Private ruling: Testamentary trust - exercise of section 99A discretion
Published: February 2012
Ruling period: 30 June 2011 to 30 June 2014

Ruling: Q1: Will the Commissioner exercise his discretion not to apply section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) to the annual income earned by the Trust Fund? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 99. | Income Tax Assessment Act 1936 Section 99A. | Income Tax Assessment Act 1936 Subsection 99A(2). | Income Tax Rates Act 1986 Subsection 12(6). | Income Tax Rates Act 1986 Subsection 12(9). | Income Tax Rates Act 1986 Sch10-PtI.

Reasons for decision: Detailed Reasoning - Discretion as per section 99A: Sections 99 and 99A of the ITAA 1936 apply to assess a trustee on income to which no beneficiary is presently entitled or income which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A. Section 99A applies in relation to all trusts unless: - the trust resulted from a will; subparagraph 99A(2)(a)(i) - the trust is bankrupt estate; paragraphs 99A(2)(b) and (c) - the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) and the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances. The applicable rate of tax under section 99A is set in subsection 12(9) of the Income Tax Rates Act 1986 (ITRA 1986) at 47%, which is imposed from the first dollar of taxable income. Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2) states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for Section 99A to apply. Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will. In order for a trust to result from a will, it is necessary that the will should be the source of the funds and that the trust should be created in consequence of a provision in the will or court order itself ( Case P53 82 ATC 247). As the Trust Fund was created in consequence of a will, the discretion under subsection 99A(2) of the ITAA 1936 is exercised to assess the income of the trust in accordance with Section 99 of the ITAA 1936. | Detailed Reasoning - Rates of tax to be applied: If no part of the net income of the Trust Fund is to be distributed to beneficiaries and section 99A is considered not to apply, then the trustee will be assessed under section 99 of the ITAA 1936 as if the income were that of an individual. The rates of tax for trustees assessed under section 99 are found in subsection 12(6) of the ITRA 1986 which directs attention to Schedule 10 of the Act. Part 1 of Schedule 10 of 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 of the ITAA 1936 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 of the ITRA 1986 comprises trustees liable to be assessed under section 99 of the ITAA 1936 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 $6,000, but rather a reduced tax free threshold of $416 applies. In this particular case, for the years ended 30 June 2006 onwards, the Trust Fund is a testamentary trust that falls into the second category and therefore will be eligible as per section 99 of the ITAA 1936 for normal individual rates of tax with a reduced tax free threshold. | Detailed Reasoning - Assessment codes: To impose the correct rates of tax and calculate the appropriate Medicare Levy, the trust tax return applies 'assessment codes' to particular parts of net income and distributions. A distinction in the coding is made between deceased estates and testamentary trusts. Code 15 applies to the estate of a deceased person that has been in existence for less than three years. Code 16 applies if the deceased estate has existed for more than three years. Code 37, on the other hand, applies to trustees assessed under subsection 99A(2) including the trustee of a trust resulting from a will i.e. a testamentary trust, but not the 'estate of a deceased person'.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The Trust Fund was established under the relevant clause of the deceased's will. | The deceased passed away several years ago. | The purpose of the trust fund is to provide assistance to the beneficiaries of the trust for the purchase a property as principal place of residence or an investment property. | The beneficiaries of the trust are the deceased's relatives who, at the date of death of the deceased, had not received any financial assistance from the deceased for the purposes of purchasing a residence. | One clause of the will stipulates that the capital and net income of the trust may be loaned to the primary beneficiaries who have attained the age of 25 and have not previously received a loan from the trust on interest free terms. If the property acquired through the assistance provided by the trust is sold within a certain period of its acquisition, the full amount of the loan has to be repaid to the trust. Otherwise, after a period of ten years, the loan will be forgiven. | Another clause of the will stipulates that, until vesting date, the trustees must accumulate the income derived in any accounting period and that accumulated income (net of any liabilities and tax) shall form part of the capital of the trust. | Assumptions: The copy of the relevant Clauses provided are an extract from the will of the deceased. | This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.