Private ruling: Child maintenance trust
Date of advice: 27 March 2023
Published: 22 May 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Child Maintenance Trust satisfy the conditions of section 102AG(2)? | A1: Yes. | Q2: Will the income distributed from the Child Maintenance Trust to the Children be 'excepted trust income' under section 102AG(2)? | A2: Yes.

Relevant facts and circumstances: The parents were married and are now divorced. The parents do not expect to live together again in a genuine domestic basis. The parents have XXXX children together (the children). Consent orders were made by the Family Court on XXXX with both parties agreeing to enter into a Binding Child Support Agreement (BCSA). The BCSA allows XXXX to meet his obligations to pay child support for the children by utilising a Child Maintenance Trust (CMT). XXXX proposes the creation of a CMT for the benefit of the children. XXXX will be the Trustee of the proposed CMT. A copy of the draft Child Maintenance Trust (CMT) deed was provided with the private ruling application. XXXX proposes to transfer $XXXX cash to the CMT by either lump sum: or multiple transfers of smaller amounts up to a total amount of $XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6AA | Income Tax Assessment Act 1936 subsection 102AC(1) | Income Tax Assessment Act 1936 subsection 102AC(2) | Income Tax Assessment Act 1936 Section 102AG | Income Tax Assessment Act 1936 subsection 102AG(2) | Income Tax Assessment Act 1936 subparagraph 102AG(2)(c)(viii) | Income Tax Assessment Act 1936 subsection 102AG(2A) | Income Tax Assessment Act 1936 subsection 102AG(3) | Income Tax Assessment Act 1936 subsection 102AG(4) Reason for decision | These reasons for decision accompany the Notice of private ruling for the Trustee for XXXX Child Maintenance Trust. | Division 6AA of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person. | A prescribed person is defined in subsection 102AC(1) of the ITAA 1936 to include any person, other than an excepted person (as defined in subsection 102AC(2)), who is under 18 years of age on the last day of the income year. | Where the beneficiary of a trust is a prescribed person, Division 6AA of the ITAA 1936 will apply to so much of the beneficiary's share of the net income of the trust that is not excepted trust income (subsection 102AG(1)). | Subsection 102AG(2) of the ITAA 1936 lists the various types of income of a trust estate which are excepted trust income in relation to the beneficiary of a trust estate. Relevantly for this ruling, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary as the result of a family breakdown (subparagraph 102AG(2)(c)(viii)). | The Commissioner has set out his view of the requirements for a child maintenance trust to be productive of excepted trust income in Taxation Ruling 98/4 Income tax: child maintenance trust arrangements . | Subparagraph 102AG(2)(c)(viii) of the ITAA 1936 does not apply to except income from the investment of property transferred to a trustee for the benefit of a beneficiary unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as a trustee) when the trust ends (subsection 102AG(2A)) Alternatively, the property should pass to the beneficiary's estate should the beneficiary die before the end of the trust. | Where any parties to an act or transaction directly or indirectly connected to the derivation of the excepted trust income are not dealing with each other at arm's length, subsection 102AG(3) of the ITAA 1936 will apply. This subsection will reduce the excepted trust income of the CMT to so much (if any) of that income as would have been derived had the parties been dealing on an arm's length basis. | Subsection 102AG(4) of the ITAA 1936 provides that assessable income derived by a trustee is not excepted income if it results, directly or indirectly, under or as a result of an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that that assessable income would be excepted trust income. However, if the purpose of deriving excepted trust income is no more than merely incidental to setting up legitimate arrangements to satisfy an obligation to provide for the maintenance of a child, then the purpose is disregarded and the income may still be excepted (subsection 102AG(5)).

Reasons for decision: Summary: Division 6AA of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person. A prescribed person is defined in subsection 102AC(1) of the ITAA 1936 to include any person, other than an excepted person (as defined in subsection 102AC(2)), who is under 18 years of age on the last day of the income year. Where the beneficiary of a trust is a prescribed person, Division 6AA of the ITAA 1936 will apply to so much of the beneficiary's share of the net income of the trust that is not excepted trust income (subsection 102AG(1)). Subsection 102AG(2) of the ITAA 1936 lists the various types of income of a trust estate which are excepted trust income in relation to the beneficiary of a trust estate. Relevantly for this ruling, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary as the result of a family breakdown (subparagraph 102AG(2)(c)(viii)). The Commissioner has set out his view of the requirements for a child maintenance trust to be productive of excepted trust income in Taxation Ruling 98/4 Income tax: child maintenance trust arrangements . Subparagraph 102AG(2)(c)(viii) of the ITAA 1936 does not apply to except income from the investment of property transferred to a trustee for the benefit of a beneficiary unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as a trustee) when the trust ends (subsection 102AG(2A)) Alternatively, the property should pass to the beneficiary's estate should the beneficiary die before the end of the trust. Where any parties to an act or transaction directly or indirectly connected to the derivation of the excepted trust income are not dealing with each other at arm's length, subsection 102AG(3) of the ITAA 1936 will apply. This subsection will reduce the excepted trust income of the CMT to so much (if any) of that income as would have been derived had the parties been dealing on an arm's length basis. Subsection 102AG(4) of the ITAA 1936 provides that assessable income derived by a trustee is not excepted income if it results, directly or indirectly, under or as a result of an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that that assessable income would be excepted trust income. However, if the purpose of deriving excepted trust income is no more than merely incidental to setting up legitimate arrangements to satisfy an obligation to provide for the maintenance of a child, then the purpose is disregarded and the income may still be excepted (subsection 102AG(5)).