Private ruling: Excepted Trust Income
Date of advice: 15 April 2016
Published: June 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the trustees of the trust be taxed under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the undistributed income of the trust? | A1: No. | Q2: Will the trustees of the trust be taxed under section 98 of the ITAA 1936 in relation to the undistributed income of the trust? | A2: Yes.

Relevant facts and circumstances: The trust was established by deed by the superfund on XXXX. The trust was established after the death of the deceased who was a member of the superfund. The proceeds of the member fund were not dealt with in the will and the superfund asked all possible beneficiaries to submit an application for a share of the fund. The superfund settled the entire sum on A. The deed states that the monies to be used by the Trustee solely for the benefit of A. A is a minor and suffers from a number of medical conditions which result in them being assessed as disabled. The trustee sought legal advice to determine the type of trust the deed had established. It was determined that the Trust was a discretionary trust. A was born on XXXX. The trust deed provides that: • the beneficiary is not entitled to the trust funds until they attain the age of eighteen years • until the beneficiary attains the age of eighteen years, the trustees may pay or apply any amount of the income or capital of the trust for the maintenance, education, advancement or benefit of the beneficiary; and • if the beneficiary dies before attaining the age of eighteen years, the trust fund passes to their estate.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Section 99. | Income Tax Assessment Act 1936 - Section 98. | Income Tax Assessment Act 1936 - Section 97. | Income Tax Assessment Act 1936 - Section 99A. | Income Tax Assessment Act 1936 - Section 102AC. | Income Tax Assessment Act 1936 - Section 102AG.

Reasons for decision: Detailed Reasoning - Excepted assessable income: 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) of the ITAA 1936), who is under 18 years of age on the last day of the income year. In this case, the beneficiary is a minor, under 18 years of age, and is a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936. 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) of the ITAA 1936). 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 the trust estate. Assessable income derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund (Subparagraph 102AG(2)(c)(v) of the ITAA 1936). In this case, the trust was created with the proceeds of a super benefit that A received as a result of the death of the deceased. Any distribution to the minor beneficiary as the result of the investment of these funds will be considered excepted assessable income under subsection 102AG(2) of the ITAA 1936. | Detailed Reasoning - Taxation of trust income: The taxation of the net income of a trust is determined under the following sections of the ITAA 1936: • Section 97 applies where a beneficiary is presently entitled to a share of the net income and is not under a legal disability; • Section 98 applies where a beneficiary is presently entitled but is under a legal disability; and • Sections 99A and 99 apply where there is an absence of present entitlement of the beneficiary to all or some of the net income of a trust estate. Legal disability A beneficiary is under a legal disability if they are a minor at general law. Under the Age of Majority Act of each state, the age at which a minor will achieve legal competence is 18 years of age. The beneficiary, in this case, is under a legal disability as they are under 18 years of age. Present entitlement There is no definition of the term 'presently entitled' in the income tax legislation; therefore, it is necessary to look at the meaning given to the term by the courts and further discussed in Taxation Ruling IT 319. In particular, in Taylor v. FCT (1970) 119 CLR 444; 1 ATR 582; 44 ALJR 148; 70 ATC 4026 (Taylor's Case) the meaning of present entitlement was considered for a beneficiary who was under a legal disability. Under the terms of the trust settlement in Taylor's case, the trust funds were to be used for the beneficiary's maintenance and education. Any excess income was to be accumulated and invested for the beneficiary until he attained 21 years of age or, if the beneficiary died before then, the funds would pass to the beneficiary's estate. In the relevant year the trustees did not exercise their discretion to pay out any part of the trust income and the whole amount was accumulated within the trust. The court found that the beneficiary was presently entitled to trust income even though the beneficiary was under a legal disability because: • the beneficiary had an absolutely vested interest in the accumulated income. That is, the beneficiary's interest was absolutely vested because the income passed to the beneficiary's estate if the beneficiary died before attaining 21 years of age and as such was indefeasible. • the beneficiary would have succeeded in an action to recover the income from the trustees had it not been for the legal disability. For a beneficiary to be presently entitled, therefore, they must have an absolute and indefeasible vested interest in the trust income. Where a beneficiary's interest in the trust income is contingent they will not be presently entitled. Where a trustee has discretion to pay or apply income of a trust to or for the benefit of a specified beneficiary (for example, by using the income to pay the beneficiaries school fees), section 101 of the ITAA 1936 deems a beneficiary to be presently entitled to the amount paid to them or applied for their benefit. In this case, the beneficiary has an absolutely vested interest in the trust funds as the income will pass to the beneficiary's estate if the beneficiary dies before the age of 18 years and the trustee has the discretion to apply the income of the trust to the maintenance of the beneficiary. Therefore, the beneficiary is considered to be presently entitled to a share of the net income of the trust. Subsection 98(1) of the ITAA 1936 applies to assess the trustee on a beneficiary's share of income where a beneficiary is presently entitled and is under a legal disability. In this case, the trustee should be assessed and liable to pay tax on the net income of the trust, pursuant to section 98 of the ITAA 1936, as if it were the income of an individual at normal individual resident rates on behalf of the beneficiary.