Private ruling: Investment income
Date of advice: 17 August 2018
Published: October 2018
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Did you derive the income from the interest bearing bank account and related share investments? | A1: 

Relevant facts and circumstances: You are a ‘prescribed person’ and you are not an ‘excepted person’. The wider family have been giving you gifts of money for your birthdays and other celebrations. Your parent has opened a youth saver bank account in your name however the bank would not let your parent open a share trading account in your name as you are under 18 years of age. Your parent opened a share trading account in their own name in trust for you. The share registry states that your parent holds the shares on your account. The registry has not been changed since the account was established shortly after your birth. The funds in the bank account and associated share investments have mainly come from family as gifts for Christmas, and other celebrations. Less than 1% has come from parents and these deposits were just made to retain the higher rate of interest in the savings account. You are the only person who has benefited from the bank account and shares. You have provided bank statements which include descriptions of the relevant celebration and reason for the gift of money attached to deposits. This is contemporaneous evidence of the source of the funds at the time the deposits were made. Your parent also prepared and signed a trust deed to ensure that your money would always be treated as yours. The State Revenue Office has stamped the trust deed and duty has been paid in accordance with the relevant state legislative requirements. The trust deed has the following key elements: ● Property: The property is clearly defined in the deed to be the bank account and related shares. ● Trustee: Your parent has declared themselves to be the trustee. ● Beneficiaries: You are the sole beneficiary. ● Date: The date of the declaration of the trust. ● Signed: Signed by the trustee on the date mentioned. ● Documented in writing: The deed is documented in writing. Your parent has declared that the funds in the bank account and the shares are being held for your sole benefit and you are the beneficial owner. There have been no share sales, just purchases. You do not receive cash dividends: any dividends are reinvested via a dividend reinvestment plan.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6AA | Income Tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision: Summary: Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) examines the assessability of income of certain children. It applies to all persons under 18 (referred to as minors), unless they fall within one or other of the categories of ‘excepted persons’ as specified in the legislation. Genuine monetary gifts received by a child on special occasions such as birthdays or religious events are not assessable. However, if the child is a ‘prescribed person’ for the purposes of Division 6AA, any interest earned on the accumulation of such gifts is considered by the ATO to be ‘eligible assessable income’ and, as such, taxable at the higher rates. Prescribed persons are children under 18 years of age on the last day of the income year and not in a full-time occupation or within certain other specified categories. The eligible income within Division 6AA is so much of the assessable income of the person as is not employment income, business income or certain other specified types of income. | Detailed Reasoning - Children's bank accounts: Taxation Determination TD 2017/11 Income tax: who should be assessed to interest on bank accounts? states at paragraph 5: 5. Where a parent operates an account on behalf of a child, but the Commissioner is satisfied that the child beneficially owns the money in the account, the parent can nonetheless show the interest in a tax return lodged for a child. The lodgement of a trust tax return will not be necessary. 6. Where interest income on a bank account is assessable to a child under 18, that income may be subject to higher rates of tax under the rules in Division 6AA Part III of the Income Tax Assessment Act 1936 (ITAA 1936) that apply to the income of certain children. Example 4 in TD 2017/11: | Detailed Reasoning - Example 4 – child savings account – parent operates as trustee: 13. Raymond, aged 14, has accumulated $7,000 over the years from birthdays and other special occasions. Raymond’s mother has placed the money into a bank account in his name, which she operates on his behalf. Raymond’s mother does not use the money in the account for herself or others. Raymond earns $490 in interest during an income year. 14. Raymond has beneficial ownership of the money in the account and is therefore assessable on all of the interest income. The birthday gifts are not assessable income. 15. However, as Raymond is under 18 years of age, he will be subject to higher rates of tax under the rules in Division 6AA of Part III of the ITAA 1936. 16. If Raymond shows the interest in his tax return for that income year, his mother will not need to lodge a trust tax return. | Detailed Reasoning - Trusts: The term ‘trust’ is not defined in legislation and therefore takes its meaning from general law. A trust can be described simply as ‘a device by which one person holds property for the benefit of another person’: Butterworths Australian Legal Dictionary . In this sense, a trust is a fiduciary obligation or set of fiduciary obligations accepted by a person (the trustee) in relation to property (the trust property). The obligations are to be exercised for the benefit of another person or persons (the beneficiaries) or for a specified purpose. The form of a trust and its constitution (usually a trust deed) will determine the nature of the interest held by the beneficiaries in the trust property or fund. This in turn will influence the taxation implications of dealings in the trust fund by beneficiaries. | Detailed Reasoning - Beneficial ownership: The term ‘beneficial owner’ is not defined in legislation. The Commissioner considers the question of who should pay tax on the earnings of accounts referred to as children’s saving accounts in TD 2017/11. Although the ruling considers bank accounts specifically, the principles are equally applicable to dividend income which is received from shares held on behalf of a child. When shares are purchased by an adult on behalf of a child, the decision of who declares the dividends received and/or any net capital gain/loss made from the sale of the shares depends on who rightfully owns the shares. If there is evidence that the investment and its associated income is really that of the adult, then it would be appropriate for the dividend income or resulting capital gains be assessed to that adult, rather than to the child. When considering your circumstances, the gifts of money have been deposited into a bank account in your name and subsequently used to purchase shares on your behalf for your intended use and benefit. It is clear that you are the original and beneficial owner of the interest bearing bank account and related share investments. | Detailed Reasoning - Assessable income - dividend and interest reinvestment plans: Where an amount otherwise payable is applied as payment for new ordinary shares, that amount is deemed to have been paid (under section 44 of the ITAA 1936) and interest applied to the purchase of shares under such a plan would be deemed to be received. Subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) explains that you are taken to have received an amount as soon as it is applied or dealt with on your behalf or as you direct. As the beneficial owner of the shares, you are assessable on the dividends, even though the dividends are reinvested and you do not receive cash: you are taken to have received the cash and acquired more shares. | Detailed Reasoning - Lodging a tax return: Special rules apply in calculating the tax payable on income of a minor (sections 102AA to 102GA of the ITAA 1936). Under these rules, ‘unearned income’ of minors over a certain level is taxed at the highest marginal rate of tax. The rules apply to income, including capital gains, derived by the minor directly or through a trust. Where the minor is a resident, the special rules do not apply if the relevant income is $416 or less.