The Trustee for the Confidential Trust and Commissioner of Taxation
[2014] AATA 878
•26 November 2014
[2014] AATA 878
Division GENERAL ADMINISTRATIVE DIVISION File Number
2013/3721
Re
The Trustee for the Confidential Trust
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Egon Fice
Date 26 November 2014 Place Melbourne The Tribunal affirms the objection decision made by the Commissioner on 11 March 2013.
[sgd]........................................................................
Senior Member Egon Fice
TAXATION – discretionary trust – minors as beneficiaries – tax on distribution to minors – low-income tax offset – prescribed person – excepted person – excepted income – excepted trust income – absolute vested interest in property of the trust
Legislation
Administrative Appeals Tribunal Act 1975, s35 (2)
Income Tax Assessment Act 1936, Pt 3 Div 6, Div 6AA, s98, s102AA, s102AC, s102AE, s102AG, s159
Income Tax Rates Act 1986, s13
Tax Laws Amendment (2011 Measures No. 4) Bill 2011, Sch 2.1
Cases
Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355
Secondary Materials
The Australian Tax Handbook, Deutsch, Friezer, Fullerton, Hanley and Snape, Thomson Reuters, 2011
REASONS FOR DECISION
Senior Member Egon Fice
On 20 October 2014 the Tribunal made orders pursuant to s. 35(2) of the Administrative Appeals Tribunal Act 1975 (the AAT Act) directing that publication, disclosure and access to the name of the applicant and its director be limited to members and staff of the Tribunal; the Tribunal transcription services; and to the parties and their representatives.
Accordingly, in these reasons for decision, I refer to the Applicant, which is a corporation, as the Trustee and its sole director as the Director.
On 2 February 2010 the Director settled a workers compensation claim, receiving $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 $16,433. It comprised $11,133 interest and $5718 of excepted income from the worker’s compensation payment. The Trust claimed $418 of deductions.
The Trust made a number of distributions to its beneficiaries in the 2012 income year including $2788 to each of Beneficiary A and Beneficiary B, both whom were minors, that is, persons under the age of 18 years.
On 11 March 2013 the Commissioner of Taxation (the Commissioner) issued notices of assessment to Beneficiaries A and B. The Commissioner assessed both Beneficiaries to be liable to pay $1254.60 tax.
On 18 March 2013 the Director notified the Commissioner that the Trust objected to the 11 March 2013 assessment. Following a request for further information, on 17 May 2013 the Director provided to the Australian Taxation Office (ATO) the further information requested. The Director objected to the assessment claiming it was excessive given that the Trustee was assessed to tax at 45% on the distribution to Beneficiaries A and B. The Director contended that the $5718 interest income was excepted assessable income within the meaning of Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936). That was because the interest was earned on monies which had been settled on the trust; being monies received from a workers compensation claim. He 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 only issue which I am required to determine is whether the Commissioner assessed the 2012 income year distribution of income from the Trust to Beneficiaries A and B at the correct rate. There are no facts in dispute in this matter.
THE LEGISLATION AND ITS OPERATION
Part III Division 6 of ITAA 1936 deals with trust income. Of relevance to this matter is s. 98 which deals with the liability of a trustee where a beneficiary of a trust estate is under a legal disability and presently entitled to a share of income of trust estate. Relevantly, it provides:
98 Liability of trustee
(1)Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of:
(a)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(b)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;
as if it were the income of an individual and were not subject to any deduction.
Division 6AA is concerned with the income of certain children. Its purpose is to discourage family income splitting arrangements whereby income is diverted to minors (those persons under 18 years) in order to reduce the tax payable on the total family income (The Australian Tax Handbook, Deutsch, Friezer, Fullerton, Hanley and Snape, Thomson Reuters, 2011). It applies to all income of all minors (referred to as prescribed persons) unless a specific exclusion exists, for example, if a minor falls within the definition of excepted person.
Prior to the passing of the Tax Laws Amendment (2011 Measures No. 4) Bill 2011, which amended s. 159N of ITAA 1936, minors were able to access the low-income tax offset to reduce tax levied on income subject to Division 6AA. As was stated in the Explanatory Memorandum to the Bill:
2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to remove the ability of minors (children under 18 years of age) to use the low income tax offset to reduce tax due on income subject to Division 6AA of Part III of the ITAA 1936.
The rates of tax payable where Division 6AA of Part III of ITAA 1936 applies are set out in s. 13 of the Income Tax Rates Act 1986. Essentially, it provides that where Division 6AA applies and the income exceeds $416, the rates of tax payable by a trustee are those set out in Part I of Schedule 12. Resident beneficiaries under Schedule 12 are taxed at the rate of 45%.
The persons to whom Division 6AA applies are set out in s. 102AC of ITAA 1936. Relevantly, it provides:
102AC (1) [Prescribed person] For the purposes of this Division, a person is a prescribed person in relation to a year of income if:
(a)the person is less than 18 years of age the last day of the year of income; and
(b)the person is not an excepted person in relation to the year of income.
Section 102AC (2) defines those persons who fall within the description excepted person. Essentially, a person is an excepted person if that person was a minor:
(c)engaged in full-time work on the last day of the year of income;
(d)in respect of whom a carer allowance was payable;
(e)to whom a disability support pension was payable;
(f)who holds a certificate issued by a legally qualified medical practitioner certifying that the person is a disabled child or adult or a person who has continuing inability to work or is permanently blind;
(g)who is the principal beneficiary of a special disability trust;
(h)entitled to a double orphan pension; or
(i)for whom a legally qualified medical practitioner has issued a certificate certifying that the minor, by reason of the permanent disability, is unlikely to be able to engage in a full-time occupation.
The eligible assessable income of a prescribed person is set out in s. 102AE of ITAA 1936. Relevantly, it provides:
(1)For the purposes of this Division, the eligible assessable income of a year of income of a person is so much of the assessable income of the person of the year of income as is not excepted assessable income.
(2)Subject to this section, an amount included in the assessable income of a person (in this subsection referred to as the minor) is excepted assessable income to the extent to which the amount:
(a)is employment income or business income;
(b)is derived by the minor from the investment of any property transferred to the minor:
(i)by way of, or in satisfaction of a claim for, damages in respect of:
(A) loss by the minor of parental support; or
(B) personal injury to the minor, any disease suffered by the minor or any impairment of the minor’s physical or mental condition;
(ii) pursuant to any law relating to worker’s compensation; ...
The Commissioner submitted that Beneficiaries A and B were neither excepted persons as that expression is defined in s. 102AC (2) nor were they in receipt of excepted income as that expression is defined in s. 102AE (2). On the other hand, the Director of the Trustee submitted that excepted income included an amount of money derived by the minor from the investment of property transferred to the minor by way of, or in satisfaction of, a claim for damages in respect of personal injury to the minor in accordance with s. 102AE (2) (b) (i) (B). I should explain that property for the purposes of Division 6AA means any property, whether real or personal, and includes money (s. 102 AA (1)).
While I have no doubt that the Director is correct about the operation of s. 102AE (2)(b)(i)(B), it has no application in this case. The $400,000 which he received by way of compensation was not received by Beneficiary A or Beneficiary B. It was received by the Trustee of the Trust. Furthermore, neither Beneficiary A nor Beneficiary B satisfies the description of an excepted person. None of the matters which I have set out at paragraph [14] above apply to them.
However, the Director submitted that s. 102AE (2)(b)(ii) did apply to this case. As best I can understand that submission, the section applied because earnings from the $400,000 related to a worker’s compensation payment. With respect to the Director, that is not the correct construction of that subsection. It fails to take into account the introductory words in s. 102AE (2)(b) which refer to the assessable income being derived by the minor from the investment of any property transferred to the minor. The $400,000 was not transferred to either beneficiary. It was transferred to the Trust.
Although the Director also referred to subsections s. 102AE (2)(b)(iv) and (v); those subsections are not applicable in this case. The circumstances under those subsections do not arise. In any event, because the beneficiaries in this case received a distribution of trust income in the income year in question, s. 102AG applies to the trust income. As expected, s. 102AG mirrors, to a large extent, the provisions to which I have referred to above in s. 102AE.
Beneficiaries under a trust who are prescribed persons in relation to a year of income are subject to the provisions set out in s. 102AG of ITAA 1936. It is this section which is of direct relevance to the assessable income of Beneficiaries A and B. Relevantly, it provides:
(1) Where a beneficiary of a trust estate is a prescribed person in relation to a year of income, this Division 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 assessable income of the trust estate that is not, in relation to that beneficiary, excepted trust income.
The expression excepted trust income is defined in s. 102AG (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;…
The circumstances described in s. 102 AG (2)(c) are subject to the qualification set out in s. 102 AG (2A) which provides:
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.
The first point which needs to be made about the provisions I have set out above is that it was clearly the intention of the legislature to provide for income derived by a minor in a year of income on identical terms, irrespective of whether the income was derived from property transferred directly to the minor or to a trust for the benefit of the minor. It is a fundamental principle of statutory construction that the language of the statute must be considered in context. The High Court of Australia (McHugh, Gummow, Kirby and Hayne JJ) in Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355, when dealing with apparently conflicting statutory provisions, said, at 381:
The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute (45). The meaning of the provision must be determined “by reference to the language of the instrument viewed as a whole” (46”. In the Commissioner for Railways (NSW) v Agalianos (47), Dixon CJ pointed out that “the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed”. Thus the process of construction must always begin by examining the context of the provision that is being construed (48).
As I understood the parties, the facts in this matter are not in dispute. There was no question regarding the source of the $400,000, or the fact that the Director was the recipient of that sum following the settlement of a worker’s compensation claim. Beneficiaries A and B did not receive that sum of money. Rather, the monies were provided by the Director to the Trustee to be held on trust for a number of beneficiaries under a discretionary trust called the Confidential Trust.
As a matter of statutory construction, taking into account the context in which the description of excepted assessable income and excepted trust income appear under Division 6AA of ITAA 1936, the intention manifested in ss. 102AE and 102AG is identical. That intention is where property is transferred to the minor pursuant to any law relating to worker’s compensation, income earned from that property, which includes money, is excepted income. Transfer to a trust is included provided that, when the trust ends, the relevant beneficiaries will acquire the trust property in accordance with the trust deed (s. 102AG (2A)). That proviso aligns a transfer to a trust on behalf of the minor with the transfer directly to a minor. Another way of stating it is the way which Ms Basilicata, who appeared on behalf of the Commissioner, put it. She referred to the minor beneficiaries being required to have an absolute vested interest in the property from the inception of the trust.
I was provided with a copy of the Discretionary Trust Deed (the Deed) which was taken into evidence. The schedule to the Deed sets out named beneficiaries as well as classes of eligible beneficiaries. Beneficiaries A and B are two of four named beneficiaries under the Deed. There are numerous classes of eligible beneficiaries listed. The Deed contains an Overview which I believe is accurate. Relevantly, it states:
The trustee is given extensive powers to distribute the income and capital of the trust among the wide range of beneficiaries. Those powers are also to be exercised at the trustee’s absolute discretion.
The beneficiaries are either named in the Schedule or are members of classes of persons described in the Schedule. The trustee has power to add beneficiaries and to remove beneficiaries. No beneficiary has any entitlement to any part of the trust fund under the trust deed.
Clause 24 deals with the situation where the trust is ended before the vesting day. It provides:
24Before the vesting day, the trustee has an absolute discretion to decide to distribute the trust fund and any unapplied and undistributed income from it, in any proportions the trustee decides, to any one or more persons who are named in the Schedule as beneficiaries or who are members of any of the classes of eligible beneficiaries described in the Schedule. The trustee has an absolute discretion to exclude a named beneficiary or member of a class of beneficiaries.
Plainly, no beneficiary has an absolute vested interest in the property of the trust. In fact, the trustee has an absolute discretion to exclude Beneficiaries A and B from receiving any distribution of capital or income from the trust fund should the Trust be concluded. It follows that in this case, the proviso set out in s. 102AG (2A) is not satisfied.
For the sake of completeness, I should also mention s. 102AG (8) of ITAA 1936. It provides:
For the purposes of this section, where:
(a)any property is transferred to the trustee of a trust estate; and
(b)the trustee has a discretion to pay or apply the income derived from that property to or for the benefit of specified beneficiaries or beneficiaries included in a specified class of beneficiaries;
(c)that property shall be taken to have been transferred to the trustee for the benefit of each of those specified beneficiaries or for each of the beneficiaries in that specified class of beneficiaries, as the case may be.
The purpose of including s. 102AG (8) is to make it clear that where income is derived by the trustee which is subject to Division 6AA, that is, it is not excepted trust income, and there is other income which falls under the definition of excepted trust income, an apportionment of the income is permissible. It does not apply in the circumstances of this case.
CONCLUSION
Beneficiaries A and B are not excepted persons. Furthermore, the income which was distributed to them in the 2012 income year was not excepted trust income. Because those beneficiaries are prescribed persons for the purposes of Division 6AA of ITAA 1936, they are liable to pay tax on that income at the rate of 45%.
On 11 March 2013 the Commissioner issued to the Trustee Notices of Assessment for the two minor beneficiaries of the Confidential Trust, each in the amount of $1254.60. That is 45% of $2788, which was the taxable income returned by each minor beneficiary. Following an objection lodged by the Trustee, the Commissioner made an objection decision on 11 March 2013 confirming that assessment. I have found that the assessment was correct and, accordingly, I affirm the objection decision.
I certify that the preceding 32 (thirty -two) paragraphs are a true copy of the reasons for the decision herein of Senior Member Egon Fice [sgd]........................................................................
Associate
Dated 26 November 2014
Date of hearing 20 October 2014 Applicant In person Counsel for the Respondent Ms C Basilicata Solicitors for the Respondent Australian Taxation Office
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Taxation Law
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Assessment of Tax
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Statutory Interpretation
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