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Whether the proceeds of a life insurance policy paid into a trust estate created for the benefit of children, as a result of the death of a person is excepted trust income for the purposes of Income Tax Assessment Act 1936 Division 6AA and assessable at individual rates under Income Tax Assessment Act 1936 subsection 98(1).

The income is excepted trust income and should be taxed under Income Tax Assessment Act 1936 subsection 98(1).

The trust was created for the benefit of children. The proceeds of a life insurance policy was paid into the trust following the death of one parent. The children are minors. In the relevant years, assessments issued to the trustee on behalf of each beneficiary. The income was assessed as eligible trust income.

The taxpayer objected to the assessments stating that the assessable income of the trust estate should be treated according to Income Tax Assessment Act 1936 subparagraph 102AG(2)(c)(iv). Accordingly, the beneficiaries should be assessed under Income Tax Assessment Act 1936 subsection 98(1) at individual rates.

Income Tax Assessment Act 1936 Subparagraph 102AG(2)(c)(iv) states that excepted income arises from property transferred to a minor directly as the result of the death of another person and under a life insurance policy. In this case the proceeds were paid directly to the trustee by the insurance company.

Income Tax Assessment Act 1936 Subsection 102AG(2A) states that 'Paragraph (2)(c) ... does not apply unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property (other than as a trustee) when the trust ends.' A specific clause in the trust deed states that any of the children who attain the age of 18 will be entitled to a proportional interest in the trust fund. If any child does not attain this age then their interest will devolve to the other beneficiaries when they attain the age of 18.

It is considered that as the property was transferred to the trustee of a trust estate directly as a result of the death of a person and under the terms of a policy of life insurance and the requirement that the beneficiaries acquire the trust property when the trust ends has been met, the income is excepted trust income and should be taxed under Income Tax Assessment Act 1936 subsection 98(1).