Edited version of private advice

Authorisation Number: 1052078063693

Date of advice: 25 January 2023

Ruling

Subject: Testamentary trust - taxation of excepted income

Question: Will the income that is taxable under section 98 of the Income Tax Assessment Act 1936 be taxed at ordinary adult rates?

Answer: Yes.

Any distribution/s made by the Trust to any minor beneficiaries of the Trust will be viewed as excepted taxable income. The Trustee of the Trust will be taxed in relation to those distributions at ordinary adult income tax rates.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

Person X's Will provided for a specified percentage of the balance of the Deceased Estate after their debts, legal and funeral expenses had been paid to be distributed into a trust fund (the Trust) set up for a specified person, being Person A, as summarised below:

•         A specified portion of the balance of the deceased estate after the deceased's debts, legal and funeral expenses had been paid would be distributed to a trust fund for Person A set up by the executors of the deceased estate

•         The Trustee of the Trust will be Person A (The Trustee)

•         The primary beneficiary of the trust fund would include Person A and their spouse, children, or grandchildren.

Person X (the Deceased) passed away and a testamentary trust was created for Person A in accordance with the Deceased's Will, being the trust fund (the Trust).

Person A is the trustee of the Trust.

An amount of money was transferred to the Trust from the Deceased Estate. No further additions have been made to the Trust's assets.

Person A's children are the only minor beneficiaries of the Trust.

A Deed of Loan was entered into which is summarised as follows:

•         Parties included the Trust as the lender and Person A and their spouse, being Person B, as the Borrower

•         The Lender has lent a specified amount to the Borrower (the Loan)

•         The Borrower shall repay the Loan on demand

•         The Borrower will not be obliged to pay interest on the Loan during the term of the Loan Deed

•         The Borrower may repay the whole of the Loan at any time, or with the consent of the Lender may repay any part of the Loan by instalments

After a period of time, a Repayment of Loan Agreement for the repayment of the Loan was entered which is summarised as follows:

•         Parties included Persons A and B (the Borrower), and the Trust (the Lender)

•         The Borrower has repaid the Loan to the Lender; and

•         The Borrower was not obligated to pay interest on the Loan during the term of the Deed.

The Loan amount was deposited into an investment account held by the Trust.

It is anticipated taxable income of the Trust that will be distributed to the beneficiaries of the Trust.

Assumptions

For the purposes of this ruling:

•         the Trust will make a distribution to either/all minor beneficiary of the Trust during the ruling period; and

•         as a result of the distribution to either/all minor beneficiary, the Trust has an obligation to pay the tax on behalf of the minor beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 102AG

Income Tax Assessment Act 1936 Division 6AA

Income Tax Rates Act 1986 Section 13

Income Tax Rates Act 1986 Schedule 12