If Person A's will provides for Person A's residual estate to be distributed to each of the Will Trusts, will income from these Will Trusts, derived from property distributed from Person A's deceased estate and distributed to a beneficiary who is a minor, be excepted trust income for the purposes of Division 6AA?
Yes This ruling applies for the following period (5 income years)
1. Person A is drafting a will. 2. When Person A's spouse Person B died some years ago, Person B's will created three testamentary trusts for the couple's three children (Will Trusts). 3. Person A wishes that Person A's residual estate pass equally to three testamentary trusts, one controlled by each of the same three children. 4. To avoid duplicating record keeping and compliance costs, Person A would prefer the residual estate passes to the existing Will Trusts rather than creating new trusts. 5. No other capital would be injected into any of the Will Trusts - 100% of the capital of each Will Trust would be sourced from Person B's estate and Person A's estate, under their wills.
Income Tax Assessment Act 1936 Section 102AC Section 102AG
In these reasons, Division 6AA and any section numbers (e.g. section 102AG) are in the Income Tax Assessment Act 1936. Question If Person A's will provides for Person A's residual estate to be distributed to each of the Will Trusts, will income from these Will Trusts, derived from property distributed from Person A's deceased estate and distributed to a beneficiary who is a minor, be excepted trust income for the purposes of Division 6AA? Answer Yes Explanation 6. Division 6AA has rules that, in effect, tax income derived by children (either directly or as a share of trust income) at the top marginal rate, unless the income falls within certain excepted categories. 7. For trust income, where the beneficiary is a prescribed person, subsection 102AG(1) says Division 6AA applies to so much of the beneficiary's share of the net income of the trust estate as (in the Commissioner's opinion) is attributable to assessable income of the trust estate that isn't excepted trust income.
8. One relevant category of excepted trust income is income derived by the trust estate from the investment of any property that devolved for the beneficiary's benefit from the estate of a deceased person: see subparagraph 102AG(2)(d)(i). 9. Subsection 102AG(8) says where a trustee has a discretion to pay or apply income derived from property to or for the benefit of specified beneficiaries, or a class of beneficiaries, the property is taken to have been transferred to the trustee for the benefit of those beneficiaries. 10. Paragraph 102AG(2)(d) will apply if Person A's will leaves property to the Will Trusts. • If the trustee of each Will Trust has a discretion to distribute income to the relevant minors, then subsection 102AG(8) will apply to treat the property as having devolved for the benefit of the relevant beneficiary from Person A's estate under subparagraph 102AG(d)(i). • If a relevant minor instead had a fixed share of income from a Will Trust, then any property that devolved from Person A's estate would have necessarily devolved to the trustee for that minor's benefit.
• In either event, any minor beneficiary's share of income flowing from that property would be covered as income derived from the investment of property that devolved for the beneficiary's benefit under paragraph 102AG(d). 11. Therefore, any minor beneficiary's share of net income derived by the Will Trusts, where the income is derived from property transferred from Person A's deceased estate, will be excepted trust income under Division 6AA.