Exempt income: 'maintenance payments' from a deceased estate

Is a periodic distribution made from a discretionary trust to an eligible recipient exempt from income tax under item 5.1 of the table in section 51-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A periodic distribution made from a discretionary trust to an eligible recipient is not exempt from income tax under item 5.1 of the table in section 51-30 of the ITAA 1997 as the distribution is not a payment attributable to a payment made by a relevant individual.

The taxpayer is the child of divorced parents.

A divorce settlement made in conformance with relevant laws of an international jurisdiction required the taxpayer's father to make monthly maintenance payments to the taxpayer. By court order, the maintenance obligations are binding upon the father's estate.

The taxpayer's father settled an inter vivos discretionary trust with the taxpayer as one of the potential beneficiaries.

Upon the taxpayer's father's death, the father's estate was transferred to the trustees of the discretionary trust.

During the relevant income year, income and capital from the trust was distributed to the taxpayer.

Section 51-50 of the ITAA 1997 sets out the conditions under which a periodic payment, in the nature of maintenance, is exempt from income tax under item 5.1 of the table in section 51-30 of the ITAA 1997.

Section 51-50 of the ITAA 1997 provides as follows: (1) This section sets out the conditions on which a periodic payment, in the nature of maintenance, that: (a) is made by an individual (the maintenance payer); or (b) is attributable to a payment made by an individual (also the maintenance payer); is exempt from income tax under item 5.1 of the table in section 51-30. (2) The maintenance payment is exempt from income tax only if it is made: (a) to an individual who is or has been the maintenance payer's *spouse; or (b) to or for the benefit of an individual who is or has been: (i) a *child of the maintenance payer; or (ii) a child who is or has been a child of an individual who is or has been a *spouse of the maintenance payer. (3) The maintenance payment is not exempt if, in order to make it or a payment to which it is attributable, the maintenance payer: (a) divested any income-producing assets; or (b) diverted *ordinary income or *statutory income upon which the maintenance payer would otherwise have been liable to income tax.

The positive tests for exemption are therefore contained in paragraphs 51-50(1)(a) and 51-50(1)(b) of the ITAA 1997.

That is, paragraph 51-50(1)(a) of the ITAA 1997 exempts a payment made by an individual (the 'maintenance payer') and paragraph 51-50(1)(b) of the ITAA 1997 exempts a payment that is attributable to a payment made by the maintenance payer. [Emphasis added].

A distribution from the trustee of a discretionary trust is clearly not a payment made 'by' an individual being a maintenance payer (paragraph 20 of Taxation Ruling TR 98/4 ). Rather, the entity from whom the payment is made is the trustee of the trust. The requirements of paragraph 51-50(1)(a) of the ITAA 1997 are therefore not satisfied on the present facts.

The construction of paragraph 51-50(1)(b) of the ITAA 1997 contemplates that the periodic payment be attributable to an antecedent payment where that payment is made by an individual, being the maintenance payer.

For a payment to be 'attributable to' an antecedent payment made by an individual, being the maintenance payer, there must of course be some payment made by the maintenance payer that can be characterised in the relevant sense.

The ordinary meaning of the terms 'payment' and 'pay' require the transfer of money, or something in lieu of money, to discharge a debt or obligation ( White v. Elmdene Estates [1960] 1 QB 1; [1959] 2 All ER 605; [1959] 3 WLR 185, The Macquarie Dictionary , 2005, 4th edn, The Macquarie Library Pty Ltd, New South Wales).

In jurisdictions with legal systems modelled on laws of the United Kingdom, generally when a person dies testate, their estate 'vests' in an executor. In Australia the devolution of property is governed by state based legislation (see note 1).

Upon death of a testator the deceased estate will either vest in the named executor or the appropriate jurisdiction's Public Trustee until a grant of administration permits vesting thereafter to an executor (see note 2).

Therefore, the testator's legal ownership of the property is transferred to the executor by operation of succession law, rather than any act of a living legal person. There is therefore no actual payment made by a living legal person unless the succession laws of the relevant jurisdiction deem such a payment to have occurred. Under the succession laws of the jurisdiction in question, no such deeming arises. Further, the vesting of the deceased's property in the executor is not a transfer to discharge a debt or obligation.

For these reasons it cannot be said there is any antecedent payment made by the deceased within the meaning contemplated by paragraph 51-50(1)(b) of the ITAA 1997. Accordingly, a distribution from a discretionary trust cannot be said to be attributable to any antecedent 'payment' made by an individual, being the maintenance payer.

Paragraph 51-50(3)(a) of the ITAA 1997 also provides for an exclusion to the exemption in circumstances where a maintenance payer has divested themselves of an income-producing asset in order to make the payment. The settlement of property on trust has been held to amount to a divestment of the subject of the settlement by the settlor to the trustee ( Connolly v. Commissioner of Taxation (WA) (1931) 34 WALR 8; (1931) 1 ATD 185).

Similarly, the death of a maintenance payer has also been held to divest the deceased of their assets ( Case 109 (1955) 5 CTBR (NS) 651 per Member AC Leslie in the majority; with Chairman JL Burke and Member FC Bock not finding it necessary to consider the point after finding payments from trustees of the estate of a deceased former husband could not be described as payments having been received from the husband).

Therefore, in circumstances where a maintenance payer dies, the exception in paragraph 51-50(3)(a) of the ITAA 1997 would also apply to deny an exemption had either of paragraphs 51-50(1)(a) or 51-50(1)(b) of the ITAA 1997 been satisfied.

In the present case the taxpayer receives distributions from a discretionary trust. For the reasons explained above, the amount of the distribution is not exempt from income tax under item 5.1 of the table in section 51-30 of the ITAA 1997. Note 1: section 39 of the Administration and Probate Act 1929 (ACT); section 44 of the Probate and Administration Act 1898 (NSW); section 52 of the Administration and Probate Act 1969 (NT); section 45 of the Succession Act 1981 (QLD); section 46 of the Administration and Probate Act 1919 (SA); section 4 of the Administration and Probate Act 1935 (TAS); section 13 of the Administration and Probate Act 1958 (VIC) and section 8 of the Administration Act 1903 (WA). Note 2: section 38A of the Administration and Probate Act 1929 (ACT); section 49 of the Administration and Probate Act 1969 (NT); section 61 of the Probate and Administration Act 1898 (NSW) and section 9 of the Public Trustee Act 1941 (WA).