Private ruling: Commissioner's discretion - pay or notice rule (section 100AA of ITAA36)
Date of advice: 2 April 2020
Published: May 2020
Ruling period: 1 July 20XX to 30 June 20XX | 1 July 20XX to 30 June 20XX | 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion to disregard the failure of the trustee to notify the exempt entities within two months of the end of the financial year required to pay or notify present entitlement to exempt entity under s100AA of Income Tax Assessment Act 1936 (ITAA36)? | A1: Yes

Relevant facts and circumstances: The taxpayer passed away on XXXXX The Will left was dated XXXXX Probate was granted to the Executor on XXXXX The Will provided at clause 6 that after all expenses, the residual money to be distributed among 3 equal parts to 3 different tax exempt entities. While the three Residuary Beneficiaries would receive their apportioned bequest, two were easily traced but, the third entity could not be identified due to the name and address not matching as listed in the Will as well as the Executor's understanding that there was an error in incorrectly representing the third entity. The Executor could not advise on the payout to the organisations until the third entity could be identified. She sought judicial advice on this issue. The solicitor who prepared the Will could not recollect what organisation was identified by the deceased when the Will was made due to similar names. To clarify this uncertainty around the third entity, the Executor made application with the Supreme Court to the Attorney General. There were a number of entities put forward by the Executor to the Attorney General to determine the correct entity. After some deliberations, on XXXXX, an agreement was reached between the entities that the correct intended beneficiary was XXXXX-Victoria. A formal letter of agreement was issued by the 3 entities on XXXXX. Until this time the Executor was unable to whether Diabetes Australia -Victoria was entitled to the gift. While waiting for the Supreme Court to formally authenticate the third entity as the beneficiary, the Executor took prompt action to finalise the Estate and made 2 interim distributions to the other 2 Residuary Beneficiaries. The Supreme Court is will make a determination on the final submission and that no party is expected to make any further submissions on the matter. Final submissions are due by XXXXX. The Court will then determine the matter on papers (as no submissions are required). It is expected that the judgment will follow in the very near future subject to Court capacity.

Relevant legislative provisions: Income Tax Assessment Act 1936 , s100AA

Reasons for decision: Detailed Reasoning - Detailed reasoning: Unders100AAof Income Tax Assessment Act 1936 , trustees have an obligation to either notify the tax exempt beneficiary of their entitlement or alternatively pay that entitlement within the two months after then end of the financial year. Section 100AA of ITAA36 states that: (1) Subsection (3) applies if: (a) an exempt entity is presently entitled to an amount of the income of a trust estate ; and (b) the exempt entity is not an exempt Australian government agency (within the meaning of the Income Tax Assessment Act 1997 ); and (c) at the end of 2 months after the end of the relevant income year, the trustee has failed to notify the exempt entity in writing of the present entitlement. (2) For the purposes of this section, treat the trustee as giving the exempt entity notice in writing of the present entitlement at a time to the extent that the trustee pays the exempt entity the amount of the present entitlement at that time. (3) For the purposes of this Act, treat the exempt entity as not being presently entitled, and having never been presently entitled, to the amount mentioned in paragraph (1)(a) of the income of the trust estate, to the extent that the trustee failed to notify the exempt entity of that amount as mentioned in paragraph (1)(c). (4) However, subsection (3) does not apply if the Commissioner decides that the failure mentioned in paragraph (1)(c) of the trustee should be disregarded. (5) In making a decision under subsection (4) (or refusing to make such a decision), the Commissioner must have regard to the following: (a) the circumstances that led to the failure mentioned in paragraph (1)(c); (b) the extent to which the trustee has taken action to try to correct the failure and if so, how quickly that action was taken; (c) whether this section has operated previously in relation to the trustee, and if so, the circumstances in which this occurred; (d) any other matters that the Commissioner considers relevant. (6) If subsection (3) applies, for the purposes of any application of section 99A in relation to the trust estate in relation to the relevant year of income, treat the trust estate as a resident trust estate. (7) This section does not apply in relation to a trust estate that is a managed investment trust (within the meaning of the Income Tax Assessment Act 1997) in relation to a year of income. | Detailed Reasoning - How does this rule apply: This means that if a tax-exempt beneficiary is not made aware of their present entitlement to trust income within two months of the end of the income year, the trustee will generally be taxed on a corresponding share of the trust's net income. The pay or notify rule applies to a trustee if: · an exempt beneficiary that is not an exempt Australian Government agency is presently entitled to an amount of trust income The written notice doesn't have to specify the dollar amount of the present entitlement. It's sufficient if it sets out how the entitlement is calculated - for example, as a percentage of trust income. If the pay or notify rule applies, for tax purposes the exempt beneficiary is treated as not being - and never having been - presently entitled to the affected amount of trust income. Instead, the trustee is taxed on a corresponding share of the net income of the trust (generally under section 99A of the ITAA 1936), unless we exercise our discretion not to apply the rule. There are circumstances in which the Commissioner may exercise discretion where a Trustee fails to pay or notify. | Detailed Reasoning - Commissioner's discretion: The Commissioner has discretion to disregard a trustee's failure to pay or notify an exempt beneficiary within two months. He can exercise the discretion if the consequences of applying the anti - avoidance rule would be unreasonable. To exercise the discretion, the following factors are considered: · the circumstances that led to the trustee failing to pay or notify | Detailed Reasoning - Application to your circumstances- Identification of beneficiary: In your circumstances, we have noted that you were aware of your obligations to pay or notify the tax exempt beneficiaries of their entitlements within the required period that is two months after the end of the financial year but, failed to notify due to some confusion on the beneficiaries, namely the third entity XXXX. The name and address did not match the beneficiary and you made application with the Supreme Court to the Attorney General to get a clarification of this uncertainty on the correct beneficiary to be paid the distribution of the estate under clause 6 (c) of the Will around XXXXX entity. You further put forward three similar entities to the Attorney General to determine the correct entity. While the three organisations came into agreement on XXXXX that the correct intended beneficiary was XXXXX, you did not get confirmation from the entities until XXXX 20XX. You advised that it was well beyond your control to have the distributions to the entities as per the Will in time due to delay in confirmation of the correct entity. You further advised that it was well beyond your control to have the distributions to the entities as per the Will in time, due to delay in confirmation of the correct entity. We also acknowledge the fact that as the Executor, you took prompt action to finalise the Estate and made two interim distributions to the other two Residuary Beneficiaries while the case of the third beneficiary was before the court. In making our decision we have also considered the following: · your inability to pay or notify a beneficiary not clearly identified in the trust deed at the end of the 20XX/20XX financial year, · your immediate action to request the Supreme Court to make a determination on the correct entitled entity, and · your immediate notification to XXXXXXX as soon as you were made aware. Therefore, the Commissioner in considering the facts and circumstances of your case does not believe that there has been any mischief by you in discharging your duties as the executor of the estate therefore, the failure mentioned in s100AA, paragraph (1)(c) of the Income Tax Assessment Act 1936 of the trustee would be disregarded.

the trust is not a managed investment trust (or treated like one for the purposes of Division 275 of the ITAA 1997) | the trustee has not notified the exempt beneficiary in writing of their present entitlement or paid the entitlement to the beneficiary within two months of the end of the relevant income year. | the extent to which the trustee tried to correct the failure and, if so, how quickly that happened | whether we have previously exercised this discretion for the trustee and, if so, the circumstances in which this occurred | any other relevant matters.