Private ruling: Assessment of Trust Income
Published: June 2012
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: On or after 1 January 2012

Ruling: Q1: Will the Commissioner exercise his discretion to assess the trustee on its income under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) instead of section 99A the ITAA 1936? | A1: Yes

Relevant facts and circumstances: The deceased passed away in 2011. The deceased was a member of a superannuation fund. In accordance with the Trust Deed governing the operations of the superannuation fund, it was decided the death benefits from the superannuation fund (superannuation balance and death insurance lump sum) be applied to a dependent of the deceased who is currently a minor. The trust was subsequently established with the deceased's dependent as sole beneficiary. Pursuant to the trust deed, the death benefits are held and used by the trustee absolutely for the benefit of the sole beneficiary until the beneficiary reaches the age of 18 years. One clause of the trust deed provides the trustee the absolute discretion to pay the capital of the trust fund or any part of it towards the maintenance education advancement or benefit of the beneficiary One clause of the trust deed provides that the trustee may in each year pay or set aside the net income of the Trust Fund in that year to or for the benefit of the beneficiary by paying so much of that net income as the trustee thinks fit for or towards the maintenance, education or benefit in any way what so ever f the beneficiary in such manner as the trustee thinks fit. Any income of the trust that is not applied towards the maintenance, education or benefit of the beneficiary is added the trust fund and invested. Once clause of the trust deed provides that if the beneficiary dies before reaching the age of 18 then the trustee shall hold the trust fund for the estate of the beneficiary.

Relevant legislative provisions: Section 95 of the Income Tax Assessment Act 1936 | Section 97 of the Income Tax Assessment Act 1936 | Section 98 of the Income Tax Assessment Act 1936 | Section 99 of the Income Tax Assessment Act 1936 | Section 99A of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Net income of a trust is defined in subsection 95(1) of ITAA 1936 as the total assessable income of the trust, calculated as if the trustee was a resident, less allowable deductions (except Income Equalisation Deposits and in certain circumstances prior year losses). Although a trustee is required to lodge an annual income tax return declaring the net income derived by the trust for the income year, the net income may be assessed in the hands of the trustee and/or the beneficiaries. The liability to taxation on the net income of a trust is determined under the following sections of the ITAA 1936: Section 97 of the ITAA 1936 applies where a beneficiary is presently entitled to a share of the net income and is not under a legal disability; Sections 98 and 100 of the ITAA 1936 apply where a beneficiary is presently entitled but is under a legal disability; and Sections 99A and 99 of the ITAA 1936 apply where there is an absence of present entitlement of the beneficiary to all or some of the net income of a trust estate. As the concepts of legal disability and present entitlement are critical in determining taxation liability, these terms will be considered before determining the section under which the net income of the trust will be assessed. | Detailed Reasoning - Legal disability: A beneficiary will be under a legal disability if they are not legally competent to give the trustee an immediate valid discharge in respect of the trust income. Generally, a beneficiary is under a legal disability if they are a minor at general law, bankrupt or insane. Under the Age of Majority Act of each state, the age at which a minor will achieve legal competence is 18 years of age. In your case, the sole beneficiary is under a legal disability as the beneficiary is under 18 years of age. | Detailed Reasoning - Present entitlement: There is no definition of the term 'presently entitled' in the income tax legislation. Generally, for a beneficiary to be presently entitled, they must have an absolute and indefeasible vested interest in the trust income. Where a beneficiary's interest in the trust income is contingent they will not be presently entitled. A contingent interest occurs where a beneficiary is not entitled to their interest in the trust income until one or more conditions are satisfied. In your case, the sole beneficiary is not presently entitled as: · the trustee has an discretion whether or not to distribute the trust income or capital to the sole beneficiary; and · the sole beneficiary is under a legal disability, being a minor. | Detailed Reasoning - Section 99 or 99A: In order to determine if the trustee will be assessed under section 99 of the ITAA 1936 on the net income of the trust estate, section 99A of the ITAA 1936 has to be considered since subsection 99(1) of the ITAA 1936 states: '1) Trust income not subject to special rate This section applies in relation to a trust estate in relation to a year of income only if section 99A does not apply in relation to that trust estate in relation to that year of income.' Subsection 99A(2) of the ITAA 1936 gives the Commissioner a discretion to assess the trustee under section 99 of the ITAA 1936, if the Commissioner is of the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply. Subsection 99A(2) states: '(2) Trust estates to which application of this section may be unreasonable This section does not apply in relation to a trust estate in relation to a year of income, being a trust estate: (a) that resulted from: (i) a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil; or (ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate; (b) that consists of the property of a person who has become bankrupt, being property that has vested in The Official Receiver in Bankruptcy, or in a registered trustee, under the Bankruptcy Act 1966; (c) that is administered under Part XI of the Bankruptcy Act 1966; or (d) that consists of property of a kind referred to in paragraph 102AG(2)(c), If the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.' However, before it can be determined that subsection 99A(2) of the ITAA 1936 can apply, one has to examine subsection 99A(3) of the ITAA 1936. According to this subsection, several matters have to be considered by the Commissioner before the discretion will be exercised. Subsection 99A(3) of the ITAA 1936 states: | Detailed Reasoning - 'Circumstances to regard in forming an opinion: In forming an opinion for the purposes of subsection (2): (a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised; (b) if a person who has, at any time, directly or indirectly: (i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or (ii) 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, has not, at any time, directly or indirectly: (iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or (iv) 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 another trust estate, whether or not the right or privilege has been exercised, the Commissioner shall have regard to that fact; and (c) the Commissioner shall have regard to such other matters, if any, as he thinks fit.' Furthermore, subsection 99A(3A) states: | Detailed Reasoning - 'Reference to trust estate: For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.' From the information we have, none of the matters in subsection 99A(3) of the ITAA 1936 apply. Generally, the Commissioner will exercise the discretion to assess deceased estates under section 99 of the ITAA 1936 where the deceased estates are of the 'ordinary and traditional' kind. According to ATO guidelines, an estate of the 'ordinary and traditional' kind would be one whose assets come directly from the assets of the deceased person - ordinarily the assets would be those of the deceased person, that is, a house or some income producing property, or assets purchased subsequent to the death of the deceased out of funds arising from the sale or conversion of those assets by the executor acting in the course of his/her duties. Based on the above information, it is clear that the trust is one of the 'ordinary and traditional' kind. Thus the Commissioner will exercise his discretion and subparagraph 99A(2)(a)(i) of the ITAA 1936 to apply. As a result of this, it means the trust estate can be taxed under section 99 of the ITAA 1936.

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