Private ruling: Excepted trust income
Date of advice: 15 April 2026
Published: 29 June 2026
Ruling period: Income year ending 30 June 20YY | An additional period until the relevant beneficiary turns 18-year-old
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will the 'investment income' derived by the trustee for the testamentary Trust (the Trustee) from the investment of death benefit that was distributed to the Trustee from the estate of the deceased be 'excepted trust income' under section 102AG of the Income Tax Assessment Act 1936 (ITAA 1936) when it is distributed to a 'prescribed person' beneficiary? | A1: Yes.

Relevant facts and circumstances: The Deceased passed away. The Deceased was survived by their two children, A and B. A and B were under 18 years of age on the date of the death of the Deceased. A trustee was appointed as the executor and trustee (the Executor) of the estate of the Deceased (the Estate). The Executor was granted probate of the last Will and Testament of the Deceased (the Will). The Will provides that: (a) The net residue of the Estate is to be divided equally between two discretionary testamentary trusts (the Testamentary Trusts) created by the Will, namely the: (i). the C Trust, wherein the primary beneficiary is A; and (ii). the D Trust, wherein the primary beneficiary is B; and (b) the Executor is to establish the Testamentary Trusts. Whilst the beneficiaries of each of the Testamentary Trusts were defined broadly in the Will, the instrument provided that the trustee of Testamentary Trusts: (a) has the discretion to pay all or part of the income and all or part of the capital of the Testamentary Trusts as the Trustee thinks fit; (b) ... The Deceased was a member of a Superannuation Fund (the Fund) on the date of their death and a superannuation lump sum Death Benefit became payable by the Fund to the Estate as a consequence of the Deceased's death. Prior to the receipt of the Death Benefit from the Fund to the Estate, the Executor resolved to: (a) accept and receive the Death Benefit from the Fund when it is paid to the Estate; (b) segregate the amounts of the Death Benefit from the Fund in the Estate such that: (i). the Estate will hold the Death Benefit on trust pursuant to the terms of the Will; (ii). the Death Benefit will not be pooled with other assets of the Estate; (iii). no other beneficiary of the Estate can obtain an interest in or benefit from the Death Benefit; and (iv). the capital of the Death Benefit will be: (A) held in the Estate solely and indirectly for A and B; and (B) distributed equally from the Estate to the C Trust and D Trust in accordance with the Will and in the manner whereby only A (in the case of the C Trust) or B (in the case of the D Trust) are the only persons to benefit from the capital of the Death Benefit received by the Estate; and (c) make an early interim distribution of the Death Benefit equally between the C Trust and D Trust. (the Resolution) On the same day, the Executor, in respective capacity as the trustee for each of the Testamentary Trusts, executed Deeds of Segregation (the Deeds) to segregate the capital of the Death Benefit which each of the Testamentary Trusts is to receive from the Estate as a separate pool of asset so that the segregated Death Benefit will: (a) not be pooled with other assets of the trust and the trustee shall administer the segregated Death Benefit as a distinct asset group which is separate from the other assets held in the trust; and (b) be held and maintained in the trust such that: (i). the capital beneficiaries of the segregated Death Benefit of the trust shall be restricted and limited only to the specified beneficiary (being A in the case of the C Trust or B in the case of the D Trust) during the lifetime of the specified beneficiary; and (ii). the Trustee's powers and discretion in the trust deed in relation to the distribution of the capital of the segregated Death Benefit shall be restricted and limited to the respective specified beneficiary during the lifetime of the specified beneficiary. In addition, prior to the receipt of the Death Benefit: (a) the Estate had set up a dedicated bank account for the purposes of receiving and segregating the Death Benefit to be received from the Fund as contemplated by the Resolution; and (b) similarly, the trustee of each of the Testamentary Trusts had set up a dedicated bank account for the purposes of segregating the Death Benefit in each of the Testamentary Trusts as contemplated by the Deeds. In consistent with the Resolution, the Deeds and the Will of the Deceased, (a) the Death Benefit was paid by the Fund to the dedicated bank account of the Estate for receiving the Death Benefit (so that there was no inter-mingling of the Death Benefit with any other monies in the Estate); and subsequently, (b) the Death Benefit was divided into two equal shares and a share was transferred from the Estate's bank account to each of the dedicated account set up by: (i). the trustee for the C Trust; and (ii). the trustee for the D Trust, as contemplated by the Will. The amount of the Death Benefit paid by the Fund to the Estate was $X of which the taxed element under taxable component is X% of the amount of the Death Benefit received. The Trustee received half of the Death Benefit from the Estate, being $Y. The Trustee has powers to invest the received Death Benefit for the earning of 'investment income'. The beneficiary receiving the 'investment income' from the Trustee, is a prescribed person defined in section 102AC of the ITAA 1936. Assumption The 'investment income' derived by the Trustee is from investments which are conducted at arms-length or commercial terms.

Relevant legislative provisions: Income Tax Assessment Act 1936 , section 102AG | Income Tax Assessment Act 1936 , section 102AC

Reasons for decision: Summary: Division 6AA of Part III of the ITAA 1936 (Division 6AA) operates to tax certain income derived by minors at a higher rate of taxation. A minor will be a prescribed person for the purposes of Division 6AA 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 (subsection 102AC(1) of the ITAA 1936). Excepted persons are defined in subsection 102AC(2) of the ITAA 1936. Section 102AG of the ITAA 1936 specifies the circumstances in which Division 6AA will apply to trust income. Specifically, where a beneficiary of a trust estate is a prescribed person, Division 6AA 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) sets out what amounts are included in assessable income as excepted trust income. Under subparagraph 102AG(2)(a)(i), an amount included in the assessable income of a trust estate is excepted trust income in relation to the beneficiary of the trust estate to the extent to which the amount is assessable income of a trust that resulted from a will, codicil or an order of a court that varied or modified the provisions of a will or a codicil. Paragraph 102AG(2)(a) is restricted by subsection 102AG(2AA) (effective from 1 July 2019) which provides that when the assessable income is derived by the trustee from property, the property must be transferred or sourced from the deceased estate to the testamentary trust to benefit the beneficiary. | Detailed Reasoning - Application: The beneficiary of the D Trust is a prescribed person under subsection 102AC(1) of the ITAA 1936, that is, they are under 18 years of age and are not excepted persons as defined in subsection 102AC(2). The D Trust is a testamentary trust created under the Will that satisfied subparagraph 102AG(2)(a)(i). The 'investment income' is to be derived from 'property', being the death benefit that was distributed from the Estate to the D Trust to benefit the beneficiary. This satisfied the 'restriction' under subsection 102AG(2AA). Therefore, the 'investment income' earned by the Trustee will be excepted trust income in relation to the beneficiary of that trust, when distributed.