The AAT has held that 2 minor beneficiaries of a trust were not excepted persons and the income that was distributed to them in the 2012 income year was not excepted trust income.
The director of a trust settled a workers’ compensation claim in 2010 and received $400,000 under that settlement. He contributed the entire sum to the Confidential Trust (the Trust). For the 2012 income year, the Trust returned net income of id=”mce_marker”6,433. It comprised id=”mce_marker”1,133 interest and $5,718 of excepted income from the worker’s compensation payment. The Trust made a number of distributions to its beneficiaries in the 2012 income year including $2,788 to each of Beneficiary A and Beneficiary B, both of whom were minors (ie persons under the age of 18). On 11 March 2013, the Commissioner issued notices of assessment to Beneficiaries A and B assessing both Beneficiaries to be liable to pay id=”mce_marker”,254.60 tax. The Trust objected, claiming the interest income of the Trust was excepted assessable income under Div 6AA because the interest was earned on monies which had been settled on the trust; being monies received from a workers’ compensation claim. The Trustee claimed that because the interest earned on the corpus of the Trust was excepted assessable income, it should have been assessed at the Beneficiaries’ marginal rates.
The Tribunal considered that neither Beneficiary A nor Beneficiary B satisfied the description of an excepted person. Because those beneficiaries are prescribed persons for the purposes of Div 6AA of ITAA 1936, the Tribunal said they were liable to pay tax on that income at the rate of 45%. It held that the assessment was correct and, accordingly, affirmed the Commissioner’s objection decision.
(AAT Case [2014] AATA 878, Re The Trustee for the Confidential Trust and FCT, AAT, Fice SM, AAT Ref: 2013/3721, 26 November 2014.)
[FJM Note: The real reason is apparent from the following paragraphs from the Tribunal’s reasons, namely that the trust’s income was not ‘excepted trust income’ under s102AG(2) of ITAA 1936 because there was no minor beneficiary who “will, under the terms of the trust, acquire the trust property … when the trust ends” under s102AG(2A) of the ITAA 1936.]
[LTN 231, 28/11/14]
Extract from [2014] AATA 878
21. The expression excepted trust income is defined in s102AG(2) of ITAA 1936. Relevantly, it provides:
(2) Subject to this section, 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) …
(b) …
(c) is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary:
(i) …
(ii) pursuant to any law relating to worker’s compensation;…
22. The circumstances described in s. 102 AG (2)(c) are subject to the qualification set out in s. 102 AG (2A) which provides:
(2A) Paragraph (2)(c) or subparagraph (2)(d)(ii) 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.