1 Will the income derived by the trustee of the minor trusts, from the investment of a superannuation death benefit, be considered excepted income for the purposes of section 102AG of the Income Tax Assessment Act 1936 ?
1 Yes. Question 2 Where the beneficiary of the minor trust does not draw down on their unpaid present entitlement from distributions made to them from the trust, and the trustee reinvests those funds within the trust, is the income or capital gains generated on the newly acquired asset excepted trust income under section 102AG of the Income Tax Assessment Act 1936? Answer 2 Yes. This ruling applies for the following periods : 30 June 202X to 30 June 202Y The scheme commenced on: 1 July 202X
The deceased, Person A, died intestate in 202X. At the date of death, the deceased was separated from their ex-partner, Person B, with whom they had been in a previous relationship with for X years and minor children C and D. Child D is the subject of this ruling and is 15 years of age. The deceased had a new partner at their date of death, with whom they had been in relationship with for X years. The deceased and their new partner had no children together. The deceased had a Superannuation Death Benefit through their membership with a superannuation fund, totalling $XXX,XXX. As the deceased died intestate, agreement was made between the deceased's current partner, the deceased's ex-partner and the superannuation fund, as to the allocation of the Superannuation Death Benefit. No court orders were obtained for the allocation process. The proceeds from the Superannuation Death Benefit were divided into equal thirds between the current partner, Child C and Child D. This represented the following allocation to Child D of $XXX,XXX. A trust deed was established for Child D for their future benefit and to assist with their ongoing expenses and maintenance costs.
Child D's share of the Superannuation Death Benefit was subsequently paid by the superannuation fund into a bank account held by Child D's trust, for the benefit of Child D. The ex-partner is the surviving parent of Child D's trust. In order with the terms of the trust deed, Child D is the sole beneficiary of their respective trust. Child D will benefit from both the income and capital of their respective trust. The discharge age for the trust is when the beneficiary reaches the age of 25.
Division 6AA of the Income Tax Assessment Act 1936 Subsection 102AC(1) of the Income Tax Assessment Act 1936 Subsection 102AC(2) of the Income Tax Assessment Act 1936 Subsection 102AE(2)(c)(ii) of the Income Tax Assessment Act 1936 Subsection 102AG(1) of the Income Tax Assessment Act 1936 Subsection 102AG(2) of the Income Tax Assessment Act 1936 Subsection 102AG(2)(c)(v) of the Income Tax Assessment Act 1936 Subsection 102AG(2AA) of the Income Tax Assessment Act 1936 Subsection 102AG(2)(d)(ii) of the Income Tax Assessment Act 1936 Subsection 102AG(7) of the Income Tax Assessment Act 1936 Does IVA apply to this private ruling? No .
These reasons for decision accompany the Notice of private ruling for The Trustee of the XXXX XXXX Trust. This is to explain how we reached our decision. This is not part of the private ruling. Issue Income derived by trustee of the minor trusts Question 1 Will the income derived by the trustee of the minor trusts, from the investment of a Superannuation Death Benefit, be considered excepted income for the purposes of section 102AG of the Income Tax Assessment Act 1936 ? Summary Yes. Income derived by the trustee of a minor's trust from investing a Superannuation Death Benefit can be considered excepted trust income under section 102AG(2)(c)(v) of the Income Tax Assessment Act 1936 , provided certain conditions are met. Detailed reasoning Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) ensures that special rates of tax and a lower tax-free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person.
A prescribed person is defined in subsection 102AC(1) of the ITAA 1936 to include any person, other than an excepted person (as defined in subsection 102AC(2) of the ITAA 1936), who is under 18 years of age on the last day of the income year. Subsection 102AC(2) of the ITAA 1936 specifies that, for Division 6AA purposes, a minor is an "excepted person" in relation to a year of income only if one or more of the following conditions is met by them: • engagement in full-time occupation • in receipt of a carer's allowance or disability support pension • principal beneficiary of a special disability trust • double orphan pension was payable to them In this case, Child D is a minor, under 18 years of age, and is a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936. Child D is not an "excepted person" for the purposes of subsection 102AC(2) as none of the above conditions apply.
Where the beneficiary of a trust is a prescribed person, Division 6AA of the ITAA 1936 will apply to so much of the beneficiary's share of the net income of the trust that is not excepted trust income (subsection 102AG(1) of the ITAA 1936). Subsection 102AG(2) of the ITAA 1936 lists the various types of income of a trust estate which are 'excepted trust income' in relation to the beneficiary of the trust estate. Subject to this section, an amount included in the assessable income of a trust estate is excepted trust incomein relation to a beneficiary of the trust estate to the extent to which the amount: (a) is assessable income , of a kind covered by subsection102AG(2AA) of the ITAA 1936 of a trust estate that resulted from: (i) a will, codicil or an order of a court that varied or modified the provisions of a will or codicil; or (ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate. (b) is employment income
(c) is derived by minor from the investment of any property that was transferred to the minor by another person out of property that devolved upon that other person from the estate of a deceased person and was so transferred within 3 years after the date of the death of the deceased person. In addition, Canberra Income Tax Circular Memorandum (CITCM) 884, which issued in May 1981, and includes in its contents an explanation of the operation of Division 6AA of the ITAA 1936, provides guidance on this point. Paragraphs 189 to 190 discuss the application of subparagraph 102AE(2)(c)(ii) of the ITAA 1936: As per subsection 102AE(2) of the ITAA 1936, an amount included in the assessable income of a person is excepted trust income. The wording of the subparagraph and the comments from CITCM 884 address its application. Paragraphs 189 to 191 of CITCM 884 state:
'189. Subparagraph (ii) of paragraph (c) covers certain cases where property comes indirectly to a child as a result of a person's death, e.g., where a husband does not make provision for his children in his will, but dies leaving all of his estate to his widow, who shortly after makes provision for the children by transferring to them all or part of property she has acquired from the estate. By this subparagraph, income from property transferred to a minor by another person out of property that devolved upon the later from a deceased estate is excepted assessable income, provided that the property was transferred within 3 years after the date of death', 190. This subparagraph should also be applied to situations in which, on the premature death of the member of a superannuation fund, under the rules of the fund benefits are not paid direct to the members estate, but to his or her widow or widower. Property transferred to a minor by the widow or widower (within the specified time period) out of such superannuation moneys paid to the widow or widower, is to be treated as coming with subparagraph 102AE(2)(c)(ii).
191. In applying subsection (10) to these cases, the superannuation monies are to be treated as if they formed part of the estate of the deceased person. Subparagraph 102AG(2)(c)(v) of the ITAA 1936 states that excepted trust income includes an amount that is transferred 'directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund'. Assessable income that derived by a trust estate that was transferred to the trustee for the benefit of the beneficiary by another person out of property that devolved upon that other person from the estate of a deceased person and was so transferred within three years after the date of death of the deceased person, is listed as excepted trust income (subparagraph 102AG(2)(d)(ii) of the ITAA 1936). In relation to Child D The income derived by the trustee of the minor trust, from the investment of the superannuation death benefit, will be considered excepted income for the purposes of section 102AG of the ITAA 1936.
The requirement to transfer funds within three years of the date of death of Person A, as set out in subparagraph 102AG(2)(d)(ii) of the ITAA 1936, has been met. The date of transfer was xxxxxxx. Subsection 102AG(7) of the ITAA1936 restricts the amount of income which will be treated as 'excepted trust income' to the amount that in the opinion of the Commissioner would have devolved directly upon the beneficiary if the deceased had died intestate. In relation to Child D, Person A died intestate and under the relevant laws of intestacy, an amount of funds for $X devolved directly from the trustee to Child D's trust bank account. Therefore, as a result of the operation of subsection102AG(7) of the ITAA, all of the income can be treated as 'excepted trust income'. Accordingly, the income to which Child D is presently entitled as a beneficiary of the trust, is 'excepted trust income' under subsection 102AG(2) of the ITAA 1936. Question 2
Where the beneficiary of the minor trust does not draw down on their unpaid present entitlement from distributions made to them from the trust, and the trustee reinvests those funds within the trust, is the income or capital gains generated on the newly acquired asset excepted trust income under section 102AG of the Income Tax Assessment Act 1936? Summary Yes. Under section 102AG of the Income Tax Assessment Act 1936 (ITAA 1936), reinvested unpaid present entitlements (UPEs) that originally qualified as excepted trust income continue to generate excepted trust income when the trustee invests them into new assets. Detailed reasoning Subject to section 102AG of the ITAA 1936, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount: (a) is assessable income , of a kind covered by subsection 102AG(2AA) (ITAA 1936) which strictly ties excepted trust income to assets connected to a deceased estate, of a trust estate that resulted from: (i) a will, codicil or an order of a court that varied or modified the provisions of a will or codicil; or
(ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of personswho die intestate; (e) is derived by the trustee of the trust estate from the investment of any property that, in the opinion of the Commissioner, represents accumulations of: (i) (i) assessable income derived by the trustee during a year of income in relation to which this Division applies, being assessable income that, in relation to the beneficiary, is excepted trust income; or (ii) (ii) assessable income derived by the trustee during a year of income in relation to which this Division does not apply, being assessable income that would, in the opinion of the Commissioner, have been excepted trust income in relation to the beneficiary if this Division were applicable in relation to the year of income during which the assessable income was derived; or
(iii) (iii) exempt income derived by the trustee to which subparagraph (i) or (ii) would, in the opinion of the Commissioner, apply if that exempt income had been assessable income. In relation to Child D Whereincome or capital gains are generated on reinvested funds within the trust, they are to be treated as excepted trust income under section 102AG ITAA 1936. Paragraph (e) extends "excepted" status to income derived from the investment of any property that represents accumulations of previously excepted trust income. Where Child D's distributions remain as an unpaid present entitlement (UPE), and where the underlying distribution was excepted trust income, the UPE represents accumulations of excepted trust income. As Child D is a minor who is a prescribed person under section 102AE(2) of the ITAA 1936, Child D pays tax on excepted income at the same individual income tax rates as an adult resident. Such excepted income- including qualifying trust distributions- allows Child D access to the full $X tax-free threshold and the standard progressive marginal rates up to 45%.