Edited version of private advice

Authorisation Number: 1052271937569

Date of advice: 11 July 2024

Ruling

Subject: Excepted trust income

Question

Will a minor beneficiary's share of the net income of the family trust (the trust) derived from the investment of the sale proceeds of the property be excepted trust income under subparagraph 102AG(2)(d)(i) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Subsection 102AG(2) of the ITAA 196 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.

After consideration of the facts and circumstances, and the operation of subsection 102AG(8) of the ITAA 1997, the Commissioner considers that the trust satisfies the conditions set out in subparagraph 102AG(2)(d)(i) of the ITAA 1936. Therefore, the income derived from the investment of property transferred into the trust from the deceased estate is excepted trust income when it is distributed to the minor beneficiaries.

This ruling applies for the following periods:

Year ended DD MM 20XX

Year ended DD MM 20XX

Year ending DD MM 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

On DD MM 20XX, Person A died.

Person A was the executor of the estate of their late parent, Person B.

On DD MM 20XX, probate of Person B's will was granted to Person A by the Supreme Court.

Pursuant to clause 4 of Person B's Will, Person B's child, Person C was given a right to occupy their principal place of residence (the property).

Property

Person A held the property on trust for Person C, pursuant to clause 4 of Person's B will.

Person C resided in the property until their death on DD MM 20XX.

Pursuant to clause 4 of Person B's will, the property passed to the trust.

The trust

The trust was established as a Discretionary Trust by way of Trust Deed (Trust Deed). Person A was the initial trustee and nominator of the Trust pursuant to clause 17(a) of the Trust Deed.

Person A was the sole trustee of the trust and the registered proprietor of the property at the date of their death.

On the death of Person A, a company became the nominator and was given the power under clause 12 of the trust deed to appoint a new trustee.

Person A's death and court proceedings

Person A was survived by their spouse and their two teenage children. Both children of Person A are under the age of 18 years and are minors.

Pursuant to Person A's will, Person A's children were left equally the shares in the company, with the intention that they would later benefit from the property. The shares were to be held in trust by the trustee of Person A's estate until their children reached the age of 18 years.

Person A's spouse commenced proceedings in the Supreme Court seeking a further family provision form part of Person A's estate or notional estate following their death.

Pursuant to a Court Order, Person A's accountant was appointed to represent the interests of their estate and notional estate.

On DD MM 20XX, the company passed a resolution appointing Person A's accountant (Trustee) as trustee of the trust.

On DD MM 20XX, a deed of appointment of new trustee was executed by the company and Person A's accountant.

Pursuant to orders dated DD MM 20XX, the Court ordered that Person A's spouse receive further provision of $XX out of the estate and notional estate.

The Court further ordered that the property be designated as notional estate to the extent necessary to give effect to the order for further provision, an order for the payment of Person A's spouse costs and other legal costs associated with the proceedings.

The property was transferred to the trustee.

On DD MM 20XX, the property was sold by the trustee for $XX.

Payment of the sums required pursuant to the Court Order, being $XX to Person A's spouse and the legal costs of parties as ordered, have been made from the proceeds of sale of the property, and all other liabilities of the estate have been paid.

The balance of the sale proceeds of the property are held by the trust.

Beneficiaries of the trust

The beneficiaries of the trust are set out in clause 16 of the Trust Deed.

The persons named in schedule 8 of the Trust Deed include Person A and the company:

One DD MM 20XX, the Trust Deed was varied to also include additional nominated beneficiaries.

Pursuant to clause 16 of the Trust Deed, Person A's spouse and children are eligible beneficiaries of the trust.

Whilst named as nominated beneficiaries, Person B and Person C predeceased Person A.

On DD MM 20XX, a further deed of variation of the trust to exclude the company as a beneficiary of the trust and to exclude foreign beneficiaries from the trust was executed.

All beneficiaries of the trust are, or were, Australian tax residents and none were excluded foreign residents.

Person A's children are not beneficiaries of any other trust and do not have income from other sources.

Assets of the trust and sale of the property

The trust contains no other assets other than the amount originally settled on the trust.

Prior to Person B's death, the property was owned and occupied by them as their main residence.

The market value of the property at the date of death of person B was estimated to be $XX.

The balance of the sale proceeds of the property are held by the trust and have been, or are to be, invested, for the benefit of Person A's children.

The only transactions to go through the discretionary trust have been the receipt of the property pursuant to person B's will, the subsequent investment of part of the proceeds arising on disposal of the property and the income earned from the investment.

The trust does not carry on a business or receive income from any sources other than described above.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 102AG(2)

Income Tax Assessment Act 1936 subsection 102AG(2)(d)(i)

Income Tax Assessment Act 1936 subsection 102AG(8)

Income Tax Assessment Act 1936 subsection 102AA(4)