Private ruling: Trust income
Date of advice: 26 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Commissioner exercise his discretion under section 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the testamentary trust under section 99 of the ITAA 1936? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 99A(2) | Income Tax Assessment Act 1936 section 99 | Income Tax Rates Act 1986 Schedule 10 | Income Tax Rates Act 1986 s ection 12

Reasons for decision: Summary: Testamentary trusts Section 99A of the ITAA 1936 provides that a special rate of tax will apply to certain trust income. The special rate of tax will apply to a share of trust income to which no beneficiary is presently entitled. The applicable tax rate is the highest marginal rate of tax for resident individuals. However, subparagraph 99A(2)(a)(i) of the ITAA 1936 provides that the special rate of tax will not apply to a trust estate that resulted from a will if the Commissioner is of the opinion that it would be unreasonable for the special rate of tax apply to that trust income. This includes both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will. If the Commissioner is of the opinion that it would be unreasonable for the special rate of tax to apply to the trust income, then more concessional rates of tax will apply under section 99 of the ITAA 1936. Section 99A(3) of the ITAA 1936 sets out factors which the Commissioner considers in deciding that it would be unreasonable for section 99A of the ITAA 1936 to apply. 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 or she thinks fit. In your case, the testamentary trust was created from a deceased estate. The money received by the Trust was as a result of the deceased estate. There is no evidence that an attempt has been made to increase the assets of the trust. That is, the Trust’s assets come directly from the assets of the deceased and there is a definable relationship of blood between the deceased person and the beneficiaries. There are no other suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind. Having regard to the factors in subsection 99A(3) of the ITAA 1936, the Commissioner considers that it would be unreasonable to apply section 99A of the ITAA 1936 to the Trust’s income. Accordingly section 99 of the ITAA 1936 will apply. Rates of tax for testamentary trusts The rates of tax for trustees assessed under section 99 of the ITAA 1936 are found in subsection 12(6) of the Income Tax Rates Act 1986 (ITRA 1986), which directs attention to Schedule 10 to the ITRA 1986. Part 1 of Schedule 10 to the ITRA 1986 identifies two classes of trustees for the purpose of determining the rates of tax that are to apply. In the first class are trustees who are liable to be assessed under section 99 in respect of resident trust estates of a deceased person, where the income is derived in the year of death of the deceased, or in any one of the following two years. These trustees are liable to pay tax at the rates applicable to resident individuals. The second class of trustees identified in Part 1 of Schedule 10 to the ITRA 1986 comprises trustees liable to be assessed under section 99 in respect of 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. These trustees are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold of $18,200. Therefore, the Trust is assessed at rates applicable to resident individuals with the benefit of the tax free threshold.

Relevant facts: The Testamentary Trust (the Trust) was established under a will. | Under the terms of the will, the Trust was created over the share of the deceased estate that entity A was entitled to, being a primary beneficiary under the will. | The capital of the Trust includes corpus. | The Trust received interest income. | No person has directly or indirectly transferred money or property to the Trust.