Trust income: beneficial interest in trust property held for certain children - accumulated income

Is the taxpayer, a trustee of a trust, created for the benefit of certain children who will be entitled to a proportional interest in the trust fund only if they attain 18 years of age, liable to be assessed under Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of accumulated income derived from life insurance policy proceeds that devolved to the trust?

No. The trustee is not liable to be assessed under Division 6AA of the ITAA 1936 in respect of accumulated income derived from life insurance proceeds that devolved to the trust. The trustee is liable to be assessed under section 99A or section 99 of the ITAA 1936.

The taxpayer is a trustee of a trust that was created for the benefit of certain children of a deceased parent. The proceeds of a life insurance policy were paid into the trust as a result of the death of the parent. The trustee invested these proceeds and derived income.

The children will be entitled to a proportional interest in the trust fund only if they attain 18 years of age. The trust deed contains a clause that, if any child does not attain 18 years of age, that child's interest will devolve to other beneficiaries when those beneficiaries attain the age of 18.

In the relevant income year, all the children are under 18 years of age. Under the trust, the trustee has discretion to accumulate income or to apply some or all of it for the benefit of the beneficiaries. No income was applied to any of the beneficiaries during the income year.

The beneficiaries of the trust are not 'excepted persons' as defined in subsection 102AC(2) of the ITAA 1936. As the beneficiaries are under 18 years of age, they are prescribed persons for the purposes of subsection 102AC(1) of the ITAA 1936.

Division 6AA of the ITAA 1936 sets out special rules that apply in working out the basic income tax liability on the income of persons who are prescribed persons. A person is a prescribed person if they are not an 'excepted person' as defined by subsection 102AC(2) of the ITAA 1936 and they are under 18 years of age.

Subsection 102AG(1) of the ITAA 1936 provides that Division 6AA of the ITAA 1936 applies to 'so much of the share of the beneficiary of the net income of the trust estate of the year of income' as, in the opinion of the Commissioner, is attributable to the assessable income of a trust estate that is not, in relation to that beneficiary, excepted trust income.

Paragraph 102AA(3)(b) of the ITAA 1936 states that a reference to the 'share of a beneficiary of the net income of a trust estate' shall be read as a reference to a share of a beneficiary of the net income of a trust estate 'in respect of which the trustee of the trust estate is liable to be assessed and to pay tax in pursuance of section 98 of the ITAA 1936'.

Subsection 98(1) of the ITAA 1936 applies to assess the trustee on a beneficiary's share of income where a beneficiary is presently entitled and is under a legal disability. In this case, all the beneficiaries of the trust are under a legal disability as they are all less than 18 years of age.

A beneficiary is presently entitled to the net income of the trust where that beneficiary has an absolute and indefeasible vested interest in the trust income ( Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 ( Taylor's case )). The High Court held that a beneficiary that is under a legal disability has an absolute and indefeasible vested interest in the trust income, where the terms of trust specify that the accumulated income of the trust is held for the beneficiary until the beneficiary ceases to be a minor or, if the beneficiary dies earlier, for their estate. However, where the terms of the trust provide for the income to go to another person in the event of the beneficiary's death before the beneficiary attains age of majority, the beneficiary is not presently entitled as the beneficiary's interest is considered contingent, and therefore defeasible.

In this case, the trust deed contains a clause that if any child does not attain 18 years of age, that child's interest will devolve to other beneficiaries when those beneficiaries attain the age of 18. In the relevant income year, all the children are under 18 years of age. Therefore, there is no beneficiary that is presently entitled in the relevant year and the trustee is not liable to be assessed and to pay tax under section 98 of the ITAA 1936. Accordingly, the trustee taxpayer is not liable to be assessed under Division 6AA of the ITAA 1936 in respect of accumulated income derived from life insurance proceeds that devolved to the trust.

As no beneficiary is presently entitled in the relevant year of income, the trustee taxpayer is liable to be assessed under section 99A of the ITAA 1936, unless the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply. If the Commissioner forms the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply, the taxpayer trustee will be assessed under section 99 of the ITAA 1936.

Date of Amendment Part Comment 8 August 2014 Facts Inserted the word 'that' in between the words 'trust' and 'was' in the first sentence of the first paragraph. Facts Removed the word 'a' of the second sentence of the third paragraph Reasons for Decision Amended to conform with the facts of Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 by removing 'reaching the age of 18' and replacing with 'the beneficiary ceases to be a minor' in the second sentence of the fifth paragraph. Reasons for Decision Amended to conform with the facts of Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 by removing 'reaching the age of 18' and replacing with 'the beneficiary attains the age of majority' in the third sentence of the fifth paragraph.

Date of Amendment | Part | Comment

8 August 2014 | Facts | Inserted the word 'that' in between the words 'trust' and 'was' in the first sentence of the first paragraph.

Facts | Removed the word 'a' of the second sentence of the third paragraph

Reasons for Decision | Amended to conform with the facts of Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 by removing 'reaching the age of 18' and replacing with 'the beneficiary ceases to be a minor' in the second sentence of the fifth paragraph.

Reasons for Decision | Amended to conform with the facts of Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 by removing 'reaching the age of 18' and replacing with 'the beneficiary attains the age of majority' in the third sentence of the fifth paragraph.