Private ruling: Section 254 - Trustee obligations
Date of advice: 25 May 2017
Published: September 2017
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Person A a 'trustee' within the meaning of section 254(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the property? | A1: Yes. | Q2: Is Person A required to lodge a return as Trustee for the 20XX-YY and 20YY-ZZ income years? | A2: Yes, to the extent that 'income, profits or gains' have been realised in his representative capacity. | Q3: Is Person A required to retain 'tax which is or will become due'? | A3: No.

Relevant facts and circumstances: Person A is a sole practitioner. Pursuant to the Order (Amended order) of the Relevant Court dated 20XX, Person A was appointed Trustee for Sale of the property. The Order of the Relevant Court appointing a trustee is made pursuant to Section 80 of the Relevant Act which under the general powers of the Court, allows the Court to appoint trustees including a trustee with a power to sell real estate. There was an earlier order in 20WW which appointed another person as Trustee for Sale. At paragraph 2 of the Amended order, the property vests in Person A for the purpose of sale. The Amended order authorised Person A inter alia to: ● Appoint a real estate agent to list, market and sell, and ● Sign necessary agency appointments; and ● Sign an appropriate Contract of Sale at such prices on such terms and conditions as deemed appropriate. The Amended order also varied the original order of with the inclusion of terms of indemnity to Person A in respect to property outgoings and liabilities and directed the payment of certain legal costs incurred from the proceeds of sale of the property to an individual. The property is a commercial building with tenants. The terms of the order did not involve any management of the real estate such as collection of rent or payment of expenses. At the date of the transfer to Person A, the property was in the of the original owners. The management of the building (collection of rent and payment of expenses) was carried on through the sale process by an agent of the original owners. Person A is not related in any way to the original owners. The property was sold in the 20XX-20YY income year with a settlement date in the 20YY-ZZ income year. The obligation of Person A under the court order was to pay the net sale proceeds to an individual in compliance with a property settlement order between the parties.

Relevant legislative provisions: Section 254 of the Income Tax Assessment Act 1936 | Section 6-1 of the Income Tax Assessment Act 1936 | Section 104-10 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Person A is a trustee in relation to the property within the meaning of section 254 of the ITAA 1936 as he meets the definition of a trustee under subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Person A was appointed by the Court under section 80 of the Family Law Act 1975 (FLA) to sell real property owned by a Trust (Amended order). At paragraph 2 of the Amended order, the property vests in Person A for the purpose of sale. The effect of section 38 of the Property Law Act (X) 1974 and Trusts Act 1973 is to vest the legal ownership of the property in Person A upon trust for sale without completing the necessary formalities of transfer or conveyance of the property to Person A. The production of the vesting order is also sufficient notice of the vesting of the legal title of the property in Person A for the purpose of selling the property. Section 254 of the ITAA 1936 sets out the obligations, liabilities and rights of agents and trustees. Section 6(1) ITAA 1936 defines a trustee as including: ' in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law: (1) an executor or administrator, guardian, committee, receiver, or liquidator (2) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability' In this instance, the Amended order authorised Person A inter alia to: ● Appoint a real estate agent to list, market and sell, the property; ● Sign necessary agency appointments; and ● Sign an appropriate Contract of Sale at such prices on such terms and conditions as deemed appropriate. Therefore, Person A is a trustee within the definition of subsection 6(1) of the ITAA 1936 and, therefore, a trustee for the purposes of section 254 of the ITAA 1936. | Summary: Person A is only required to lodge an income tax return as Trustee to the extent that 'income, profits or gains' have been realised in his representative capacity. | Detailed Reasoning - Detailed reasoning: ATO ID 2009/129 is about land vested in a trustee for sale. It states the making of the court order effects a change of ownership of the property from the original owners to the Trustee under CGT event A1. This is clear from the terms of the amended court order itself (which expressly vests the property in the trustee). The production of the vesting order is sufficient notice of the vesting of the legal title of the property in Person A for the purpose of selling the property. However, in this case there have been 2 court orders in relation to this property. The first Order, made in 20WW, which appointed another person as Trustee for Sale. The second order (the Amended order) dated in 20XX, substituted that person with Person A. Although we have not been asked to consider whether there was a CGT event under section 104-10 ITAA 1997, ATO ID 2009/129 provides that on the Court making an appointment of the earlier Trustee in 20WW that there was a change of ownership under CGT event A1. It is possible there was a subsequent disposal on the appointment of Person A in December 20XX. However, a change of ownership of a CGT asset does not occur merely because of a change of trustee (sec 104-10(2) of the ITAA 1997). Taxation Determination 2012/21 gives guidance as to when varying the terms and conditions of a trust may lead to a CGT event. In the case where there was no change of ownership upon the change of Trustee, the acquisition cost of the property would be its market value upon the initial court order date being 20WW. In the case where there was a CGT event upon the amended order in 20XX, the acquisition cost would be the market value at that date in 20XX. Table L of the legislative instrument that sets out lodgement obligations each income year, states a trust must have derived income for a lodgement obligation to arise. In your case, Person A will have made a capital gain as Trustee in relation to the sale of the property in the 20XX-YY income year if the capital proceeds are greater than the cost base. | Summary: An obligation to withhold only arises where an assessment has been issued by the Commissioner for the income year in which the property was sold. | Detailed Reasoning - Detailed Reasoning: In this instance, Person A is a trustee within the definition of section 6(1) ITAA 1936 subject to the further qualification of 'income, profits or gains' realised in his capacity as Trustee and or representative capacity in regard to the sale of the property Section 254 (1) (a) and (b) ITAA 1936 imposes certain obligations in respect to payment of tax and lodgement of tax returns in respect to his or her representative capacity. It is unclear based on the information provided whether the Trustee has realised income, profit or gains in this instance. In the event that income, profits or gains have been realised in that representative capacity then the obligation to withhold such amount under subsection 254(1)(d) ITAA 1936 can only arise where an assessment has been issued by the Commissioner for the income year in which the property was sold (see FC of T v Australian Building Systems Pty Ltd (In Liq) and Ors 2015 ATC )