Private ruling: application of section 99B of the Income Tax Assessment Act 1936 to distributions in excess of share of section 95 net income
Published: June 2014
Ruling period: 1 July 2013 to 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Where the distributions received by Resident Trust (Trust) from Non-Resident Trust (NRT) for an income year exceed its share of the section 95 net income of NRT for that year due to a net loss arising from NRT's investment in a project being taken into account in the section 95 net income calculation, does section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to include in the assessable income of Trust so much of the distributions as exceeds Trust's share of the section 95 net income of NRT? | A1: No

Relevant facts and circumstances: 1. Resident Trust (Trust) is a resident trust for Australian tax purposes. Trust's investors are various funds. 2. Trust is a unit holder of Non-Resident Trust (NRT). NRT is a non-resident unit trust for Australian tax purposes. 3. NRT is a fully distributing trust on an annual basis. NRT income is allocated immediately per the trust deed. 4. NRT acquired an interest in a project, the assets of which are held by various entities established outside Australia. 5. The entities are treated as partnerships for Australian tax purposes. NRT includes the partnership income/loss of the investment in the calculation of its net income. 6. During the early stages of the project, depreciation of assets used in the project (plus other expenses) has resulted in losses for the intermediary entities for tax purposes. Consequently, the project was in an overall net loss position for Australian tax purposes. 7. Due to NRT's interest in the project (and its losses for tax purposes), the trust income of NRT exceeds the section 95 net income of NRT. 8. As a result, the Trust has received trust distributions in excess of its section 95 net income.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95, | Income Tax Assessment Act 1936 section 97 and | Income Tax Assessment Act 1936 section 99B(1).

Reasons for decision: Summary: 1. Where a resident beneficiary is presently entitled to a share of the income of a trust estate, section 97 applies to include in the assessable income of the beneficiary the corresponding share of the section 95 of the ITAA 1936 net income (section 95 net income) of the trust. As a result, Trust will be required to include in its assessable income under section 97 of the ITAA 1936, for each of the income years in question, their relevant share of the section 95 net income of NRT. 2. However for some or all of the income years in question, the trust income of NRT exceeds the section 95 net income of NRT because of NRT's interest in a net loss, arising from its investment. As the trust deed requires NRT to fully distribute its income on an annual basis, the question arises whether the share of the excess trust income distributed to Trust is assessable to Trust under section 99B of the ITAA 1936. 3. Subsection 99B(1) of the ITAA 1936 applies where an amount, being property of a trust estate, is paid to, or applied for the benefit of, a resident beneficiary of the trust estate. The provision applies to include that amount in the assessable income of the beneficiary, although the amount assessable is reduced to the extent that one of the exclusions in subsection 99B(2) of the ITAA 1936 apply. As one of those exclusions is for an amount that is included in the assessable income of the beneficiary under section 97 of the ITAA 1936, it is only the share of the excess trust income distributed to Trust that falls for consideration under section 99B of the ITAA 1936. 4. As Trust is a resident beneficiary, and as the distribution of excess trust income was sourced from the property of the trust estate, subsection 99B(1) of the ITAA 1936 will, subject to subsection 99B(2) of the ITAA 1936, apply to include the share of the excess trust income distributed to Trust in the assessable income of Trust unless it can be argued that section 99B of the ITAA 1936 was not intended to apply to such amounts. 5. The Explanatory Memorandum (EM) to the Income Tax Assessment Amendment Bill (No. 5) 1978, which introduced section 99B to the ITAA 1936, relevantly provides: Proposed section 99B will require the inclusion in a beneficiary's assessable income of amounts paid to or applied during a year of income for the benefit of a resident beneficiary where that amount represents trust income of a class which is taxable in Australia but which has not previously been subject to Australian tax in the hands of either the beneficiary or the trustee. It will normally apply where accumulated foreign-source income of a non-resident trust estate (or of a resident trust estate that previously was not able to be taxed in Australia in the light of the Union Fidelity decision) is distributed to a resident beneficiary. 6. In this case, the share of the excess trust income distributed to Trust does not constitute accumulated income but rather income that was derived during the particular year in question. The income was taken into account in calculating the section 95 net income of NRT but was 'sheltered' or offset by a non-cash deduction - in this case being an interest in a net loss arising from NRT's investment. As a result, the 'sheltered' income does not form part of NRT's section 95 net income and no part of it is therefore included in the assessable income of Trust under section 97. 7. In circumstances such as these, it is considered that sections 97 and 99B of the ITAA 1936 should be read together as a coherent whole such that section 99B of the ITAA 1936 should not apply to defeat the clear operation of section 97 of the ITAA 1936 and make assessable an amount which is not assessable under section 97 of the ITAA 1936 because of deductions that were expressly allowed in the calculation of the section 95 net income. 8. As a result, section 99B of the ITAA 1936 will not apply to include the share of the excess trust income distributed to Trust in the assessable income of Trust as this amount represents amounts which are taken into account in calculating the NRT's section 95 net income but which are 'sheltered' by non-cash deductions. Not applying section 99B of the ITAA 1936 to such amounts is consistent with the history and purpose of the provision as the EM indicates that the normal application of the provision is to income which is accumulated prior to it being paid to, or applied for the benefit of, the resident beneficiary. 9. As the share of the excess trust income distributed to Trust is not assessable to Trust under subsection 99B(1) of the ITAA 1936, it is not necessary to consider whether any of the exclusions in subsection 99B(2) of the ITAA 1936 apply.

Matters not considered by this ruling: This ruling does not consider any provision in the ITAA 1997 or the ITAA 1936 other than the relevant legislative provisions set out below.