Natasha Panagis, head of technical services at the Institute of Financial Professionals Australia, highlighted the PBR in a recent quarterly superannuation update.
“The ATO confirmed in the ruling that income earned in a trust for a minor beneficiary from investing super death benefit is excepted trust income under Section 102ag of the Income Tax Assessment Act [1936],” Panagis said.
“This allows the minor to be taxed at standard adult tax rates, rather than the punitive minor tax rates under Division 6AA. The ATO confirmed that the income or the capital gains from reinvesting those unpaid present entitlements remain accepted trust income.”
Panagis continued that Div 6(vii)AA imposes special tax rates on most trust income distributed to minors, unless it qualifies as excepted income.
“And this section specifically treats income derived from property transferred to a trust as a direct result from a person’s death and sourced from a super death benefit – that will be seen as excepted trust income,” she said.
“Applying that provision the ATO accepted that the death benefit paid into the minor’s trust was a qualifying post-death transfer from a super fund, so all investment earnings on that amount were excepted.”
She added that it also found that where the minor became presently entitled to trust income, but didn’t call for it, therefore a UPE was created and the trust therefore reinvested those funds, the subsequent incoming gains on those reinvested assets remained excepted trust income.
“A couple of key takeaways here. Adult tax rates may apply here, and this is where investment income arising from a super death benefit paid into a trust can fall within the adult tax rates and be quite beneficial for minor beneficiaries,” she said.
“However, you’ve got to be able to trace all of this, maintain clear records showing the super death benefit source and the link between that corpus and the subsequent earnings to preserve that excepted status.”
Furthermore, Panagis said, reinvested UPEs don’t taint the character based on these facts, so where UPEs that relate to trust income are reinvested, the ATO accepts that the earnings on those reinvestments can be excepted.
“This can provide some long-term trust strategies for minors. This is a case-by-case basis, and as always with private binding rulings, the outcomes depend on the specific facts of the case,” Panagis said.
“But it’s just good to know that this was the ATO treatment of how this could apply to a specific particular circumstance.”
