Private ruling: Trust
Published: June 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 19 December 2011

Ruling: Q1: Is the Beneficiary, of the Trust, an 'excepted person', for the purposes of Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Will the Trustee of the Trust, established for the Beneficiary, be liable to pay tax under subsection 98(1) of the ITAA 1936 on income distributions made to the Beneficiary? | A2: Yes.

Relevant facts and circumstances: The Beneficiary is under 18 years of age. The Beneficiary been diagnosed with a medical condition and will be subject to ongoing specialist care and supervision for the foreseeable future. The beneficiaries' father did not leave a Will. The Trust was created using the life insurance proceeds from the late father's superannuation fund. The beneficiaries' mother is the Trustee of the Trust. Due to the high maintenance costs for the Beneficiary these funds will be drawn down over time as needed.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 98 | Income Tax Assessment Act 1997 Section 100 | Income Tax Assessment Act 1997 subsection 102AC(1) | Income Tax Assessment Act 1997 subsection 102AC(2) | Income Tax Rates Act 1986 Part 1 of Schedule 10 | Social Security Act 1991 Part 2.19 Question 1: | Is the Beneficiary, of the Trust, an 'excepted person', for the purposes of Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer: | Yes. | Detailed Reasoning | The Beneficiary, for the years of this Ruling, will be under the age of 18. | Special rules under Division 6AA of the ITAA 1936, which comprises sections 102AA to 102AGA, apply when calculating the tax payable on income of minors (that is, persons under the age of 18). | The rules were introduced to discourage income-splitting by means of the diversion of income to children, but they are not confined to situations where income-splitting is involved. | Generally, where the rules apply, special rates of income tax apply. The special rates are the equivalent of the top marginal personal rate (refer Income Tax Rates Act 1986 at 51-455). Several categories of minors are excluded from the special rules and thus excluded entirely from the operation of Division 6AA of the ITAA 1936. | The minors to whom the special rules do not apply are referred to as 'excepted person' (subsection 102AC(2) of the ITAA 1936). | One of the categories of 'excepted person' includes a 'disabled child' under subparagraph 102AC(2)(d)(i) and 102AC(2)(d)(ii) of the ITAA 1936 which relevantly states: | (d) the Commissioner: | has received a certificate issued by a legally qualified medical practitioner certifying that the minor is: | a disabled child, or a disabled adult, within the meaning of Part 2.19 of the Social Security Act 1991; or | a person who has a continuing inability to work within the meaning of Part 2.3 of the Social Security Act 1991 or is permanently blind; and is satisfied that, on the last day of the year of income, the minor was a person of the kind mentioned in sub-subparagraph (i)(A) or (B); | The meaning of a 'disabled child' from Part 2.19 of the Social Security Act 1991 is: a person aged under 16 who: | (a) has a physical, intellectual or psychiatric disability, and | (b) is likely to suffer from that disability permanently or for an extended period. | In the present case | The medical report provided confirms that the Beneficiary has been diagnosed with a medical condition that requires ongoing specialist care and supervision for the foreseeable future. It is considered that this is a medical condition that would meet the definition of 'disabled child' for the purposes of the Social Security Act 1991 . The Commissioner is satisfied that the Beneficiary would be considered an 'excepted person' and would therefore be excluded from the operation of Division 6AA of the ITAA 1936. | Question 2 | Will the Trustee of the Trust, established for the Beneficiary, be liable to pay tax under subsection 98(1) of the ITAA 1936 on income distributions made to the Beneficiary? | Answer: | Yes. | Detailed Reasoning | The taxation of trust income is governed by the provisions of Division 6 of Part III (sections 95 to 102) of the ITAA 1936. | Generally, where a beneficiary of a trust is presently entitled to the income of the trust, they are liable to tax on that income in their own right, under subsection 97(1) of the ITAA 1936. | However, where a beneficiary who is presently entitled to the trust income is under a legal disability, the trustee is liable to pay tax on that income on behalf of that beneficiary under subsection 98(1) of the ITAA 1936. | The taxing of trust income to the trustee or beneficiary is therefore dependant on whether or not the beneficiary is: | · presently entitled | · under a legal disability | Present Entitlement | The taxation of trust income varies depending on whether it is income to which a beneficiary is presently entitled or income to which no beneficiary is presently entitled. | Several conditions must be satisfied for a beneficiary to be presently entitled ( FC of T v. Whiting (1943) 68 CLR 199; Taylor v. FC of T (1970) 119 CLR 444; Taxation Ruling IT 319). | Those conditions are as follows: | The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income; | The interest must not be contingent but must be such that the beneficiary may demand immediate payment of that income. Or, if the beneficiary is under a legal disability, the interest must be such that the beneficiary would have been able to demand immediate payment of the income had there been no disability or incapacity; | A beneficiary can only be presently entitled to income that is legally available for distribution to the beneficiary. | A beneficiary may be presently entitled even if, under the terms of the trust, the entitlement is only to have money applied for their benefit and not paid directly to them ( Sacks v Gridiger (1990) 22 NSWLR 502; 90 ATC 4299). | Legal Disability | A legal disability arises where a beneficiary is a minor, bankrupt, or mentally incapacitated, as they cannot give a valid discharge for money paid to them. In each case, the beneficiary is incapable in law of acknowledging a receipt of trust income from the trustee, so as to discharge the trustee from any further obligation to pay over or otherwise apply income for the benefit of the beneficiary. | In the present case | Present Entitlement | A distribution of income, during an income year, from the Trust to the Beneficiary will result in the Beneficiary to have an interest in possession in an amount of income that is legally ready for distribution so that the Beneficiary would have a right to demand payment of it if the Beneficiary were not under a disability. The Beneficiary would therefore be absolutely entitled to the income arising from the trust distribution. Accordingly, the Beneficiary would be presently entitled to the income. | Legal Disability | The Beneficiary is a minor and is therefore unable to give a valid discharge of money paid to the Beneficiary. The Beneficiary is therefore under a legal disability. | As the Beneficiary is presently entitled but under a legal disability, section 98 of the ITAA 1936 would have application. However, as the Beneficiary is a 'minor', initial consideration would need to be had as to whether Division 6AA of the ITAA 1936 would be applicable. | Is this income to which Division 6AA of the ITAA 1936 applies? | The taxing provisions of certain children are provided for under Division 6AA of the ITAA 1936. As discussed under 'Question 1', the Beneficiary is excluded from the operations of Division 6AA of the ITAA 1936. | Section 98 of the ITAA 1936 | Section 98 of the ITAA 1936 provides that where a beneficiary who is under a legal disability, is presently entitled, the trustee of the trust estate is assessed and is liable to pay tax on the beneficiary's share of the net income of the trust estate. | In this case, section 98 of the ITAA 1936 is applicable, as the Beneficiary is presently entitled and under a legal disability.