Private ruling: Special disability trust - death of principal beneficiary - who is assessed?
Date of advice: 10 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Trustee for the Special Disability Trust (SDT) assessable on the income derived by the SDT that was applied for the principal beneficiary's reasonable care and accommodation needs at general individual rates? | A1: Yes. | Q2: Is the Trustee for the SDT assessable on the income derived by the SDT that was not applied for the principal beneficiary's reasonable care and accommodation needs (unexpended income) at general individual rates (without the benefit of the tax-free threshold)? | A2: Yes. | Q3: Is the income earned on the residual trust funds from the date of death of the principal beneficiary until 30 June 2015 included in the net income of the SDT? | A3: No.

Relevant facts and circumstances: The SDT resulted from a will. During the year ended 30 June 2015 the trustee of the SDT applied some of the net income of the trust estate to meet the reasonable care and accommodation needs of the principal beneficiary. The trust derived other income during the income year ended 30 June 2015 before the principal beneficiary died that was not applied for her reasonable care and accommodation needs. The principal beneficiary (not a minor) was under a legal disability in the year ended 30 June 2015.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 section 95AB | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A

Reasons for decision: Summary: Division 6 of the ITAA 1936 sets out the basic taxation treatment of the net income of trust estates. Generally: • it has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate • it has the result of assessing the trustee directly on any residual net income, and • as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non-residents and those under a legal disability. Division 6 of the ITAA 1936 applies with the modifications set out in section 95AB in relation to a year of income in relation to a trust estate that is a SDT at the end of the year income. Under the modifications, the principal beneficiary is deemed to be presently entitled to all of the income of the SDT (even if there is none), and is also taken to be under a legal disability. However, if a trust estate is not a special disability trust at the end of an income year, these modifications do not apply and the net income of the trust estate is taxed under the ordinary trust taxation rules. Sections 97, 98, 99 and 99A of the ITAA 1936 contain the rules to determine who and how much will be assessed on the net income of a trust estate. Broadly these provisions operate as follows: • section 97 assesses the beneficiary where that beneficiary is: • presently entitled to a share of the income of the trust estate, and • not under a legal disability • section 98 assesses the trustee on a beneficiary's share of net income where that beneficiary is one or more of: • presently entitled to a share of the income but under a legal disability • deemed to presently entitled under subsection 95A(2), or • a non-resident at the end of the income year, and • section 99 or 99A assess the trustee where there is an amount of net income which is not assessed to a beneficiary. Beneficiary presently entitled and not under a legal disability Where a beneficiary of a trust estate is not under any legal disability and is presently entitled to a share of the income of the trust estate, section 97 of the ITAA 1936 includes in the assessable income of that beneficiary: • so much of that share of the net income of the trust estate that is attributable to a period when the beneficiary was a resident, whatever the source of the income, and • so much of that share of the net income of the trust estate that is attributable to a period when the beneficiary was not a resident and that is also attributable to sources in Australia. The beneficiary will include their share of the net income of the trust estate in their tax return together with their other assessable income and will be assessed at the rates specified for resident individuals. Beneficiary presently entitled and under a legal disability Where a beneficiary of a trust estate is under any legal disability and is presently entitled to a share of the income of the trust estate, section 98 of the ITAA 1936 assesses the trustee of the trust estate on: • so much of that share of the net income of the trust estate that is attributable to a period when the beneficiary was a resident, whatever the source of the income, and • so much of that share of the net income of the trust estate that is attributable to a period when the beneficiary was not a resident and that is also attributable to sources in Australia. The trustee is assessed on the beneficiary's share of the net income of the trust estate at the rates specified for resident individuals. No beneficiary presently entitled The net income of a trust estate to which no beneficiary is presently entitled is taxed in the hands of the trustee under either section 99 or 99A of the ITAA 1936. All such income initially falls within the ambit of section 99A where it is taxed at the highest marginal rate of tax for individuals. However, subsection 99A(2) gives the Commissioner a discretion to assess the trustee pursuant to section 99, rather than section 99A, inter alia, in relation to a trust estate that resulted from a will, a codicil, an intestacy or a court order varying the provisions of a will, a codicil or the operation of the intestacy provisions. Subsection 99A(3) of the ITAA 1936 provides that in forming an opinion for the purposes of subsection 99A(2) the Commissioner is to have regard to: (1) the circumstances in which and the conditions, if any, upon which, at any time: a. property - including money - was acquired by or lent to the trust estate b. income was derived by the trust estate c. benefits were conferred on the trust estate, or d. special rights or privileges - irrespective of whether they have been exercised - were conferred on or attached to property of the trust estate (2) whether any person, who has at any time, directly or indirectly: a. transferred or lent any property (including money) to, or conferred any benefits on, the trust estate, or b. conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate, whether or not the right or privilege has been exercised (3) whether any person has at any time, directly or indirectly, done any similar thing in relation to any other trust estate, and (4) such other matters, if any, as he thinks fit. Trustees liable to be assessed under section 99 of the ITAA 1936 in respect of the income of a resident trust estate, other than the estate of a person who died fewer than three years before the end of the income year, are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold. | Detailed Reasoning - Application to your circumstances: As the principal beneficiary died during the year ended 30 June 2015 the modifications set out in section 95AB of the ITAA 1936 do not apply to the SDT and the net income of the trust estate is taxed under the ordinary trust taxation rules. The principal beneficiary was presently entitled to the net income of the trust estate that was applied for her benefit; however, due to the strict rules relating to SDTs they were not presently entitled to the unexpended net income of the trust. As the principal beneficiary was under a legal disability, the Trustee of the SDT is assessed on that part of the net income of the trust estate that was applied for their benefit under section 98 of the ITAA 1936 at general individual rates. With the principal beneficiary being the sole beneficiary of the SDT there is no beneficiary presently entitled to the unexpended (accumulated) income derived by the SDT during the year ended 30 June 2015. As such, this income is assessable in the hands of the trustee of the SDT. Having regard to the circumstances, and giving consideration to the matters listed above, the Commissioner considers it would be unreasonable to apply section 99A of the ITAA 1936 to the unexpended income of the SDT. Accordingly, the unexpended income is assessable under section 99 at the rates specified for resident individuals (without the benefit of the tax free threshold). When the principal beneficiary died the SDT ended. As such, any income derived on the residual trust funds after the date of death of the principal beneficiary is not included in the net income of the SDT.