Edited version of private advice

Authorisation Number: 1052099220676

NOTICE

This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number 1052091107181.

Date of advice: 21 March 2023

Ruling

Subject: Workers compensation proceeds

Question 1

Are the income benefits paid to you from Work Cover Queensland (WCQ) excepted assessable income under subsection 102AE(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Based on the facts provided any income benefits received from WCQ is excepted assessable income under subsection 102AE(2) of the ITAA 1936 and taxed at normal marginal rates.

Question 2

Are all earnings generated by the trust from investing the Workers Compensation proceeds (both lump sum and periodic Workcover payments) considered 'excepted trust income' under subsection 102AG(2) of the ITAA 1936 when distributed to the specified beneficiaries during their minority?

Answer

Yes.

Based on the facts provided any income derived from the investment of monies received from WCQ is excepted trust income under subsection 102AG(2) of the ITAA 1936 and taxed at normal marginal rates.

Question 3

Is Capital gains tax (CGT) deferred when each of the beneficiary's portion of the trust assets is transferred to them at the conclusion of their trust relationship, and only payable by the beneficiary when they actually sell the assets in their own name?

Answer

Yes.

Paragraph 8 of TR 2004/D25 Income Tax: capital gains; meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) provides that the main CGT provisions to which the concept of absolute entitlement is relevant apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability).

Subsection 106-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that for the purposes of this Part and Part 3-3 (about capital gains and losses), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

Paragraphs 66 to 68 of TR 2004/D25 also explain that the concept of absolute entitlement is to be determined ignoring any legal disability (such as being a minor).

Based on the facts provided, each beneficiary will be absolutely entitled to the assets of the Trust as against the Trustee, given that under clauses 4 and 5 of the Trust Deed, the Trustee must apply as absolutely and beneficially entitled without any exercise of discretion, according to the capital and income accounts for each beneficiary.

As such, upon transfer of the assets to the beneficiaries at the conclusion of their trust relationship, there will be no change in beneficial ownership of those assets, as each beneficiary is considered to have had beneficial ownership of the Trust assets from when they were originally acquired. Therefore, CGT event A1 would not occur in those cases.

However, if those assets are later disposed of by the beneficiary, this will bring forth a CGT event with a potential capital gain (or loss) for the beneficiary at the time of the disposal.

This ruling applies for the following periods:

Income Year ending 30 June 20XX

Income Year ending 30 June 20XX

Income Year ending 30 June 20XX

Income Year ending 30 June 20XX

Income Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away on XX/XX/20XX leaving no Will. He is survived by his spouse and children.

All children are under 18 years of age (the Specified Beneficiaries).

WCQ required the entitlements to be paid in trust to the children whilst they are minors (both in the form of a lump-sum payment and an income stream for the duration of their dependency).

The Trust (the Trust) was established by Deed on XX/XX/20XX (the Deed).

Under subclause XX of the Deed, the Trustee does not have the power to add new Beneficiaries.

Clause XX of the Deed provides the Trustee powers to amend the Trust subject to the restrictions specified in the Deed.

Under the Deed the Trustee is restricted to add capital to the Trust unless it's from the original workers compensation decision.

WCQ confirmed Child A as totally dependent.

WCQ assessed Child A as being entitled to a lump sum payment of $XX.

WCQ assessed Child A as being entitled to an additional lump sum payment of $XX.

WCQ assessed Child A as being entitled to a quarterly back payment entitlement of $XX.

WCQ assessed Child A as being entitled to ongoing quarterly entitlement of $XX per week.

The Deed established Child A as a Specified Beneficiary.

Under clauses X and X of the Deed, the Trustee must apply as absolutely and beneficially entitled without any exercise of discretion, according to the capital and income accounts for Child A.

The funds for Child A are quarantined in a separate account.

WCQ confirmed Child B as totally dependent.

WCQ assessed Child B as being entitled to a lump sum payment of $XX.

WCQ assessed Child B as being entitled to an additional lump sum payment $XX.

WCQ assessed Child B as being entitled to a quarterly back payment entitlement of $XX.

WCQ assessed Child B as being entitled to ongoing quarterly entitlement of $XX per week.

The Trust Deed established Child B as a Specified Beneficiary.

Under clauses X and X of the Deed, the Trustee must apply as absolutely and beneficially entitled without any exercise of discretion, according to the capital and income accounts for Child B.

The funds for Child B are quarantined in a separate account.

WCQ confirmed Child C as totally dependent.

WCQ assessed Child C as being entitled to a lump sum payment of $XX.

WCQ assessed Child C as being entitled to an additional lump sum payment of $XX.

WCQ assessed Child C as being entitled to a quarterly back payment entitlement of $XX.

WCQ assessed Child C as being entitled to ongoing quarterly entitlement of $XX per week.

The Trust Deed established Child C as a Specified Beneficiary. Under clauses X and X of the Deed, the Trustee must apply as absolutely and beneficially entitled without any exercise of discretion, according to the capital and income accounts for Child D.

The funds for Child C.are quarantined in a separate account.

WCQ confirmed Child D as totally dependent.

WCQ assessed Child D as being entitled to a lump sum payment of $XX.

WCQ assessed Child D as being entitled to an additional lump sum payment of $XX.

WCQ assessed Child D as being entitled to a quarterly back payment entitlement of $XX.

WCQ assessed Child D as being entitled to ongoing quarterly entitlement of $XX per week.

The Trust Deed established Child D as a Specified Beneficiary.

Under clauses X and X of the Deed, the Trustee must apply as absolutely and beneficially entitled without any exercise of discretion, according to the capital and income accounts for Child D.

The funds for Child D are quarantined in a separate account.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102AE

Income Tax Assessment Act 1936 subsection 102AE(2)

Income Tax Assessment Act 1936 section 102AG

Income Tax Assessment Act 1936 subsection 102AG(2)

Income Tax Assessment Act 1997 subsection 106-50(1)

Income Tax Assessment Act 1997 section 118-37