Division 6AA Trusts Superannuation
DISCLAIMER
- These notes contain a collection of slides for use by lecturers in Taxation Law.
- It is not meant to be a complete nor comprehensive coverage of the topics involved. Rather it is an aid to assist students in note taking. It should be understood that these slides may be modified, discarded or supplemented by lecturers at their absolute discretion.
- Students should not rely on the information contained in the slides, but should use them as a preliminary basis for research only. This area of the law is changing on a daily basis and these slides are not meant to cover more than some broad themes referred to in lectures and to trigger discussion. At all times, students should refer to primary sources such as the actual legislation, court reports & current ATO rulings.
- Do not rely on the summaries contained in these slides.
- For individual and /or personal advice, students should consult qualified advisors in finance, tax, accounting and law.
Taxation of Minors
Division 6AA ITAA 1936
Division 6AA can apply to:
- Individual’s own Assessment
- Section 98 Assessment of a Trustee (Discussed Later)
Tax Rates for Eligible Taxable Income
Table sets out the higher tax rates that apply to the
ELIGIBLE TAXABLE INCOME of a minor who was a
resident for the full income year.
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Income |
Tax rates for 2018–19 income year |
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$0 - $416 |
Nil |
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$417 - $1,307 |
Nil plus 66% of the excess over $416 |
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Over $1,307 |
45% of the total amount of income that is not excepted income |
Division 6AA ITAA 1936 Who does it apply to?
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• A Prescribed Person (a Person under 18 who is not an Excepted Person) will be assessed at Division 6AA rates on his or her Eligible Assessable Income. • Two (2) Questions – Who is an Excepted Person? – What is Eligible Assessable Income? |
DIV 6AA ITAA 1936 TAXATION OF MINORS
Excepted Person (Summary Only) Please check all of Section 102AC
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A person who is under 18 (a minor) on 30 June is an excepted person if in the income year: • they were ▪ working full-time, or had worked full-time for three months or more in the income year (ignoring full-time work that was followed by full-time study) ▪ intending to work full-time for most or all of the income year, and ▪ not intending to study full-time in the income year. • they were entitled to a disability support pension or rehabilitation allowance, or someone was entitled to a carer allowance to care for them • they were permanently blind |
Excepted Person (Summary Only) Please check all of Section 102AC
- they were disabled and were likely to suffer from that disability permanently or for an extended period
- they were entitled to a double orphan pension and received little or no financial support from relatives, or
- they were unable to work full-time because of a permanent mental or physical disability and received little or no financial support from relatives.
Eligible Assessable Income (Summary Only)
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Eligible Assessable Income is any assessable income which is not Excepted Assessable Income. Excepted Assessable Income includes:• employment income, • taxable pensions or payments from Centrelink or the Department of Veterans’ Affairs, • compensation, superannuation or pension fund benefits, • income from a deceased person's estate |
Eligible Assessable Income
Summary Only)
- income from property transferred to the minor as a result of the death of another person or family breakdown, or income in the form of damages for an injury they suffer
- income from their own business
- income from a partnership in which they were an active partner
- net capital gains from the disposal of any property or investments listed above, and
- income from the investment of any of the amounts listed above. Sub-section102AE(2)
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Trusts |
Steps in Taxation of Trusts
- Determine whether a Trust (either intervivos or deceased estate) exists
- Calculate the Net Income of the Trust
- Determine who has the liability to pay tax (under sections 97, 98, 99 or 99A) on the Net Income of the Trust
- Determine what Rates of Tax apply (sections 99 or 99A, Ordinary rates, Non-resident rates or Division 6AA rates)
Step 1 - Features of a Trust
- Trustee
- Trust Property
- Beneficiary
- Obligation
- In a Trust the Legal title and equitable title are held by different entities.
- A Partnership does not require property at formation but Trusts do.
- A trust usually starts with a nominal amount (such as $20)
- A Trustee can be one of the beneficiaries but not the sole beneficiary
Key Terms
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Trust Trust deed Settlor Trustee Beneficiary Corpus or capital Deceased estate Inter-vivos trust |
Not defined in Income Tax Assessment Act 1936 or 1997 so it takes its ordinary meaning (see previous slides) The document establishing the trust and setting out the terms of the Trust The person who established the trust by transferring the trust property to the trustee to hold for the beneficiaries The legal owner of the trust property - see also subsection 6(1) ITAA 1936 The person with equitable rights in the trust property The subject of the trust and may be tangible or intangible e.g. land, buildings, cash at bank A trust established as a result of the death of the settlor A trust established during the settlor's lifetime |
Trusts
- Trusts can be created in a number of ways:
Express - Implied - Constructive
- Focus on Express Trust
Inter Vivos Trust - Trust created other than by Will
Deceased Estate - Trust created by Will
Types of Express Trust
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• Bare trust • Fixed trust • Discretionary trust (e.g. Family trust) • Unit trust – Public / Private. • Superannuation fund This course deals only with Australian Resident Trust Estates. Section 95(2) ITAA 1936 |
- Calculate Net Income
For our purposes
Net Income = Taxable Income
- Liability
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The liability to pay tax on the Net Income of the Trust can attach to the • Beneficiary(ies) • Trustee, or • Beneficiary(ies) and Trustee This depends on the Beneficiary’s: ▪ Residency ▪ Legal Disability ▪ Present Entitlement |
Residency / Legal Disability
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Residency Resident or Non-resident of Australia: section 6(1) Legal Disability Beneficiary cannot give an effective discharge because he or she is one of the following: 1. Minor (under 18) 2. Undischarged Bankrupt 3. Insane person 4. Prisoner |
Present entitlement to trust income
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• Present Entitlement is a critical concept in the trust provisions. • This is because the method of taxing trust income varies according to whether it is: ➢ income to which a beneficiary is presently entitled or ➢ income to which no beneficiary is presently entitled. |
Summary
3 Ways to be “Presently Entitled”
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1. Right To Demand Payment If a beneficiary has the Right To Demand Payment or would have, but for a Legal Disability, then he is presently entitled - Whiting and Taylor cases 2. Income paid or applied to benefit a beneficiary For example a Trustee applies money for the benefit of a beneficiary - Deemed presently entitled - Section 101 ITAA 1936 3. Vested and indefeasible interest – but no right to demand payment Deemed presently entitled - Section 95A(2) ITAA 1936 |
TRUST NET INCOME
Example
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XYZ Inter Vivos Trust - Net Income = $10,000 |
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• |
Must account for the $10,000 |
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Beneficiary A has right to demand payment of $5,000 and the beneficiary has No Legal Disability (Section 97) |
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Beneficiary B has a vested and indefeasible interest in $3,000 and the beneficiary has No Legal Disability (Section 98) |
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Beneficiary C has $1,000 spent on him by the Trustee and the beneficiary has a Legal Disability (Section 98) |
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Accumulated Balance - nobody Presently Entitled to remaining $1,000 (Section 99A) |
Section 97 or 98 ITAA 1936
Once a beneficiary is presently entitled then either
Section 97 or 98 ITAA applies
Section 97
Section 97 applies when a Resident Beneficiary is:
- Presently Entitled (under either Whiting/Taylor or Section 101 ITAA 1936) to some or all of the net income of the Trust and
- is Not under a Legal Disability.
Impact of Section 97
The Beneficiary is assessable on the amount of the net income of the Trust to which he/she is presently entitled.
Section 98
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Section 98 applies in each of the following cases: 1.When a beneficiary is Presently Entitled to some or all of the net income of the Trust and is under a Legal Disability 2.When a beneficiary is Presently Entitled under subsection 95A(2) – vested and indefeasible interest 3.When a beneficiary is a Non-resident (sub-sections 98(3) & (4) and section 98A) |
Impact of Section 98
- Trustee is liable for tax in the first instance on behalf of the beneficiary at that beneficiary's tax rate.
(Ordinary rates or Division 6AA rates)
- Beneficiary will only be liable in their own right if the Beneficiary derived any income from a source outside the Trust.
Section 98 - Scenario 1
- Beneficiary is Presently Entitled and is under a legal disability and has derived no other income.
- Impact:
Trustee is liable for tax on behalf of the beneficiary and the beneficiary is not liable.
Section 98 - Scenario 2
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Beneficiary is Presently Entitled and is under a legal disability and the beneficiary has derived income from outside the Trust |
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Impact: (a) Trustee is liable for tax on behalf of the beneficiary. (b) The beneficiary is liable for tax and is assessable on the trust income to which he is presently entitled. (c) To avoid double taxation the beneficiary is entitled to a credit for the actual tax paid by the trustee (section 100 ITAA 1936). |
Section 99 or 99A ITAA 1936
- No Beneficiary Presently Entitled (Trust income accumulated)
- If a Trust fund is accumulating income (which is the same as saying there is no beneficiary presently entitled) then the Trustee is liable as Trustee under Section 99 or section 99A.
- Section 99 only applies if section 99A does not apply.
Section 99 or 99A ITAA 1936
- Section 99 generally applies to Deceased Estates or Bankrupt Estates.
- Section 99A tax rates are higher than section 99 tax rates.
Where a Trust has net income then either the Trustee or Beneficiaries or Both are liable for tax.
Tax Rates for Beneficiaries Assessed under Section 97
- Where a Beneficiary is assessed under section 97 then the normal rates of tax of that beneficiary apply.
Tax Rates for Trustees Assessed under Section 98
- Where a Trustee is assessed on behalf of the beneficiary under section 98 the rates of tax applicable to the Trustee are those that would be applicable to the beneficiary on the relevant income.
- These would be the normal rates of tax for individuals or companies.
- But Division 6AA rates will apply if there is eligible taxable income of a minor beneficiary.
Tax Rates for Trustees Assessed under Section 99
- A trustee assessed under Section 99 in respect of the net income of a resident trust estate of a person who died less than three
years before the end of the income year is taxed at the GENERAL INDIVIDUAL
RATES for resident beneficiaries.
Tax Rates for Trustees
Assessed under Section 99A
- The net income of a trust estate to which no beneficiary is presently entitled and in respect of which the trustee is assessed under Section 99A is taxed at a flat rate of
- 47% for the year ended 30 June 2017.
- 45% for the year ended 30 June 2018.
SUPERANNUATION
Very common trust but can be a very complex area.
Following slide provides a very brief generalised summary.
SUPERANNUATION
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There are three ways that superannuation funds are given preferential tax breaks: 1. Money contributed into the funds may be given a concessional tax rate. [Compulsory Superannuation (Superannuation Guarantee Scheme) was introduced in 1986 at 3%. These have since been increased to the current level of 9.5%.] 2. Accumulations within the funds may be given concessional tax rates. 3. Money paid out of the super fund to a retiree may be given concessional tax rates and, in some circumstances, attract no tax. |
