Questions we've been asked: General issues
QB 07/02 - Whether The Minor Beneficiary Rule Exemption In Section HH 3B Applies On A $1,000 "Per Beneficiary" Or On A $1,000 "Per Beneficiary Per Trust" Basis.
We have been asked to clarify the correct application of section HH 3B of the Income Tax Act 2004 (the minor beneficiary rule exemption).
This QWBA sets out the operational guidelines regarding the minor beneficiary rule exemption.
(Please note: All legislative references in this QWBA refer to the Income Tax Act 2004).
Section HH 3A(1) states:
If a minor derives beneficiary income,-
- a trustee of the trust from which the beneficiary income is derived must pay income tax on the beneficiary income as if the beneficiary income were trustee income:
- despite section HH 3(1), the beneficiary income is excluded from being income of the minor.
Section HH 3B states:
Section HH 3A does not apply if the amount of beneficiary income derived by a minor in relation to a tax year is $1,000 or less.
Section HH 3A(1) provides that if a minor derives beneficiary income from a trust the trustee must pay income tax on that beneficiary income as if it were trustee income. The beneficiary income is not income of the minor.
However, section HH 3B contains a de minimis exemption to this rule. It provides that where the amount of beneficiary income derived by a minor in relation to an income year is $1,000 or less, the beneficiary income is taxed at the minor beneficiary's marginal tax rate and not at the trustee's tax rate.
The Commissioner is aware of the uncertainty over the application of section HH 3B. That is, it is unclear whether section HH 3B applies on a "per beneficiary" basis or a "per beneficiary per trust" basis.
The Commissioner has reviewed the statement regarding HH 3B in the Tax Information Bulletin, Vol 13, No 5 (May 2001) and past practices. The operational guidelines are clarified as follows.
Discussion - correct application of section HH 3B
The Commissioner considers that section HH 3B must be applied in the context of sections HH 3A and HH 3C which are formulated on a "per beneficiary per trust" basis. Accordingly, the reference to "beneficiary income" in section HH 3B can only mean the beneficiary income derived from a specific trust that would be treated as trustee income for that trust under section HH 3A.
The underlying purpose of section HH 3B also supports this interpretation. The purpose of section HH 3B is to provide an exemption to the general rule in section HH 3A. Therefore the exemption can only apply in respect of the beneficiary income derived from a particular trust to which section HH 3A applies.
Accordingly, section HH 3B should be interpreted as applying to each beneficiary for every trust from which they derive income. If a beneficiary receives beneficiary income from a number of trusts the $1,000 exemption in section HH 3B will apply to the income that is received from each trust. That is, the aggregate exemption can exceed $1,000.
Although there is no express limit on the number of trusts that can make distributions of $1,000 or less to the same minor beneficiary and benefit from the section HH 3B exemption a settlor must have a legitimate purpose in establishing multiple trusts. The Commissioner may consider the application of the general anti-avoidance rules if people establish multiple trusts to obtain a greater than $1,000 exemption.
Other pages in: General issues
- QB 12/11: Income tax - look-through companies, rental properties and avoidance
- QB 12/10: Do the historic depreciation rates continue to apply to grandparented structures acquired before 1 April 2005?
- QB 12/09: Income tax - look-through companies: interest deductibility where funds are borrowed to make a payment to shareholders to reflect an asset revaluation
- QB 12/08: Income tax - look-through companies: interest deductibility on funds borrowed to repay shareholder current accounts
- QB 12/04: Income tax - deductibility of expenditure on widening or metalling a farm acess road or track
- QB 12/03: Income tax - deductibility of expenditure on cattle stops
- QB 12/05: Income tax - deductibility of expenditure on stock yards
- QB 12/02: Income tax - Treatment of quad bikes for depreciation purposes
- QB 12/01: Income tax - deductibility of expenditure on replacing and extending an inlet race to a dairy shed
- QB 11/03: Income tax - look through companies and interest deductibility
- QB 11/02: Deductibility of expenditure incurred by bloodstock breeders in respect of horses that they race
- QB 11/01: Residential investment property or properties in Australia owned by New Zealand resident - NRWT treatment of interest paid to Australian financial institution
- QB 09/06: GST - Apportionment of the cost of bare land for the purposes of a change-in-use adjustment
- QB 10/06: Elections for qualifying company status
- QB 10/01: Reimbursing shareholder-employees for motor vehicle expenses and the use of the Commissioner's mileage rate
- Are tax sparing disclosures still required?
- QB 09/05: Residential investment property or properties in Australia owned by New Zealand resident - NRWT treatment of interest paid to Australian financial institution
- QB 09/03: Decisions on application of CA 1(2) - common law interest and income under ordinary concepts
- QB 09/02: Holiday houses - income tax treatment
- QB 09/01: Payments made in addition to financial redress under Treaty of Waitangi settlements - income tax treatment
- QB 08/04: Income Tax Act 2007: research and development credits (subpart LH) - tax avoidance (section BG1)
- Kiwisaver - creditable membership
- QB 08/03: Application for a private ruling or product ruling on an issue dealt with in a mutual agreement made under a Double Tax Agreement - Tax Administration Act 1994, sections 91E(4)(D)(ii) and 91F(4)(D)
- QB 08/02: Commissioner's power to issue a replacement ruling that operates retrospectively
- QB 08/01: Tax Administration Act 1994 - Section 91E(4)(f) and self-assessment
- QB 07/05 - Ability to rule where the Commissioner is auditing or investigating - whether the Commissioner has a discretion to rule or is prohibited
- Tax treatment of wooden scaffolding planks
- Exemption from gift duty for dispositions of property made by or under an order of the Court: section 75(A) Estate and Gift Duties Act 1968
- Private and product binding rulings - to whom do they apply?
- Bankrupt's ability to carry forward accumulated losses
- Records for controlled foreign companies or foreign investment funds to be available in English
- Website expenditure - deductibility
- Qualifying foreign private annuity exemption from the Foreign Investment Fund regime
- Tourism service providers' payments made to tour guides or drivers - the income tax liability of those parties and the tour operator employing the guide or driver
- Managing communications associated with a dispute referred to the Adjudication Unit
- When does derivation occur in relation to land sales with a deferred settlement, by business taxpayers who provide vendor finance?
- Section 108 Tax Administration Act 1994 (TAA) - commencement of four year statutory period (November 2002)
Date published: 17 Apr 2007
Back to top