acting as trustee for the taxpayers satisfies the conditions set out in subparagraph 102AG(2)(d)(i) of the ITAA 1936. Therefore, the interest and dividend income derived from the inheritance from the deceased estate is excepted trust income.

To the extent that earnings are derived from the inheritance, those earnings are excepted trust income and should be declared in each taxpayer's personal income tax return, to be assessed at ordinary income tax rates.

To the extent that any earnings are derived from the investment of funds from other sources, those earnings are eligible taxable income under the provisions of Division 6AA of the ITAA 1936 and taxed at the special rates of tax for such income as set out in the Income Tax Rates Act 1986 (section 13, schedule 11 for resident taxpayers).

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayers' grandparent died several years ago.

The deceased's will left an amount of cash to each of the taxpayers. The will provided that as they were under the age of 18 years, the money was to "be held on trust by their parents and applied for their benefit in the exercise of their absolute discretion."

The taxpayers' parent has paid part of the taxpayers' inheritance into bank accounts which they operate as trustee for each taxpayer. They do not access the funds in the accounts for their own purposes but for the benefit of the taxpayers' maintenance & investments.

The taxpayers' bank accounts also include money gifted to them for Christmas and birthdays.

Acting as trustee for the taxpayers, the parent has also used part of their inheritance to acquire shares in listed companies.

The parent has also acquired shares for the taxpayers using funds from their own inheritance from the deceased.

The proceeds from the sales of these shares are also deposited back into the taxpayers' bank accounts.

The shares are owned by the parent in their capacity as bare trustee for each taxpayer.

Dividends from the shares are paid directly into the taxpayers' bank accounts.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 102AG(2)