Private ruling: Excepted Income
Date of advice: 24 June 2015
Published: June 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the income from funds transferred by a superannuation fund as a death benefit to two trusts specifically set up for minor children taxed at normal resident tax rates? | A1: Yes. | Q2: Would the income earned from funds raised by mourners that was transferred to the above trusts be taxed at normal resident rates? | A2: No.

Relevant facts and circumstances: The deceased died on the X. The deceased had a benefit amount of X and had left a binding death nomination that this income was to be split equally between her/his two children and kept on trust for them until they turn 18. The beneficiaries are Australian Residents and will continue to be during this time. Australian Super has drawn up two constituted trust deeds with themselves as settlor and the deceased's relative, as trustee. The two trust deeds allow the funds for the appropriate trust to be able to be used for the education and welfare of each beneficiary, otherwise to be invested until the beneficiaries are 18. Each deed states that when the beneficiary reaches the age of 18, the trustee shall hold the trust fund for the beneficiary absolutely provided that if the beneficiary dies before reaching the age of 18 then the trustee shall hold the trust fund for the estate of the beneficiary. Additional funds of approximately X were raised by mourners. The trustee is considering adding the X, to the two trusts, depending on its tax treatment.

Relevant legislative provisions: Division 6AA of the Income Tax Assessment Act 1936 | Section 102AC(2) of the Income Tax Assessment Act 1936 | Section 102AG of the Income Tax Assessment Act 1936 | Subsection 102AG(2) of the Income Tax Assessment Act 1936 | Subsection 98(1) of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) operates to tax certain income derived by minors who are 'prescribed persons' at penalty rates. A minor will be a 'prescribed person' for the purposes of Division 6AA of the ITAA 1936 if, in relation to a year of income, they are: • less than 18 years of age on the last day of the income year, and • not an 'excepted person' in relation to the year of income. Excepted persons are defined in section 102AC(2) of the ITAA 1936. Neither beneficiary will be excepted persons for the purposes of Division 6AA of the ITAA 1936. Section 102AG of the ITAA 1936 specifies the circumstances in which Division 6AA of the ITAA 1936 will apply to trust income. Specifically, where a beneficiary of a trust estate 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 estate as, in the opinion of the Commissioner, is attributable to the assessable income of the trust estate that is not, in relation to the beneficiary, excepted trust income. Subsection 102AG(2) of the ITAA 1936 specifies the types of trust income that will be 'excepted trust income.' In particular, subparagraph 102AG(2)(c)(v) of the ITAA 1936 provides that 'excepted trust income' includes assessable income of a trust estate derived directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund. Consequently, the assessable income of both of the trusts will be excepted income and Division 6AA of the ITAA 1936 will not apply. Subsection 98(1) of the ITAA 1936 applies to assess the trustee on a beneficiary's share of income where a beneficiary is a resident, presently entitled and is under a legal disability. In this case, the beneficiaries of each of the trusts are under a legal disability as they are less than 18 years of age. A beneficiary is presently entitled to the net income of the trust where that beneficiary has an absolute and indefeasible vested interest in the trust income (Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 (Taylor's case )). The High Court held that a beneficiary that is under a legal disability has an absolute and indefeasible vested interest in the trust income, where the terms of trust specify that the accumulated income of the trust is held for the beneficiary until the beneficiary ceases to be a minor or, if the beneficiary dies earlier, for their estate. However, where the terms of the trust provide for the income to go to another person in the event of the beneficiary's death before the beneficiary attains age of majority, the beneficiary is not presently entitled as the beneficiary's interest is considered contingent, and therefore defeasible. In this case, both of the trust deeds specify that the accumulated income of the trust is held for the beneficiary until the beneficiary ceases to be a minor or, if the beneficiary dies earlier, for their estate. Consequently, the beneficiaries are each presently entitled to the net income of their related trust and the trustee of the trusts will be assessed and liable to pay tax as if it were the income of an individual and were not subject to any deduction. As per Subsection 102AG(2) of the ITAA 1936 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: (a) is assessable income of a trust estate that resulted from: (i) a will, codicil or an order of a court that varied or modified the provisions of a will or codicil; or (ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate; (b) is employment income; (c) 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: (i) by way of, or in satisfaction of a claim for, damages in respect of: (A) loss by the beneficiary of parental support; or (B) personal injury to the beneficiary, any disease suffered by the beneficiary or any impairment of the beneficiary's physical or mental condition; (ii) pursuant to any law relating to worker's compensation; (iii) pursuant to any law relating to the payment of compensation in respect of criminal injuries; (iv) directly as the result of the death of a person and under the terms of a policy of life insurance; (v) directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund; (vi) directly as the result of the death of a person by an employer of the deceased person; (vii) out of a public fund established and maintained exclusively for the relief of persons in necessitous circumstances; or (viii) as the result of a family breakdown; (d) is derived by the trustee of the trust estate from the investment of any property: (i) that devolved for the benefit of the beneficiary from the estate of a deceased person; (ii) that was transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person from the estate of a deceased person and was so transferred within 3 years after the date of the death of the deceased person; or (iii) being a verifiable prize in a legally authorized and conducted lottery and being a prize of which the beneficiary is the beneficial owner; or (e) is derived by the trustee of the trust estate from the investment of any property that, in the opinion of the Commissioner, represents accumulations of: (i) assessable income derived by the trustee during a year of income in relation to which this Division applies, being assessable income that, in relation to the beneficiary, is excepted trust income; (ii) assessable income derived by the trustee during a year of income in relation to which this Division does not apply, being assessable income that would, in the opinion of the Commissioner, have been excepted trust income in relation to the beneficiary if this Division were applicable in relation to the year of income during which the assessable income was derived; or (iii) exempt income derived by the trustee to which subparagraph (i) or (ii) would, in the opinion of the Commissioner, apply if that exempt income had been assessable income. Consequently, the additional income earned from funds raised by mourners is not excepted income. Division 6AA of the ITAA 1936 will apply and the income will not be taxed at normal resident rates.