Private ruling: Trust – income - minor
Date of advice: 27 June 2018
Published: September 2018
Ruling period: Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the XYZ Trust a testamentary trust, a fixed trust or a Hybrid trust? | A1: No. | Q2: Is the Trustee of the XYZ Trust assessed on the net income of the Trust to which no beneficiary is presently entitled to a share of that income in a particular year? | A2: Yes | Q3: Will the Commissioner exercise his discretion under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) to assess the Trustee of the XYZ Trust on the net income of the Trust to which no beneficiary is presently entitled under section 99 of the ITAA 1936? | A3: No.


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Section 95A(2) | Section 97 | Section 98 | Section 99 | Section 99A | Subsection 99A(2) | Subparagraph 99A(2)(a)(i) | Subparagraph 99A(2)(a)(ii) | Paragraph 99A(2)(b) | Paragraph 99A(2)(c) | Paragraph 99A(2)(d) | Section 101 | Schedule 2F | Section 272-65 | Subsection 272-5(1) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Rates Act 1986 Subsection 12(9) | Administration Act 1903 (WA) Section 14

Reasons for decision: Detailed Reasoning - Testamentary trust: The XYZ Trust was established by Deed and is based on the Deed of Family Arrangement executed by persons entitled to distribution from the Estate of the Deceased under the intestacy law of the relevant State in Australia. The two minor relatives of the deceased are the main beneficiaries of the Trust. A clause in the Deed of Family Arrangement provides among other things that the Trust is established to hold and invest funds held by the Trustee for the benefit of the beneficiaries received as a distribution under the Estate of the deceased. It is not agreed that the funds are considered distribution from the Estate of the Deceased. Under the intestacy law of the relevant State the two minor beneficiaries are not entitled persons to receive distribution from the Estate. The terms of the Deed of Family Arrangement as reflected in the Recitals of the Trust Deed varied the distribution of the Estate. However no approval from the Court has been sought and granted. Therefore the Trust is not considered a testamentary trust created on intestacy. The trust is also not a trust created under a Will as the deceased died intestate leaving no Will. | Detailed Reasoning - Fixed trust: A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust – section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). In relation to the meaning of the term fixed entitlement, subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides: If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. The term ‘vested and indefeasible’ appears in subsection 95A(2) of the ITAA 1936 and in the context of that subsection, the term has been considered by the courts; for example, refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 91 ATC 5000. The term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 which introduced the trust loss measures gives an explanation in relation to the meaning of ‘vested and indefeasible’ interest – see paragraphs 13.3 to 13.9 of the EM. In this case, the Trust Deed gives the Trustee absolute discretion to distribute income to any of the beneficiaries, the power to amend the Deed, and the power to nominate anyone as a specified class of beneficiary. Aside from statutory powers, the Trustee also has the discretionary powers and authorities of a private individual as if it were the beneficial owner of the trust fund. The Trustee’s powers under the Deed are considered defeasible powers which may defeat the entitlement of the beneficiaries. Also the beneficiary’s interest is contingent upon reaching a certain age. Therefore, the Trust is not a fixed trust for income tax law purposes. | Detailed Reasoning - Hybrid trust: The term hybrid trust has no established legal meaning and no clear non-technical meaning. The term is descriptive taking their meaning from usage rather than doctrine. For example in Product Ruling PR 2014/15, a summary of the scheme describes the trust as a hybrid trust where the trustee has both an ability to issue units that confer on a unit holder fixed rights to specified trust income (including capital gains) and capital and the trustee has an absolute discretion to distribute the balance (if any) of the income and/ or capital of the trust to discretionary trust beneficiaries. Another type of hybrid trust is a fixed discretionary trust where the trust deed specifies that a fixed percentage of income and capital must be applied for the benefit of a particular class of beneficiaries, with a separate class benefiting from another percentage and so on. In examining the Trust Deed, in this case, it is concluded that the Trust doesn’t have the features of a hybrid trust. Therefore, the Trust is not considered a hybrid trust. | Detailed Reasoning - Discretionary trust: For completeness a discretionary trust is defined under section 101 of the ITAA 1936 where it provides that if a trustee is given discretion to pay or apply the trust income for the benefit of specified beneficiaries, the beneficiaries are deemed to be presently entitled to the amount when the trustee exercises the discretion in their favour. The Trust is considered a discretionary trust given the discretionary powers of the Trustee under the Deed. | Detailed Reasoning - Present entitlement to a share of income: The net income of a trust estate for a particular year is calculated in accordance with section 95 of the ITAA 1936. Broadly, it is the amount that would have been the trustee's taxable income if it were assumed that the trustee was a resident taxpayer. The net income is assessed to the trustee or to the beneficiaries of the trust in accordance with the rules set out in Division 6 of Part III of the ITAA 1936. Section 97 of the ITAA 1936 provides (subject to certain exceptions) that a beneficiary who is presently entitled to a share of the income of a trust estate must include in their assessable income that share of the net income of the trust estate. Where no beneficiary is presently entitled to a share of the net income of the trust, that income is assessed to the trustee under section 99A of the ITAA 1936 or, at the Commissioner’s discretion, under section 99 of the ITAA 1936. In this case you confirmed that the Trustee of the XYZ Trust would accumulate the net income of the Trust until the beneficiaries reach a certain age. You also confirmed that the Trustee of the Trust has no intention of paying for any expenses for the maintenance, advancement or benefit of the beneficiaries. Therefore, in this case, where no beneficiary is presently entitled to a share of the net income of the Trust in a particular year, the Trustee is assessed to that income under section 99A of the ITAA 1936 or, at the Commissioner’s discretion, under section 99 of the ITAA 1936. | Detailed Reasoning - Commissioner’s discretion: Subsection 99A(2) of the ITAA 1936 gives the Commissioner discretion to assess the trustee under section 99, rather than section 99A, where the trust estate in relation to a year of income is a trust estate that resulted from the following: ● a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil (subparagraph 99A(2)(a)(i)) or ● 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 (subparagraph 99A(2)(a)(ii)); ● 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 (paragraph 99A(2)(b)) ● that is administered under Part XI of the Bankruptcy Act 1966 (paragraph 99A(2)(c)) or ● that consists of property of a kind referred to in paragraph 102AG(2)(c) (paragraph 99(2)(d)). In this case the XYZ Trust is not a trust that resulted from any of the conditions set out in subsection 99A(2) of the ITAA 1936. The deceased died intestate leaving no Will so it could not be said that the Trust resulted from a Will. The minor beneficiaries of the Trust are not entitled persons to receive distribution from the Estate of the Deceased under the intestacy law of the relevant State. The Deed of Family Arrangement entered into by the parties to include the minor beneficiaries as entitled persons to receive distribution from the Estate of the Deceased was not approved by the Court. As such it is considered a private family arrangement and therefore it is not within the scope of subparagraph 99A(2)(a)(ii). The conditions set out in paragraphs 99A(2)(b) and (c) and (d) are not relevant to the circumstances of this case. Given the Trust does not satisfy the conditions in subsection 99A(2), the Commissioner will not exercise the discretion in that subsection to assess the Trustee under section 99 of the ITAA 1936. Therefore in this case, the net income of the Trust for a particular year is assessed to the Trustee under section 99A of the ITAA 1936 where no beneficiary is presently entitled to a share of that income. The rate of tax under section 99A is set out in subsection 12(9) of the Income Tax Rates Act 1986 at 45%. Note: Where the Trustee, in a particular year, exercises their discretion to apply any part of the net income of the Trust for the benefit of a beneficiary over the age of majority, the beneficiary will be presently entitled to that share. The share amount is assessable to the beneficiary under section 97 of the ITAA 1936. Where the Trustee, in a particular year, exercises their discretion to apply any part of the net income of the Trust for the benefit of a beneficiary under the age of majority, the beneficiary will be presently entitled to that share. However, the share amount will be assessable to the Trustee on behalf of the minor beneficiaries under section 98 of the ITAA 1936.

Relevant facts: A person died intestate. At the date of death, the deceased was divorced leaving no de-facto partner and didn’t have any children. | A relative of the deceased was granted Letters of Administration by the Supreme Court of the relevant State to act as Administrator of the Estate of the deceased. | Under the intestacy law of the relevant State, certain relatives of the deceased are entitled persons to receive a distribution from the Estate. | The relatives of the deceased who are entitled persons of the Estate entered into a Deed of Family Arrangement. Under the arrangement it was agreed they would share their respective entitlement to the residuary estate to the other two relatives who are minors by gifting an amount to each of them. | A trust deed was executed to establish the XYZ Trust with the two minor relatives as the main beneficiaries. The purpose of the trust is to allow the trustee greater powers of investment for the benefit of the beneficiaries until they reach a certain age. | The trust deed provides that the vesting day of each beneficiary’s interest in the Trust is the day that particular beneficiary turns a certain age. | Under the trust deed, the trustee has powers to nominate in writing additional beneficiaries. The trustee has absolute discretion to appoint income to any of the beneficiaries. The trustee holds the income of the trust fund for one or more of the beneficiaries in equal shares and may make further investments of the income and capital of the trust as the trustee deems appropriate. | The trustee intends to accumulate the income of the trust until the beneficiaries reach a certain age. The trustee has no intention of paying for any expenses from the trust fund for the maintenance, advancement or benefit of the beneficiaries.