Private ruling: Excepted trust income
Published: February 2015
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will any income distributed from the trust to a beneficiary who is under 18 years of age be 'excepted trust income' under subsection 102AG(2) of the Income Tax Assessment Act 1936 (ITAA 1936) and be taxed at beneficiaries marginal tax rates (adult rates)? | A1: Yes

Relevant facts and circumstances: The deceased passed away on X. Their will created a testamentary trust. The residue of their estate was to be held on trust for their grandchildren living at the time of their death who shall survive to the age of 30. The will empowered the trustee in their absolute discretion to apply the whole or any part of the income and a portion of the capita to the grandchildren for their maintenance, education, advancement or otherwise benefit.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 102AC | Income Tax Assessment Act 1936 section 102AG | Income Tax Assessment Act 1936 Division 6AA | Income Tax Rates Act 1986 section 13

Reasons for decision: Summary: Division 6AA of Part III 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 mean 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. The beneficiaries will be a 'prescribed person' for the purposes of Division 6AA of Part III of the ITAA 1936. Division 6AA of Part III of the ITAA 1936 will apply, where the beneficiary of a trust is a 'prescribed person', 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 a trust which resulted from a will (a testamentary trust), is listed as 'excepted trust income' (subparagraph 102AG(2)(a)(i) of the ITAA 1936). Therefore, the income distributed from a testamentary trust to the taxpayer, a beneficiary of the trust who is a prescribed person, is 'excepted trust income' under subsection 102AG(2) of the ITAA 1936. Consequently the trustee will be assessed at on behalf of the beneficiary under the legal disability that is present entitled to the income of the trust at the beneficiary's marginal tax rate (adult rates) as opposed to the minor beneficiary's special tax rate.