Private ruling: Treatment of Trust income
Published: May 2013
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 17 December 2009

Ruling: Q1: Will the Commissioner exercise his discretion in relation to income tax on minors income and either classify the individual beneficiaries as Excepted Persons or classify the trust distributions from the trust as Excepted Trust Income? | A1: No. No such discretion is available to the Commissioner.

Relevant facts and circumstances: There are a number of beneficiaries of the Trust, all being minors. The trust was established during the 20XX income year to administer community donations received as a result of the death of the father of the beneficiaries in the same income year. The father of the beneficiaries had sole custody of the children at the time of his death. The mother of the children is still alive. Since the death of the father sole custody of the children has been granted to a grandparent. The Commissioner previously refused an application for the Trust to be approved as a Necessitous Circumstance Fund.

Relevant legislative provisions: Section 102AC of Division 6AA Income Tax Assessment Act 1936 | Section 102AG of Division 6AA Income Tax Assessment Act 1936 | Subsection 98(1) Income Tax Assessment Act 1936 | Part 1 of Schedule 12 Income Tax Rates Act

Reasons for decision: Detailed Reasoning - Excepted Person: The income of children is considered under Division 6AA of the ITAA 1936. Section 102AC sets out the persons to whom the Division applies. From the facts supplied by the trustees of the Trust, none of the beneficiaries of the Trust satisfy the criteria to be considered to be Excepted persons. Consequently, the minor beneficiaries are Prescribed persons to whom Division 6AA of the ITAA 1936 applies, being under the age of 18 years and not Excepted persons. | Detailed Reasoning - Excepted Trust Income: Section 102AG details the type of trust income which is caught under Division 6AA of the ITAA 1936. From the facts supplied by the trustees of the Trust, the income of the Trust does not satisfy the criteria to be considered to be Excepted trust income and Division 6AA of the ITAA 1936 therefore applies to such income. The Trust is not a Necessitous Circumstances Fund. | Detailed Reasoning - Discretion: Because the beneficiaries of the Trust are not Excepted persons and the income of the Trust is not Excepted Trust income, it is necessary to consider the relevant assessing provisions and whether the Commissioner has any discretion to vary these provisions. ATO ID 2002/238 provides the ATO View on the assessment of a minor beneficiary's share of the net trust income and determines that pursuant to section 98(1) of the ITAA 1936 the trustee is assessable on the minor beneficiary's share of the net trust income. Subsection 98(1) provides that where a beneficiary who is under a legal disability (ie a minor or of mental incapacity) is presently entitled to a share of trust income, the trustee is liable to pay tax on that share. The trustee is taxable on: · so much of the share of the net income as is attributable to a period when the beneficiary was a resident; and · so much of the share as is attributable to a period when the beneficiary was not a resident and is also attributable to Australian sources · as if it were the income of an individual and were not subject to any deduction. As all of the beneficiaries of the Trust were less than 18 years of age (minors) on 30 June 2012 and therefore under a legal disability, the trustee is assessable separately on each of the beneficiaries' share of the net income of the Trust under subsection 98(1). Special rules apply in calculating the tax payable on income of a minor under Division 6AA 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 Income Tax Rates Act (ITRA) sets out the appropriate rates of tax levied. Schedule 12 of the ITRA provides the rates of tax payable by a trustee under section 98 of the ITAA 1936 where Division 6AA of Part III of that Act applies. Where a minor is a resident, the special rules do not apply if the relevant eligible income is $416 or less. If the eligible taxable income is $416 or less, the whole of the taxable income is taxed at normal rates. If the eligible taxable income exceeds $416 but is less than $1308, the tax on the eligible income is the greater of: (a) 66% of the excess over $416; and (b) the difference between tax on the whole of the taxable income and tax on so much of the taxable income that does not qualify as eligible taxable income. Where the eligible taxable income exceeds $1307, tax is payable on the whole of the eligible taxable income at the rate of 45%. There is no discretion available to the Commissioner to treat the income of the trust as if it were Excepted Trust income, or to treat the beneficiaries as if they were Excepted persons. Further there is no discretion available to the Commissioner to vary the taxing provisions under either ITAA 1936 or the ITRA.