Private ruling: Excepted trust income
Date of advice: 9 September 2024
Published: 21 October 2024
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Where a beneficiary of the Testamentary Trust chooses not to draw down their entitlement to an unpaid present entitlement (UPE) from distributions made to them from the Trust, and the Trustee reinvests those funds within the Trust, is income or capital gains generated on the newly acquired asset excepted trust income under subsection 102AG(2) of Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. Section 102AG of ITAA 1936 provides that Division 6AA of ITAA 1936 will apply to a beneficiary of a trust estate that is a prescribed person in relation to a year of income that is not 'excepted trust income'. Subsection 102AG(2) of ITAA 1936 allows for property vested in a Testamentary Trust on the death of a specified individual to be classified as excepted trust income should the requirements of the section be met. Subsection 102AG(2) of ITAA 1936 lists what is excepted trust income in relation to a beneficiary of a trust estate. It includes at paragraph 102AG2(a) the following: a) is assessable income, of a kind covered by subsection (2AA), of a trust estate that resulted from: i. a will, codicil or an order of the court that varied or modified the provisions of a will or codicil. Subsection 102AG(2AA) of ITAA 1936 states, for the purposes of paragraph (2)(a), assessable income of a trust estate is of a kind covered by this subsection if: a) the assessable income is derived by the trustee of the trust estate from property; and b) the property satisfies any of the following requirements: i. the property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person concerned, as a result of the will, codicil, intestacy or order of the court mentioned in paragraph (2)(a); ii. the property represents accumulations of income or capital from property that satisfies the requirement in subparagraph (i); iii. the property represents accumulations of income or capital from property that satisfies the requirement in subparagraph (ii), or (because of a previous operation of this subparagraph) the requirement in this subparagraph. The assets held by the Trust including the funds from the UPE are assets that were transferred to the Trust as a result of the Will of the deceased or were directly derived from proceeds received from the disposal of assets that were so transferred. There have been no assets transferred into the Trust that were not derived from assets of the deceased estate. Accordingly, as the only assets held, or that will be held by the Trust, are property vested by the deceased in the Will, or the proceeds received from the disposal of such property, or new assets acquired with those proceeds, any income generated from such assets is considered to be excepted trust income when distributed to a minor beneficiary of the Trust.

Relevant facts and circumstances: The Testamentary Trust (the Trust) was created by the Will of an individual upon their death. The Trust was created for the benefit of the individual's child and their descendants. Pursuant to the will, the Trust received interests in various assets. During the financial year ended 30 June 20XX, the Trustees of the Trust disposed of various assets held by the Trust. As a result, the Trust made a significant capital gain for the year, which was resolved by the trustee to be distributed to a beneficiary of the Trust. The beneficiary's preference is not to draw down on the entitlement. Instead, they would prefer to use the proceeds from the disposal of assets that were bequeathed on the Trust to make further investments within the Trust for the benefit of the beneficiary and other family members. There has been no property transferred into the Trust that has not been derived from the net assets of the deceased estate.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 102AG | Income Tax Assessment Act 1936 Subsection 102AG(2) | Income Tax Assessment Act 1936 Subsection 102AG(2AA)