Private ruling: Assessability of trust distribution
Published: September 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the proposed distribution from the Trust's 'Capital Account' be assessable in your hands pursuant to section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No.

Relevant facts and circumstances: Individual A is, and at all relevant times was, a non-resident. In the 200X financial year, the Trust was settled outside of Australia. According to the Trust Deed: · The Trustee may accept any property as an accretion to the Trust Fund. · The Trustee may with the prior written consent of the Protector - in respect of amounts of capital exceeding $X - pay, transfer, apply or deal with the whole or part of the Trust Fund to Beneficiaries at any time during the Trust Period, so long as the Trustee does so in writing, and the beneficiary is not a resident of Country X. · The Trustee may pay, transfer, apply or deal with the income of the Trust Fund for the benefit of any one or more of the Beneficiaries. · In default of the Trustee exercising its power in relation to the income of the Trust Fund, the income is accumulated and the accumulated income forms part of the capital of the Trust Fund. · Subject to powers requiring the consent of the Protector, the Trustee may administer the trust for the benefit of the beneficiaries in whatever manner they determine and in that regard shall have the widest possible powers of managing and dealing with the Trust Fund. During the relevant period X gave $X of property to trustee the Trust, who accepted the gift as an accretion to the Trust Fund. The property gifted by X was reported in the Trust's financial statements as part of the 'Trust Capital Account'. The Trustee acquired all the shares in the Company for and lent the Company $X. During 200X these assets constituted the entirety of the Trust Fund. The Company invested the amounts received from the Trust. The Company derived income from its investments, which it accumulated. The composition of the Trust Fund did not change during 200X, although the value of the loan to the Company decreased to $X. The value of the loan from the Trust to the Company was never less than $X. During the year ended 200X the Trust and Company's affairs were restructured. The Company was collapsed and all the assets it held were paid as an in specie dividend to the Trust. The in specie dividend was reported in the Trust's financial statements in two ways: the value of the shares in the Company and the loan to the same continued to be reported as the 'Trust Capital Account', and the excess was reported as 'Undistributed Reserves Account'. During 200X, the 'Trust Capital Account' of the Trust was $X. The Trustee continues to maintain the same 'Trust Capital Account' that existed during 200X. The Trustee proposes to distribute to you money or property with a current market value expected to be up to $X, which will be debited to the 'Trust Capital Account'. You are an Australian resident for tax purposes. You are a beneficiary of the Trust because you are a relative of X. You are not under any legal disability.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 99B(1) | Income Tax Assessment Act 1936 subsection 99B(2)(a)

Reasons for decision: Summary: Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid or applied for the benefit of a beneficiary during a year of income, and the beneficiary was a resident at any time during the year, that amount is included in the assessable income of the beneficiary. Paragraph 99B(2)(a) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount included in assessable income under subsection (1) is reduced to the extent that the amount represents corpus of the trust estate, except to the extent to which the amount is attributable to amounts that would be assessable, if they were derived by a resident taxpayer. The corpus of the Trust includes the initial settlement sum and the gifts from X, which during 200X was valued at $X. These amounts are accounted for by the Trustee as the 'Trust Capital Account'. This accounting designation remained consistent since the gifts were received, notwithstanding changes in the underlying assets. If the Trustee were to exercise its power to pay, transfer, apply or deal with part of the 'Trust Capital Account' for your benefit that amount will be included in your assessable income pursuant to subsection 99B(1) of the ITAA 1936 because: · the amount is property of the Trust; · it will be paid to you (or applied for your benefit); · you are a beneficiary of the Trust; and · you are a resident of Australia for tax purposes. However, the amount included in your assessable income pursuant to subsection 99B(1) of the ITAA 1936 will be reduced pursuant to paragraph 99B(2)(a) of the ITAA 1936. This is because the 'Trust Capital Account' forms part of the corpus of the Trust estate. Furthermore the 'Trust Capital Account', being the initial settlement sum and gifts from X, would not be included in assessable income if they were derived by a resident taxpayer because the gifts have no connection to an income producing activity of the recipient ( Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47). Accordingly, paragraph 99B(2)(a) of the ITAA 1936 will reduce the amount included in your assessable income pursuant to section 99B(1) of the ITAA 1936 to nil.