Private ruling: Present entitlement of beneficiary to income of a trust estate
Published: August 2014
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: When the A Trust was established.

Ruling: Q1: Was the Trustee of the B Trust presently entitled to a share of the income of the trust estate of the A Trust for the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) in the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013? | A1: Yes | Q2: Did the assessable income of the Trustee of the B Trust, for the purposes of determining the net income of the trust estate under section 95 of the ITAA 1936, include a share of the net income of the trust estate of A Trust for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013 under section 97 of the ITAA 1936? | A2: Yes | Q3: Was the Trustee of A Trust liable to tax under section 99A of the ITAA 1936 in respect of income distributed to the B Trust for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013? | A3: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. In an income year preceding the relevant period, the A Trust was established by the Trust Deed (the Deed). The terms of the Deed form part of the description of the scheme. 2. Under the Deed, the A Trust was established with the trust fund divided into two ordinary units. One of the units was held by an individual (the Individual). 3. Company A was appointed as the Trustee of the A Trust. The Individual was appointed as one of two directors of Company A. 4. The trust fund of the A Trust comprises the initial sum of $A and all monies, investments and property paid or transferred to and accepted by the Trustee on issue of units or which otherwise becomes subject to the Deed. 5. Registered Holder is defined in the deed to mean each holder of the initial ordinary units as specified in Schedule 5 of the Deed and 'each person for the time being registered under this deed as the holder of Units and includes persons so jointly registered'. 6. Pursuant to clause 4 of the Deed, the Trustee of the A Trust is entitled to create, issue and allot units to any person who has executed an application at such value and in such manner and on such terms and conditions as the Trustee thinks fit. The application form is set out in schedule 1 to the Deed. 7. Pursuant to clause 6 of the Deed, the Trustee of the A Trust must issue a signed unit certificate to each Registered Holder bearing a distinctive number and specifying their name and address and the number of units to which it relates. 8. Pursuant to clause 5 of the Deed, the Trustee of the A Trust must keep and maintain a register of unit holders. The details to be entered in the register include: • the name and address of each Registered Holder; • the number and classification of the units held; • the number of the certificate issued to the Register Holder in respect of the units; • the date on which any units were entered in the register. 9. Units held by a Registered Holder as trustee must be marked in the register in such a way as to be identified that they are held on trust (clause 5.4 of the Deed). Nevertheless, except in limited circumstances, the Trustee of the A Trust must recognise the person named in the register as the Registered Holder and the only person entitled to those units. 10. Pursuant to Clause 3 of the Deed, subject to the rights of the holders of a class of units, the beneficial interest in the trust fund is held by the Registered Holders in proportion to the number of units held. 11. Pursuant to clause 11.2 of the Deed, in each accounting period (1 July to 30 June in a year) until the vesting day, the Trustee of the A Trust has the discretion to pay, apply or set aside the whole or any part of the net income of the trust fund for the benefit of Registered Holders in such proportion as it determines and any distribution in favour of Registered Holders of a specific class must be made in proportion to the number of units held. Under Clause 11.3, the Trustee of the A Trust may also make interim distributions of income. 12. Any income to which Registered Holders become entitled under clause 11 ceases to form part of the trust fund and is to be held by the Trustee as a separate fund on trust absolutely for the Registered Holder entitled to it. 13. A corporation is entitled to act as a Trustee despite its directors or shareholders being legally or beneficially entitled to any units and the Trustee is entitled to exercise its powers despite any director or shareholder having a direct or personal interest in the manner or result of exercising the power (clauses 15.8 and 15.9 of the Deed). 14. In an income year preceding the relevant period, the B Trust was established by way of deed. The Individual was a beneficiary of the B Trust. 15. On a date after the establishment of the A and B Trust and prior to the relevant years, the Trustee of the B Trust applied in writing for one income unit in the A Trust. 16. At a meeting of its directors on that same day, the Trustee of the A Trust accepted the application of the Trustee of the B Trust for one income unit. The Minutes of a meeting of directors of Company A as trustee of the A Trust, recording its decision to accept the application of income units on that day, incorrectly recorded accepting an application for one income unit in the A Trust from the Individual instead of the Trustee for the B Trust. 17. The Minutes of the meeting of the A Trust recorded the terms of issue of the income units which included that the distribution of income would be at the discretion of the Trustee. 18. On the same day, the Trustee for the A Trust issued a certificate stating that the Trustee of the B Trust is the registered holder of one income unit of the A Trust. 19. On the same day, the register of unit holders in the A Trust was updated to record the issue of one income unit in the A Trust to the Trustee for the B Trust. 20. The Trustee for the B Trust recorded the one income unit as an asset in its financial statements for the year it was issued. 21. In the years ended 30 June 2010 to 30 June 2013, the A Trust had positive 'income of the trust estate' within the meaning of that phrase in subsection 97(1) of the ITAA 1936. 22. During the year ended 30 June 2010, the Trustee for the A Trust resolved to distribute a percentage of the income of the A Trust for the year ended 30 June 2010 to the B Trust. 23. During the year ended 30 June 2011, the Trustee for the A Trust resolved to distribute a percentage of the income of the A Trust for the year ended 30 June 2011 to the B Trust. 24. During the year ended 30 June 2012, the Trustee for the A Trust resolved to distribute a percentage of the income of the A Trust for the year ended 30 June 2012 to the B Trust. 25. During the year ended 30 June 2013, the Trustee for the A Trust resolved to distribute a percentage of the income of the A Trust for the year ended 30 June 2013 to the B Trust. 26. As a result of a recent due diligence process conducted by a third party that had made an offer to purchase all of the issued shares in Company A and all of the issued units in the A Trust, the error in the Minutes of the meeting of directors of the Trustee of the A Trust was discovered. 27. The intention of the directors of Company A as Trustee of the A Trust was that the Trustee of the B Trust would hold the income unit in the A Trust. 28. As soon as the error was identified during the purchaser due diligence process, the Trustee immediately corrected the error in its records.

Relevant legislative provisions: Subsection 95(1) of the ITAA 1936 | Subsection 97(1) of the ITAA 1936 | Section 99A of the ITAA 1936 | Question 1 | Was the Trustee of the B Trust presently entitled to a share of the income of the trust estate of the A Trust for the purposes of section 97 of the ITAA 1936 in the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013? | Answer | Yes | Reasoning | 1. Section 97 of the ITAA 1936 broadly provides that a beneficiary of a trust, who is not under any legal disability, who is presently entitled to a share of the income of the trust estate shall include in their assessable income so much of that share of the (tax) net income of the trust estate for a year of income. | 2. If there is some (tax) net income not assessed to or in respect of any beneficiary, then the trustee is generally assessed on that net income under section 99 or section 99A of the ITAA 1936. | 3. In Harmer v. Federal Commissioner of Taxation (1991) 173 CLR 264; (1991) 91 ATC 5000; (1991) 22 ATR 726 ( Harmer ), the High Court summarised, based on the principles established in previous cases, that a beneficiary is 'presently entitled' to a share of the income of the trust estate, if and only if: | a. the beneficiary has an interest in the income which is both vested in interest and vested in possession, and | b. the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. | 4. Subsection 95A(2) of the ITAA 1936, deems a beneficiary to be presently entitled to income of the trust estate where the beneficiary has a vested and indefeasible interest in the income. | 5. The expression 'income of the trust estate' was considered by the High Court in Commissioner of Taxation v Phillip Bamford & Ors; Phillip Bamford & Anor v Commissioner of Taxation [2010] HCA 10; 240 CLR 481 ( Bamford ). As a result of the Bamford decision: | a. 'income of the trust estate', as provided in subsection 97(1) of the ITAA 1936, takes its meaning from general trust law and the language of 'presently entitled to a share of the income of the trust estate' is that of the general law of trusts, but adapted to the operation of the ITAA 1936 upon distinct years of income; | b. the reference to trust law encompasses various factors including the general law, statutory law, trust accounting principles, the trust deed, the actions taken by the trustee in accordance with the deed (including resolutions to appoint income or capital) and the settlor's intention | c. income of the trust estate in the context of Division 6 of Part III of the ITAA 1936 is measured in respect of distinct years of income, is a product of the trust estate and is a reference to the net amount of income in respect of which a beneficiary can be made presently entitled or can be accumulated by the trustee, commonly referred to as 'distributable income'. | 6. For the purposes of section 97 of the ITAA 1936, a beneficiary needs to be presently entitled to income of the trust estate within the relevant tax year: Harmer and affirmed in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; 2011 ATC 20-235 at paragraph 32 | Is the Trustee of the B Trust a beneficiary of the A Trust? | 7. Pursuant to clause 4 of the Deed, the Trustee of the A Trust is entitled to create, issue and allot units to any person who has executed an application at such value and in such manner and on such terms and conditions as the trustee thinks fit. | 8. On the same day that an application made by the Trustee for the B Trust for one income unit in the A Trust was made, the Trustee of the A Trust, by its directors, determined that it would accept that application. That determination was recorded by the issue of a Unit Certificate to the Trustee for the B Trust and the entry in the register of unit holders consistent with the requirements of the Deed. | 9. Although the name of the unit holder was incorrectly recorded in the Minutes of the meeting of the directors, that record is not the decision to accept the application for units itself. The record of the decision can be corrected to reflect the actual decision made. Upon becoming aware of the error, the Trustee of the A Trust has taken steps to correct its record of the relevant meeting. | 10. Consistent with its decision to issue units to the Trustee for the B Trust, the Trustee of the A Trust has made distributions of income to the B Trust in the years ended 30 June 2010 to 30 June 2013. | Was the Trustee of the B Trust presently entitled to income of the trust estate within the relevant tax years? | 11. In the years ended 30 June 2010 to 30 June 2013, the A Trust estate had positive 'income of the trust estate' within the meaning of that phrase in subsection 97(1) of the ITAA 1936. | 12. Within each of the years ended 30 June 2010 to 30 June 2013, pursuant to clause 11 of the Deed, the Trustee of the A Trust resolved to distribute a percentage of the income of the A Trust to the Trustee of the B Trust. | 13. Clause 11.4 of the Deed, makes it clear that any income which a Registered Holder becomes entitled to pursuant to a decision of the Trustee under clause 11, will be held as a separate fund on trust for the registered holder absolutely. | 14. Therefore, the Trustee for the B Trust had a vested interest and a legal right to demand and receive payment of a percentage of the income of the A Trust, and thus, was presently entitled to a share of the income of the A Trust's trust estate within the meaning of section 97 of the ITAA 1936. | Question 2 | Did the assessable income of the Trustee of the B Trust, for the purposes of determining the net income of the trust estate under section 95 of the ITAA 1936, include a share of the net income of the trust estate of the A Trust for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013 under section 97 of the ITAA 1936? | Answer | Yes | Reasoning | 15. The net income of a trust estate is defined in subsection 95(1) of the ITAA 1936 as follows: | net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions [excepting certain identified deductions that are not presently relevant] 16. Where a beneficiary is presently entitled to a share of the income of a trust estate, paragraph 97(1)(a) of the ITAA 1936 requires the beneficiary to include in their assessable income that share of the trust's (tax) net income. A beneficiary's share of the (tax) net income of a trust estate is worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled: Taxation Determination TD 2012/22: Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled? | 17. To determine the net income of the trust estate of the B Trust, section 95 of the ITAA 1936 requires an enquiry as to the assessable income of the trust estate as if the trustee were a taxpayer. | 18. The Trustee of the B Trust was presently entitled to a share of the income of the A Trust in each of the years ended 30 June 2010 to 30 June 2013. Therefore, for the purposes of determining the net income of the B Trust under section 95 of the ITAA 1936, the Trustee is required to include in its assessable income its proportionate share of the (tax) net income of the A Trust under section 97 of the ITAA 1997. | Question 3 | Was the Trustee of A Trust liable to tax under section 99A of the ITAA 1936 in respect of income distributed to the B Trust for the years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013? | Answer | No | Reasoning | 19. In general terms, in respect of resident trust estates, subsection 99A(4) and (4A) of the ITAA 1936, provide that where part or all of the net income of the trust estate is not included in the assessable income of a beneficiary under section 97, or in respect of which the trustee is assessed and liable to pay tax under section 98, the trustee shall be assessed and liable to pay tax on that part or all of the net income, as the case may be. | 20. The Trustee of the B Trust was required to include in its assessable income its proportionate share of the (tax) net income of the A Trust under section 97 of the ITAA 1997. Therefore, the Trustee of the A Trust could not be liable to pay tax in respect of that share of the (tax) net income of the A Trust under section 99A.