Private ruling: Excepted income
Published: September 2014
Ruling period: 1 July 2013 to 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Is income derived from the investment of property transferred to the X Trust excepted income pursuant to subparagraph 102AG(2)(c)(vii) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes


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 Subsection 102AG(1) | Income Tax Assessment Act 1936 Subsection 102AG(2) | Income Tax Assessment Act 1936 Paragraph 102AG(2)(c)(vii)

Reasons for decision: Summary: In the case of a trust estate, 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. Where a beneficiary is less than 18 years at the end of the taxation year, it is considered that they have been under a legal disability for that taxation year. Where a trustee has discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries (for example, by paying or using the income to pay the beneficiary's 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. Division 6AA of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in determining the basic income tax liability of a 'prescribed person', on their assessable income, unless the income is 'excepted assessable income' (subsection 102AG(1) of the ITAA 1936). 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), under 18 years of age at the end of the income year. 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. An amount derived by the trustee of a trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary out of a public fund established and maintained exclusively for the relief of persons in necessitous circumstance is listed as excepted trust income (subparagraph 102AG(2)(c)(vii) of the ITAA 1936). | Detailed Reasoning - Whether a 'public fund': As discussed in paragraphs 5 to 9 in Taxation Ruling TR 95/27, the word 'public' as applied to a 'fund' refers to the source, constitution and management of the fund rather than to the objects for which it is established. The term 'public fund' is not defined in the ITAA 1936. The decision of the High Court in Bray v. Federal Commissioner of Taxation (1978) 140 CLR 560 ; 78 ATC 4179; 8 ATR 569 establishes that a fund will be 'public' where: (a) it is the intention of the promoters or founders that the public will contribute to the fund; (b) the public, or a significant part of it, does in fact contribute to the fund; and (c) the public participates in the administration of the fund. There are two types of funds which are considered to be 'public funds': (a) funds established and controlled by governmental or quasi-governmental authority; and (b) funds to which the public is invited to contribute and in fact does contribute. These funds must be controlled or administered by persons or institutions having a degree of responsibility to the community as a whole. Persons who are considered to have a degree of responsibility to the community as a whole include: church authorities, school principals, judges, clergymen, solicitors, doctors and other professional persons, mayors, councillors, town clerks and members of parliament. Generally, persons who are acceptable as having a degree of responsibility to the community as a whole, are known to a broad section of the community because they perform a public function, or they belong to a professional body (such as the Institute of Chartered Accountants, State Law Societies and Medical Registration Boards) which has a professional code of ethics and rules of conduct. TR 95/27 states in paragraph 9 that for the ATO to accept a fund as a public fund, the founding documents of the public fund must reflect each of the following: (a) the objects of the fund must be clearly set out and reflect the purpose of the fund; (b) the fund must be kept separate from any other funds of the sponsoring organisation. A separate bank account and clear accounting procedures are required; (c) receipts must be issued in the name of the fund; (d) the public must be invited to contribute to the fund; (e) the fund must operate on a non-profit basis. Moneys must not be distributed to members of the managing committee or trustees of the fund except as reimbursement for out-of-pocket expenses incurred on behalf of the fund or proper remuneration for administrative services; (f) the fund must be managed by members of a Committee, a majority of whom have a degree of responsibility to the general community (see above); and (g) should the public fund be wound-up any surplus money or other assets must be transferred to some other deductible gift recipient. It is considered that the Y Fund meets the above criteria to be considered a public fund. | Detailed Reasoning - The property must be transferred beneficially to a child.: For subparagraph 102AG(2)(c)(vii) of the ITAA 1936 to apply, the property must be transferred to the trustee for the benefit of the minor. The child must have an absolute vested interest in the property from the inception of the trust. Subsection 102AG(2A) of the ITAA 1936 makes it clear that, the child must, under the terms of the trust, acquire the trust property other than as a trustee when the trust ends. In addition, the property must pass into the child's estate, should the child die before the trust ends. Under a clause of the trust deed the trustee of the Trust has an absolute discretion to make a distribution of income for the beneficiary's benefit. Pursuant to another clause, the Trustees may accumulate any part of the net income of the Trust Fund not so paid or applied. We find that the effect of the Trust Deed provides that the beneficiary has an absolute vested interest in the property from the Trusts inception. We are also of the opinion that subsection 102AG(2A) of the ITAA 1936 is satisfied. It is concluded that assessable income derived by the trustee of the X Trust from the investment of the property transferred to the trustee for the benefit of the beneficiary, is excepted income pursuant to subparagraph 102AG(2)(c)(vii) of the ITAA 1936.

Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | • The private ruling application 20 August 2014 | • Previous private ruling application dated 10 January 2014 | • Trust Deed for The Y Fund | X died, leaving a child under the age of 18. | Following X's death, Z organisation received requests from the public to make donations for the benefit of X's child. | Accordingly, a bank account was established to collect the donations (the 'Y Fund'). | By Deed, Z organisation settled a trust known as the X Trust for the benefit and maintenance of the child. | Funds from the Y Fund held in the bank account were transferred from time to time into the X Trust. | The initial corpus of X Trust was a portion of the monies that had been received into the Y Fund at that time. | A trust deed was executed establishing the Y Fund as a necessitous circumstances fund, for the relief of children, dependents and/or relatives of deceased persons from a particular industry who are in necessitous circumstances.