Private ruling: Excepted Trust Income
Date of advice: 11 April 2018
Published: July 2018
Ruling period: Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | Year ended 30 June 2023
Date scheme commenced: 1 July 2018

Ruling: Question and answer | Is the income you receive from the estate proceeds trust (EPT) excepted trust income? | Yes.

Relevant facts and circumstances: The Deceased had a spouse. They had XXX children: The Deceased passed away on a date between # and #. The Deceased left the whole of his estate to the spouse. The spouse is the sole executor and sole beneficiary under the deceased’s will. The spouse wants to make provision for their children in an EPT. The spouse will transfer a portion of the assets from the deceased estate to the EPT. The spouse and children are beneficiaries of the EPT. There is a power of appointment of income in favour of any of the beneficiaries. The spouse is the first Appointor and may appoint the trustee. The spouse will probably be involved with the trustee, a company, as sole shareholder and sole director. The trust deed will be completed with some details. It will be dated. The trustee has not yet been incorporated, but will be in due course, and its name and ACN will be inserted on the deed. The property of the EPT will earn income. The Trustee will invest property transferred to the EPT, and may change investments as desired. In some years, the trustee will appoint income to one or more of the children. In those or other years, the trustee will appoint income to the parent. Under the applicable state law, children of a deceased who dies intestate take a share of the estate.

Relevant legislative provisions: Division 6AA of the Income Tax Assessment Act 1936 | Subsection 102AC(1) of the Income Tax Assessment Act 1936 | Subsection 102AC(2) of the Income Tax Assessment Act 1936 | Subsection 102AG(1)of the Income Tax Assessment Act 1936 | Subsection 102AG(2) of the Income Tax Assessment Act 1936 | Subparagraph 102AG(2)(d)(ii) of the Income Tax Assessment Act 1936 | Subparagraph 102AE(2)(c)(ii) of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Division 6AA 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 include any person, other than an excepted person (as defined in subsection 102AC(2) of the ITAA 1936), who is under 18 years of age on the last day of the income year. In this case, the children are minors, under 18 years of age, and are prescribed persons for the purposes of subsection 102AC(1) of the ITAA 1936. Where the beneficiary of a trust 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 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 that derived by a trust estate 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 three years after the date of death of the deceased person is listed as excepted trust income (subparagraph 102AG(2)(d)(ii) of the ITAA 1936). As per subsection102AE(2) of the ITAA 1936 an amount included in the assessable income of a person is excepted trust income to the extent to which the amount: (c) is derived by minor from the investment of any property: (ii) that was transferred to the minor 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 Although looking at amounts derived by minors from the investment of property, this subparagraph uses the same terminology as subparagraph 102AG(2)(d)(ii) of the ITAA 1936. Note the wording of the subparagraph and the comments from CITCM 884 which address its application: Paragraphs 189 to 191 of CITCM 884 state: '189. Subparagraph (ii) of paragraph (c) covers certain cases where property comes indirectly to a child as a result of a person's death, e.g., where a husband does not make provision for his children in his will, but dies leaving all of his estate to his widow, who shortly after makes provision for the children by transferring to them all or part of property she has acquired from the estate. By this subparagraph, income from property transferred to a minor by another person out of property that devolved upon the later from a deceased estate is excepted assessable income, provided that the property was transferred within 3 years after the date of death..' 190. This subparagraph should also be applied to situations in which, on the premature death of the member of a superannuation fund, under the rules of the fund benefits are not paid direct to the members estate, but to his or her widow or widower. Property transferred to a minor by the widow or widower (within the specified time period) out of such superannuation moneys paid to the widow or widower, is to be treated as coming with subparagraph 102AE(2)(c)(ii). 191. In applying subsection (10) to these cases, the superannuation monies are to be treated as if they formed part of the estate of the deceased person.' We accept that the arrangement meets the requirement set out in subparagraph 102AG(2)(d)(ii) of the ITAA 1936. The income you receive from the EPT is considered excepted trust income.