Trust & Partnership income
If you are under the age of 18 you pay the middle rate on your unearned income
What is a prescribed person? - A minor who will be taxed at the middle rate!
What is an excepted person? - A minor who will NOT taxed at the middle rate!
What is excepted income? - Income which will NOT be taxed at the middle rate!
What is taxable eligible income?
Let's go over all that one more time!
The special rate does not apply unless the income exceeds $416
If you are under the age of 18 and not excepted,
you may pay the middle rate on your unearned income
Division 6AA of the 1936 Assessment Act creates a class of taxpayers known as
'prescribed persons'These are
dependent children under the age of 18 yearsThe
'unearned income' of prescribed persons is subjected to tax at the middle rate of tax (47%).So, a businessman wishing to split the income of his business between the members of his family will find that his children pay tax of at least 47% on income distributed to them from trusts or other means
Section 102 AC defines a
prescribed person as one who is...
Under 18 on 30 June of the tax year
and who is not an excepted person
.
So what is an excepted person?
An excepted person is one who is not affected by Div 6AA - such a person pays tax at normal rates on his income.
Subsection 2 of section 102AC lists various classes of persons who will be excepted - in other words - who will not be prescribed persons - in other words - who will not be affected
You may find it easier to follow these through in para 2-170 of the CCH Master Tax guide than in the Act.
Excepted Persons
(who will not be affected by this Division)
are....102 AC(2) (b) - persons in full time employment on 30 June
102 AC(2) (c)&(d)-handicapped persons
102 AC(2) (e)&(f)-double orphans
102 AC(2) (g)-the permanently disabled
Rate of tax paid by minors
on income which is not excepted income
So 102 AC attempts to isolate those persons under the age of 18 who are not 'dependent' (fully employed).... And those who are fully dependent - handicapped, permanently disabled or double orphaned
All other children will be caught by the operation of the provision on income which is not 'excepted income'
Excepted income is income, which will never be affected by Div 6AA regardless of who receives it.
Section 102 AE (2) lists the types of excepted income - you will find it beneficial to follow these through at para 2-180 of the CCH Master Tax Guide
102 AE (2) (a)-
refer para 2-180 for details on this
102 AE (2) (b)-income from
investment of amounts received from damages awards, superannuation, public benevolent institutions or divorce settlements
102 AE (2) (c)-income from
deceased estates & lottery prizes
102 AE (2) (d)-
non business partnership income, which would have been excluded if, earned by the minor in his own right
102 AE (2) (e)-
102 AE (2) (f)-income arising from accumulations of excepted income - paragraph 2-180 of the CCH Master Tax Guide lists these classes of income in categories
Remember the distinction between taxable and assessable income?
Assessable income less Allowable deductions equals Taxable income
Div 6AA uses a similar approach.
Section 102 AE (1) defines
eligible assessable income as so much of the assessable income that is not excepted assessable incomeSection 102 AD (1) defines
taxable eligible income as the Assessable Eligible Income less ... Deductions which relate exclusively to that incomeDeductions which do not relate solely to the eligible taxable income are apportioned between excepted income and eligible income
As a general rule income passed to a minor will bear tax at the middle rate of tax.
However if the minor can show he was independent of the person giving him the money (in full time employment) then he will be taxed under the general rules.
Also, if he is handicapped, permanently disabled or double orphaned, he will be taxed under the general rules.
The provisions of Div 6AA do not affect such persons
All other minors are affected-we refer to them as prescribed persons.
Once a minor has been classified as a prescribed person we then look at the income he has derived. If it could be said that the minor has earned the income in his own right, rather than passively accepting it as part of an income splitting scheme then that income is taxed according to the general rules-we call it excepted income, Excepted income includes
Employment and business income 'earned' by the minor.
Investment income from damages awards
income from deceased estates and death benefits
income from lotteries, public funds and divorce settlements
income from investment of excepted income and partnership and trust income equivalent to excepted income