Edited version of private advice

Authorisation Number: 1052169381297

Date of advice: 16 October 2023

Ruling

Subject: Trust income for minors - excepted person

Question

Is Person A an excepted person for the purposes of subsection 102AC(2)(d) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

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

Person A is a beneficiary of a trust.

Person A's date of birth is XX and they are under the age of 18 years (a minor) and under the age of 16 years during the relevant period.

The Applicant provided a medical certificate from a qualified medical practitioner dated XX describing Person A's condition. Person A's condition is permanent.

Reasons for decision

1.    Subsection 98(1) of Division 6 of Part III of the ITAA 1936 assesses a trustee (in that capacity) on a share of the net income of the trust estate in circumstances where a beneficiary who is under a legal disability is presently entitled to a share of the income of the trust estate. 'Legal disability' is not defined in the ITAA 1936. It refers to an entity's inability to exercise fully ordinary legal rights and includes a minor (person under the age of 18).

2.    The minor beneficiary may also be assessed on the share of the net income that the trustee has been assessed on, under section 100 of the ITAA 1936. Where section 100 applies, there will be a credit given to the beneficiary in respect of the tax paid by the trustee under section 98. Broadly, section 100 requires the inclusion of an amount in the beneficiary's assessable income if either or both of the following apply, they:

•         are a beneficiary of more than one trust;

•         derive income from another source (including because of Subdivision 115-C or 207-B of the Income Tax Assessment Act 1997).

3.    Division 6AA of the ITAA 1936 and section 13 of the Income Tax Rates Act 1986 impose higher tax rates on minors as a specific tax integrity measure to deny most minors a tax advantage from receiving income that might flow from income-splitting arrangements. In broad terms, the rules are intended to discourage the diversion of income from adults to minors.

4.    The effect of section 13 of the Income Tax Rates Act 1986 (together with the Schedules to that Act) is that specified tax rates will apply to certain amounts of Division 6AA income. Very broadly, these tax rates apply both to:

•         the taxable income of prescribed persons for the purposes of Division 6AA, and

•         the trustee of a trust estate liable to be assessed and to pay tax under section 98 in respect of a part of the net income of the trust estate to which Division 6AA applies.

5.    Division 6AA applies to income (including income from a trust estate) for people under 18 unless exceptions apply.

•         The effect of subsection 102AG(1) is that Division 6AA applies to the beneficiary's share of the net income of the trust estate where that beneficiary is a prescribed person, where the income isn't 'excepted trust income'.

•         The effect of subsection 102AC(1) is that a person under 18 (on the last day of the income year) will be a prescribed person where they aren't an excepted person.

6.    Subsection 102AC(2) lists several ways a minor can be an 'excepted person'.

7.    Under paragraph 102AC(2)(d), a minor will be an 'excepted person' in relation to a year of income if:

(d) the Commissioner:

(i) has received a certificate issued by a legally qualified medical practitioner certifying that the minor is:

(A) a disabled child, or a disabled adult, within the meaning of Part 2.19 of the Social Security Act 1991; or

(B) a person who has a continuing inability to work within the meaning of Part 2.3 of the Social Security Act 1991 or is permanently blind; and

(ii) is satisfied that, on the last day of the year of income, the minor was a person of the kind mentioned in sub-subparagraph (i)(A) or (B);

8.    'Disabled child' is defined in Part 2.19 of the Social Security Act 1991 (SSA) as:

disabled childmeans a person aged under 16 who:

(a) has a physical, intellectual or psychiatric disability; and

(b) is likely to suffer from that disability permanently or for an extended period.

Application to your circumstances

9.    Person A will be a prescribed person unless they are an excepted person. They are under 18 throughout the relevant income years.

10.  However, Person A is an excepted person for the relevant income years because they meet both subparagraphs 102AC(2)(d)(i) and (ii).

11.  Subparagraph 102AC(2)(d)(i) is met. The Applicant supplied the Commissioner with a certificate issued by legally qualified medical practitioner that identifies and describes Person A's condition. That condition is a physical, intellectual or psychiatric disability that is a permanent condition.

12.  Therefore, Person A is a disabled child for the purposes of Part 2.19 of the SSA; and the Commissioner is satisfied they are likely to suffer from that disability permanently or for an extended period.

13.  Subparagraph 102AC(2)(d)(ii) is also met. On these facts, the Commissioner is also satisfied that Person A will continue to be a disabled child on the last day of all relevant income years.