Private ruling: Family trust - members of family group - specified individual and spouse separated - specified individual's spouse deceased
Date of advice: 30 January 2020
Published: March 2020
Ruling period: Income Year ending 30 June 2019
Date scheme commenced: 01 July 2018

Ruling: Q1: On 30 June 2019, was Individual 1 a member of Individual 2's family and family group pursuant to sections 272-90 and 272-95 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) in relation to conferrals or distributions from Family Trust 1 (FT1)? | A1: Yes | Q2: On 30 June 2019, was Individual 3 the spouse of Individual 2 pursuant to section 6(1) of the ITAA 1936 in relation to conferrals or distributions from Family Trust 2 (FT2)? | A2: No | Q3: On 30 June 2019, was the deceased estate of the late Individual 3 a member of Individual 2's family group pursuant to section 272-90 of Schedule 2F of the ITAA 1936 in relation to conferrals or distributions from FT2? | A3: No

Relevant facts and circumstances: Family Trust 1 (FT 1) and Family Trust 2 (FT 2) are Australian resident discretionary trusts, and both trusts were settled in 20XX. Individual 3, the original trustee and appointor of both trusts, passed away. The trustees of both trusts made family trust elections (FTE) in accordance with section 272-80 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) specifying Individual 2, the spouse of Individual 3, as the individual whose family group is taken into account in relation to the FTE. As of June 2019, Individual 1, the brother of Individual 3, was the trustee for both trusts. On XX June 2019, the trustee for FT 2 resolved to distribute the income of the trust for the year ending 30 June 2019 in the following manner: · 100% of the trust's capital gains and franked dividends to the deceased estate of the late Individual 3 (the Estate), · the first $416 of all other income to Individual 3's child, and · the balance to the Estate. Pursuant to the trust deed, each of these entities are potential beneficiaries of FT 2. On XX June 2019, the trustee for FT 1 made a resolution to distribute 100% of the income of the Trust for the year ending 30 June 2019 to Individual 1. Pursuant to the trust deed, Individual 1 is a potential beneficiary of FT 1. Individual 2 and Individual 3 were legally married prior to the time of settlement of the trusts. Subsequently, Individual 2 and Individual 3 ceased their marital relationship and ceased living together. Individual 2 and Individual 3 were still legally married at the time of Individual 3's death. Court proceedings had been commenced to determine property settlement and custody arrangements prior to Individual 3's death. Individual 1 continued the court proceedings on behalf of Individual 3 as their legal personal representative (LPR). According to the provisions in subsection 79(8) of the Family Law Act, Individual 3 remains a party to the court proceedings, albeit being represented by Individual 1. Individual 3's Will was made in 20XX, and contains the following relevant information: · Individual 1, Individual 2 and Individual 4 (Individual 3's parent) are Individual 3's executors, jointly; · the Will appoints the Executor under the Will to be the guardian and appointor of any trust, of which Individual 3 is the guardian and appointor at the date of their death. Probate was granted to Individual 1. Consent for Individual 1 to apply for probate independently was signed by Individual 2 and Individual 4, with leave reserved for them to apply for probate in the future, if necessary.

Relevant legislative provisions: Income Tax Assessment Act 1936 : section 6(1) | subsection 272-5(1) of Schedule 2F | section 272-80 of Schedule 2F | subsection 272-90(2) of Schedule 2F | subsection 272-90(2A) of Schedule 2F | subsection 272-90(3) of Schedule 2F | subsection 272-90(3A) of Schedule 2F | subsection 272-90(4) of Schedule 2F | subsection 272-90(5) of Schedule 2F | subsection 272-90(9) of Schedule 2F | subsection 272-95(1) of Schedule 2F | subsection 272-95(2) of Schedule 2F | subsection 272-140(1) of Schedule 2F | Income Tax Assessment Act 1997 section 995-1 | Acts Interpretation Act 1901 section 2E | Family Law Act 1975 subsection 79(8)

Reasons for decision: Summary: Until Individual 3's death, Individual 3's brother Individual 1 was a member of Individual 2's family and family group pursuant to sections 272-90 and 272-95 of Schedule 2F to the ITAA 1936. Based on the assumptions that Individual 2 had not entered into a new spousal relationship with another individual prior to 30 June 2019 when the trust distributions were conferred, Individual 1 has not ceased to be the member of Individual 2's family and family group upon Individual 3's death. | Detailed Reasoning - Detailed reasoning: Family trust distribution tax arises when a trust has made a family trust election (FTE), and a distribution of income or capital is made from the trust to a beneficiary that is not a member of the family group of the individual specified in the FTE (the primary individual or PI). Section 272-90 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) discusses whether a person is a member of the family group of the individual (the primary individual ) specified in the family trust election. Members of the family group of the primary individual include: · members of the PI's family · former members of the PI's family who are no longer members due to a breakdown in a marriage or relationship, or death (including former spouses, former widows/widowers and former stepchildren) · the family trust for which the family trust election has been made · other trusts for which FTE's have been made that specify the same individual · other trusts, companies or partnerships for which interposed entity election (IEE) have been made to become a member of the PI's family, and · trusts, companies or partnerships (other than non-fixed trusts) where certain family group members have fixed entitlements to all of the income and capital of the trust, company or partnership. The "family" of the PI consists of the primary individual and all of the following (if applicable): a) any parent, grandparent, brother or sister of the primary individual or the primary individual's spouse; b) any nephew, niece or child of the test individual or the primary individual's spouse; c) any lineal descendant of a nephew, niece or child referred to in paragraph (b); d) the spouse of the primary individual or of anyone who is a member of the primary individual's family because of paragraphs (a), (b) and (c) (subsection 272-95(1) of Schedule 2F to the ITAA 1936). Subsection 272-95(2) of Schedule 2F to the ITAA 1936 provides that a person does not cease to be a family member merely because of the death of any other member. Use of the term "merely" in subsection 272-95(2) of Schedule 2F to the ITAA 1936 indicates that there may be reasons, other than the death of an individual, that could lead to individuals that have been members of a family (and consequently the family group) of a PI, ceasing to be "family" of the PI or members of the PI's "family group" under Schedule 2F to the ITAA 1936. One example is when the deceased person's former spouse enters into a new spousal relationship. In order to determine whether Individual 1 is a member of Individual 2's family, and consequently their family group, we need to consider whether Individual 3 is Individual 2's spouse. An individual's spouse includes another person (of any sex) who: · the individual is in a relationship with that is registered under a prescribed state or territory law, or · although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple. (section 6-1 of the ITAA 1936 and section 995-1 of the ITAA 1997) ATO Interpretative Decision ATO ID 2014/3 Income Tax Family Trust Election: individual specified in election is deceased when election made (ATO ID 2014/3) discusses use of the word "individual" in subsection 272-80(3) of Schedule 2F to the ITAA 1936 and can be applied similarly to other sections of Schedule 2F. ATO ID 2014/3 explains that, although the term "individual" is not defined in the ITAA 1936, section 2B of the Acts Interpretation Act 1901 defines the word to mean "a natural person". The Macquarie Dictionary (Online) defines "natural person" as an "individual human being (as opposed to an artificial person)", as "legal persons" - having come into existence by man-made laws - can be distinguished from "natural persons". Having regard to the terms of sections 272-90 and 272-95 of Schedule 2F to the ITAA 1936 and its surrounding context, we consider that "individual" means a living human being. Until Individual 3's death, although separated, Individual 2 and Individual 3 were still legally married. As such, Individual 3 was Individual 2's spouse, the spouse of the primary individual, and a member of Individual 2's family pursuant to paragraph 272-95(1)(d) of Schedule 2F to the ITAA 1936. Further, Individual 3's sibling Individual 1 was a member of Individual 2's family pursuant to paragraph 272-95(1)(a) of Schedule 2F to the ITAA 1936. Based on the accepted assumptions that apply to this ruling, as Individual 2 had not entered into a new spousal relationship with another individual prior to 30 June 2019 when the trust distributions were conferred, Individual 1 has not ceased to be the member of Individual 2's family, or consequently their family group, upon Individual 3's death. As such, on 30 June 2019, Individual 1 was a member of Individual 2's family and family group in relation to the conferrals or distributions by FT 1 pursuant to sections 272-90 and 272-95 of Schedule 2F to the ITAA 1936. | Summary: From xx XX 20XX, when Individual 3 passed away, they were no longer: · Individual 2's spouse pursuant to section 6(1) of the ITAA 1936 in relation to conferrals or distributions by the FT 2; · a member of Individual 2's "family" pursuant to paragraph 272-95(1)(a) of Schedule 2F to the ITAA 1936; · a "former family member" pursuant to subsection 272-90(2A) of Schedule 2F to the ITAA 1936 | Detailed Reasoning - Detailed reasoning: As discussed in Question 1, "spouse" is defined in subsection 995-1(1) ITAA 97, and includes legally married individuals. Further in Question 1, 'individual' for the Family Trust Election (FTE) provisions means a "natural person". In your private ruling application you contend that Individual 3 remains Individual 2's spouse after their death and until such time as the court proceedings dealing with the property settlement and custody arrangements are finalised, as the definition of "spouse" in section 995-1 of the ITAA 1997 is not exhaustive. You advise that: · Individual 3 was substituted by Individual 1 in the court proceedings subject to subsection 79(8) of the Family Law Act 1975 (FLA). · Individual 3 remains a party to the court proceedings, albeit being represented by their LPR, Individual 1. We would like to address the points you have made as follows: Subsection 79(8) of FLA reads: (8) Where, before property settlement proceedings are completed, a party to the marriage dies: (a) the proceedings may be continued by or against, as the case may be, the legal personal representative of the deceased party and the applicable Rules of Court may make provision in relation to the substitution of the legal personal representative as a party to the proceedings; (b) if the court is of the opinion: (i) that it would have made an order with respect to property if the deceased party had not died; and (ii) that it is still appropriate to make an order with respect to property; the court may make such order as it considers appropriate with respect to: (iii) any of the property of the parties to the marriage or either of them; or (iv) any of the vested bankruptcy property in relation to a bankrupt party to the marriage; and (c) an order made by the court pursuant to paragraph (b) may be enforced on behalf of, or against, as the case may be, the estate of the deceased party. This provision specifically provides for a 'legal person' to continue to exist after a party to the marriage dies for the purpose of the FLA. There is no corresponding provision in taxation legislation. As such, from the date of their death, Individual 3 was not Individual 2's spouse pursuant to section 6(1) of the ITAA 1936 in relation to conferrals or distributions by the FT 2. From the date of Individual 3's death, they were no longer Individual 2's spouse, or a member of Individual 2's "family" pursuant to paragraph 272-95(1)(a) of the ITAA 1936. Nor was Individual 3 a former family member in subsection 272-90(2A) from the date of their death onwards. | Summary: Where a single family member dies, their estate is placed on trust until it is fully dealt with according to the deceased Will. As the Executor has not made a Family Trust Election (FTE) or an Interposed Entity Election (IEE) in respect of the Estate, it is not a member of Individual 2's family group pursuant to subsections 272-90(3), (3A) or (4)of Schedule 2F to the ITAA 1936. As none of the beneficiaries of the Estate have fixed entitlements to the income or capital of the Estate, the Estate is not a member of the family group of Individual 2 pursuant to Subsection 272-90(5) of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Detailed reasoning: As discussed in Question 1, section 272-90 of Schedule 2F to the ITAA 1936 states whether an individual or other entity is a member of the "family group" of the PI in a FTE. In your private ruling application you contend that Individual 2's family group should include the Estate as at 30 June 2019 because: · after their death, Individual 3 was still a member of Individual 2's family group pursuant to paragraph (a) of subsection 272-90(2A) of Schedule 2F to the ITAA 1936, or · paragraph (b) of the subsection provides that after the death of a PI or a member of the PI's family, the deceased person's former spouse is included in the PI's family group, and · you consider that a family group should also include the deceased estate of a person who, when they passed away, was a spouse of the primary individual. Pursuant to subsection 272-90(2A) of Schedule 2F to the ITAA 1936 certain former family members remain members of the family group of the PI, as follows: The following persons are members of the primary individual's family group in relation to the conferral or distribution: (a) a person who was a spouse of either the primary individual or of a member of the primary individual's family before a breakdown in the marriage or relationship; and (b) a person: (i) who was the spouse of either the primary individual or of a member of the primary individual ' s family immediately before the death of the primary individual or member of the primary individual ' s family; and (ii) who is now the spouse of a person who is not a member of the primary individual ' s family; and (c) a person who was a child of the spouse of either the primary individual or of a member of the primary individual ' s family before a breakdown in the marriage or relationship of the primary individual or the member of the primary individual ' s family. | Detailed Reasoning - Paragraph 272-90(2A)(a): Each of the above paragraphs in subsection 272-90(2A) of Schedule 2F to the ITAA 1936 applies to a "person". The term "person" refers to natural persons and, by virtue of subsections 995-1(1) of the ITAA 1997 and 6(1) of the ITAA 1936 also includes a company. For the purpose of Schedule 2F to the ITAA 1936, there are no legislative provisions that apply to legally extend a person's existence after they have passed away. Having regard to the terms and provisions of Schedule 2F and its surrounding context, it is considered that "person" (other than in reference to a company) means a living human being. Similarly, for completeness, there are no legislative provisions that apply to substitute the deceased person's legal personal representative for the deceased person for the purpose of Schedule 2F to the ITAA 1997. Prior to their death, Individual 3 was still legally married to Individual 2 and, as Individual 2's spouse, was still a member of Individual 2's "family" and "family group" by virtue of subsection 272-90(2) of Schedule 2F of the ITAA 1936. Although Individual 2 and Individual 3 experienced a "breakdown in the marriage" (as defined in subsection 272-140(1) of Schedule 2F of the ITAA 1997), after Individual 3's death Individual 3 no longer satisfied the definition of "individual", and consequently was no longer Individual 2's "spouse". For this reason, Individual 3 ceased to be a member of the family and family group, not by reason of the marriage breakdown. As discussed above, paragraph (a) of subsection 272-90(2A) of Schedule 2F to the ITAA 1936 applies only to "persons". As such, after Individual 3's death, this paragraph did not apply to Individual 3 (or Individual 3's LPR). | Detailed Reasoning - Paragraph 272-90(2A)(b): Paragraph 272-90(2A)(b) of the ITAA 1936 does not apply to Individual 3 as it applies to former family members who were the spouses of deceased persons, not to the deceased persons themselves. Further, paragraph 272-90(2A)(b) of the ITAA 1936 does not apply to the deceased Estate as: · the Estate does not satisfy the definition of a "person" and · there is no legislative provision that applies to substitute the executor of the deceased estate, or the deceased person's legal personal representative, for the deceased person. | Detailed Reasoning - Whether the Estate is a member of Individual 2's family group: Subsection 272-90(9) of Schedule 2F to the ITAA 1936 specifically applies to deceased estates in circumstances where the PI and all of the members of his or her family are deceased when a conferral takes place or the distribution is made. In this circumstance, the deceased estate of the individual and the deceased estates of the members are all members of the primary individual's family group in relation to the conferral or distribution. Where a single family member dies, their estate is placed on trust until it is fully dealt with according to the deceased Will (or if no will, according to law). This trust can be a member of the family group of the PI in relation to conferrals or distributions to the estate pursuant to subsections 272-90(3), 272-90(3A), 272-90(4), or 272-90(5) of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Subsections 272-90(3), (3A) and (4): A trust will be a member of the SI's family group in respect of a conferral or distribution if: · the trustee has made a FTE in respect of the trust which specifies the PI (subsection 272-90(3) of Schedule 2F to the ITAA 1936, · the trustee has made an FTE in respect of the trust which specifies the same primary individual as another trust's FTE (subsection 272-90(3A)), or · the trustee has made an IEE to that effect (subsection 272-90(4)), and · the FTE or the IEE is in force when the conferral takes place or the distribution is made As the Executor has not made an FTE or an IEE in respect of the Estate, the Estate is not a member of Individual 2's family group pursuant to subsections 272-90(3), (3A) or (4)of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Subsection 272-90(5): Subsection 272-90(5) of Schedule 2F ITAA 1936 provides that a trust is a member of the primary individual's family group in relation to a conferral or distribution if, when the conferral takes place or the distribution is made: (a) the primary individual; or (b) one or more members of the primary individual's family; or (c) the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts; or any combination of the above, have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust. Subsection 272-5(1) of Schedule 2F to the ITAA 1936 establishes that a beneficiary has a fixed entitlement to a share of income or capital of a trust where, under a trust instrument, the beneficiary has a vested and indefeasible interest in that share of the income or capital of the trust. The term "vested and indefeasible" is not defined in taxation legislation. However, the term's ordinary meaning is provided by the general law, which is discussed in paragraphs 13 to 16 of Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trusts (PCG 2016/16): In terms of the concept of "fixed entitlement", an interest is "vested" if it is vested in interest or vested in possession. An interest is "vested in possession" when it gives its holder a right of present enjoyment, whereas an interest is "vested in interest" if it gives its holder a present right to future enjoyment (paragraph 13 of PCG 2016/16). A vested interest is indefeasible where, in effect, it cannot be lost. For example, where the trust instrument, i.e. the Will, contains conditions by which a beneficiary could lose their vested interest, the interest will not be a fixed entitlement. Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates (IT 2622) considers entitlements of the beneficiaries of deceased estates at every stage of administration. As discussed in paragraphs 9 to 14 of IT 2622, until the administration of the estate has been completed, no beneficiaries of the estate are entitled to the income or the assets of the estate. The High Court of Australia in F.C. of T. v. Whiting (1943) 68 CLR 199; 7 ATD 179 held that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered. In their joint judgment, Latham C J and Williams J stated (CLR at 216; ATD at 184), that numerous authorities had established that: ".... until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries." Until the estate of a testator has been fully administered and the net residue ascertained, a residuary beneficiary has no proprietary interest in any specific investment forming part of the estate or in the income from any such investment. Both corpus and income are the property of the executors or administrators (paragraph 13 of IT 2622). As the legal dispute over the assets of the Estate continues, the administration of the Estate has not been finalised. Therefore, none of the beneficiaries have fixed entitlements to either the income or the capital of the estate. As none of the beneficiaries of the Estate have fixed entitlements to the income or capital of the Estate, the Estate is not a member of the family group of Individual 2 pursuant to Subsection 272-90(5) of Schedule 2F to the ITAA 1936.