Private ruling: Taxation of Trusts – income of the trust estate
Date of advice: 30 November 2018
Published: March 2019
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: The scheme has commenced

Ruling: Q1: For the purpose of working out the Trust’s “net income” under subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936), are the External Administrators’ fees and disbursements an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when incurred in their respective capacities as: (i) voluntary administrators of the Company (ii) administrators of a deed of company arrangement (DOCA) executed by the Company; and/or (iii) liquidators of the Company? | A1: No | Q2: If the answer to question 1 is no, for the purpose of working out the Trust’s “net income” under subsection 95(1) of the ITAA 1936, are the External Administrators’ fees and disbursements an allowable deduction under section 40-880 of the ITAA 1997 when incurred in their respective capacities as: (i) voluntary administrators of the Company (ii) administrators of a deed of company arrangement (DOCA) executed by the Company; and/or (iii) liquidators of the Company? | A2: Yes, to the extent the fees and disbursements cannot be included in working out the amount of any capital gain or loss from the sales of the land . | Q3: For the purpose of section 97 of the Income Tax Assessment Act 1936 , are capital gains and capital losses included in the ‘income of the trust estate’ of the Trust for the relevant years? | A3: No | Q4: Is the Company assessed on any part of the capital gain made by the Trust under section 99A of the ITAA 1936 and Subdivision 115-C of the ITAA 1997 for the relevant years inclusive? | A4: Yes

Relevant facts and circumstances: The Trust was established by a deed dated dd mm yyyy (the Trust Deed). At all relevant times the Company, in Liquidation since dd mm yyyy, was the trustee of the Trust. The directors of the Company are Mr X and Mrs X. The Company in its capacity as Trustee carried on business activities consisting of primary production activities. The Trustee purchased land for farming (the Land) and attempted to farm the land for three years. As these activities were ultimately unsuccessful it was decided to sell the land, and that to do so it was necessary to subdivide the land into smaller lots. The Trustee’s agent previously applied for a private ruling on behalf of the Trustee, expressing that the Trustee held the following views: ● in subdividing and selling the land, they were not carrying on a business, and ● the activities undertaken in relation to subdividing and selling the land were not commercial transactions, that would characterise any profits made from the transactions as income. A private ruling was issued to the Trustee advising that: ● the subdivision of the Land would not amount to carrying on a business or a profit making undertaking; ● the proceeds from the sale of the subdivided land would not be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); and ● the sale of the subdivided land would be subject to the CGT rules under Part 3-1 of the ITAA 1997. The Company entered voluntary administration and External Administrators (the EAs) were appointed as the voluntary administrators and the farming business ceased. A Deed of Company Arrangement (DOCA) was executed between the Company and its creditors, and the EAs were appointed as the Deed Administrators. During the period of the DOCA, the EAs were responsible for realising sufficient properties to repay the participating creditors. During the period of the DOCA, with the exception of the Land (and assets associated with the subdivision), the Directors took back control of the Company and the Company’s residual assets, including the responsibilities involved in acting as the Trustee. The DOCA ended and the Company went into liquidation. The EAs were appointed as Liquidators of the Company. As detailed in the draft financial statements of the Trust, the Trust made capital gains and losses from the sale of the subdivided lots. The EAs advise that no beneficiary has received, or is reasonably expected to receive, any amount of the capital gains from the sale of the subdivided lots in the relevant years. Based on the information provided in the draft Trust tax returns, it is evident that the Trustee has not chosen to be specifically entitled to any amount of the capital gain under section 115-230 of the ITAA 1997. Disregarding the amount of any capital gains/losses made for each year, the Trust made revenue losses in each of the relevant years. Section 99A of the ITAA 1936 applies to the Trustee in respect of the Trust estate. The EAs do not have any information that would indicate that Mr X or Mrs X were under any legal disability during the relevant income years. Mr X and Mrs X were Australian residents during the relevant periods. The Trust Deed and resolutions of the Trustee ‘The beneficiaries’ are defined in subclause 1.1 of the Trust Deed. The Schedule to the Trust Deed, as varied, names Mr X and Mrs X as Beneficiaries. The Trust Deed does not define the terms “income”, “income of the Trust Fund” or “net income of the Trust Fund”. The ‘Trust Fund’ is defined in subclause 1.2 of the Trust Deed “Year of Income” is defined in subclause 1.7 of the Trust Deed. The Trust Deed rules for dealing with the income of the Trust Fund. The Trust Deed provides rules for dealing with the capital of the Trust Fund. Clause 7 of the Trust Deed requires that ‘any determination or resolution of the Trustee under any of the provisions hereof shall be recorded in a written minute and such minutes shall be signed by the Trustee, and kept with the accounts and records of the Trust Fund.’ Subclause 9(g) of the Trust Deed provides that the Trustee has uncontrolled discretion, and the power and authority ‘to determine whether any sums received or disbursed are on account of capital or income or partly on account of one and partly on account of the other and in what proportions and the decision of the Trustee whether made in writing or implied from the acts of the Trustee shall be conclusive and binding.’ Clause 15 of the Trust Deed, in relation to Trust Accounts, requires the Trustee to keep complete and accurate books of account and records of all receipts and expenditures on account of the Trust Fund, and states that promptly after the close of each Accounting Period the Trustee shall prepare a written accounting report (prepared in accordance with normally accepted accounting procedures) for such period consisting of a balance sheet a statement of income and expenditure and a list of assets held at the close of the period.’ As far as the EAs are aware, the Trustee has not made any resolutions in respect of the relevant years: ● to pay or apply the whole or any part of the income of the trust fund to or for the benefit of any beneficiaries of the Trust under subclauses 2.1 or 2.2 of the Trust Deed, ● to pay or apply the whole or any part of the any capital or net capital proceeds to or for the benefit of any beneficiaries under clause 3 of the Trust Deed, ● to treat the whole or any part of the net capital proceeds from the sale of the subdivided land as being on income account under clause 9(g) of the Trust Deed. The EA’s fees and disbursements The Trustee incurred expenses for the EAs fees and disbursements during the relevant years in respect of the voluntary administration, administration of the DOCA and the liquidation.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | subsection 95(1) | section 97 | section 99A | Division 6E | Income Tax Assessment Act 1997 section 8-1 | subsection 8-1(1) | subsection 8-1(2) | section 40-880 | subsection 40-880(2) | paragraph 40-880(2)(b) | paragraph 40-880(2)(d) | subsection 40-880(3) | subsection 40-880(5) | paragraph 40-880(5)(f) | section 110-25 | subsections 110-25(3) | subsection 110-25(5) | subsection 110-35(1) | subsection 110-35(2) | Subdivision 115-C | section 115-222 | subsection 115-222(4) | subsection 115-222(5) | subsection 115-225(1) | section 115-227 | section 115-228 | section 115-230

Reasons for decision: Summary: The External Administrator’s (EAs) fees and disbursements are of a capital nature. As such, for the purpose of calculating the ‘net income’ of the Trust estate under Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) they are not an allowable deduction under section 8-1 of the of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the basic rules for taxation of the net income of a trust estate. Subsection 95(1) of the ITAA 1936 defines ‘net income’ in relation to a trust, which is generally the total assessable income of the trust estate (calculated as if the trustee were a resident taxpayer in respect of that income), less all allowable deductions (except certain excluded deductions). When treated as a taxable resident entity, subsection 8-1(1) of the ITAA 1997 allows a deduction from the assessable income of the trust estate for any loss or outgoing to the extent that: (a) it is incurred in gaining or producing assessable income (the ‘first limb’), or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (the ‘second limb’). A deduction is not allowed to the extent that the loss or outgoing is of a capital, private or domestic nature, is incurred in producing exempt income, or where another provision of the income tax law prevents a deduction (subsection 8-1(2) of the ITAA 1997). Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues (TR 2011/6) explains that outgoings incurred to change the entity’s profit-yielding structure or organisation (including its demise) are considered to be of a capital nature (paragraph 68). As the Company incurred the fees and disbursements after the farming business had ceased, and were for activities carried on to dispose of capital assets, settle liabilities, and bring the company and trust to end, the fees and disbursements are of a capital nature. As such, for the purpose of calculating the ‘net income’ of the Trust, the fees and disbursements incurred during the voluntary administration, administering the Deed of Company Arrangement (DOCA), and liquidation are not deductible under section 8-1 of the ITAA 1997. | Summary: To the extent that the EA’s remuneration fees could be included in calculating the amount of a capital gain or capital loss from the sale of a CGT asset of the Trust, they are not deductible under section 40-880 of the ITAA 1997. However, for the purpose of calculating the ‘net income’ of the Trust estate for the purpose of Division 6 of the ITAA 1936, the balance of the EA remuneration fees (after excluding any amount that could be included in calculating capital gains or losses) are allowable deductions under section 40-880 of the ITAA 1997, deductible in equal portions over a period of five years (starting in the year in which they are incurred). Further, for the purpose of calculating the ‘net income’ of the Trust estate in Division 6 of the ITAA 1936, the EA’s disbursements are allowable deductions under section 40-880 of the ITAA 1997, deductible in equal portions over a period of 5 years (starting in the year in which they are incurred). | Detailed Reasoning - Detailed reasoning: For the purpose of determining the ‘net income’ of a trust estate under Division 6 of the ITAA 1936, where the trustee of a trust estate is treated as a taxable resident entity, certain business capital expenditure is deductible in equal portions over a period of 5 years, starting in the year in which they are incurred under section 40-880 of the ITAA 1997. Expenditure that is deductible under section 40-880 of the ITAA 1997 must be business capital expenditure incurred: (a) in relation to a business carried on by the trustee on behalf of the trust; or (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on (subsection 40-880(2) of the ITAA 1997). Capital expenses a company or trust incurs to cease carrying on a business, as a consequence of a business ceasing, or to liquidate or wind-up the entity, are deductible under paragraph 40-880(2)(b) of the ITAA 1997 to the extent that they are not excluded under subsection 40-880(5) (paragraphs 103 and 134 of TR 2011/6). | Detailed Reasoning - Apportionment and expenses that could be taken into account in working out the amount of a capital gain or loss from a CGT event.: Use of the expression ‘to the extent that’ in section 40-880 of the ITAA 1997 indicates that apportionment may be required in applying the section (TR 2011/6, paragraph 24). Under subsection 40-880(5) of the ITAA 1997, at paragraph (f), an expense cannot be deducted to the extent that it could be taken into account in working out the amount of a capital gain or capital loss from a CGT event. Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens on disposal of a CGT asset. A capital gain is made if the capital proceeds from the disposal are more than the asset’s cost base. A capital loss is made if the capital proceeds are less than the asset’s reduced cost base. The cost base and reduced cost base of a CGT asset includes ‘incidental costs’ incurred: ● to acquire the asset, or ● that relate to a CGT event happening to the asset (subsections 110-25(3) and 110-35(1) of the ITAA 1997). The incidental costs include remuneration expenses incurred for the services of an ‘agent’ in relation to the CGT event (subsection 110-35(2)). The EA’s remuneration fee expenses are predominantly for two kinds of activities: ● activities related to administering the voluntary administration, DOCA and the liquidation, and ● activities more directly connected with administering the subdivision and sale of the CGT assets of the Company held in its capacity as trustee of the Trust. As the EAs were acting as the Company’s agent in carrying out the subdivision and sale activities, any remuneration expenses (or part thereof) connected with those activities could be taken into account in working out the amount of a capital gain or capital loss from CGT event A1 under upon sale of the subdivided lots. As such, these amounts are not deductible under section 40-880 of the ITAA 1997 by virtue of paragraph 40-880(5)(f). After excluding those fees incurred to remunerate the EAs for activities to subdivide and sell the land, the balance of the EA fees are deductible under paragraph 40-880(2)(b) of the ITAA 1997. From the information provided, the Commissioner accepts that the EA’s disbursements, or outlays, incurred by the Company are deductible under section 40-880 of the ITAA 1997. | Summary: The net proceeds from the sale of the Trust subdivided land in each of the relevant years, is not ‘income of the trust estate’ for the purpose of section 97 of the ITAA 1936. The net proceeds are of a capital nature and the Company in its capacity as trustee for the Trust (the Trustee) has not validly exercised any power under the Trust to treat the capital receipts and outlays as being on income account. | Detailed Reasoning - Detailed reasoning: Under section 97 of the ITAA 1936 (which is found in Division 6), where a beneficiary of a trust estate (who is not under any legal disability) is presently entitled to a share of the ‘income of the trust estate’, the beneficiary’s assessable income includes: (a) so much of that share of the ‘net income’ of the trust estate as is attributable to a period when the beneficiary was a resident, and (b) so much of that share of the ‘net income’ of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia, and (c) amounts in respect of exempt income of the trust estate, and (d) amounts in respect of non-assessable non-exempt (NANE) income of the trust estate. From the facts, the Trust did not have any exempt income or NANE income during the relevant income years. Further, to the best of the EAs knowledge the beneficiaries of the Trust were not under any legal disability and were Australian residents during the relevant periods. | Detailed Reasoning - Income according to ordinary concepts: According to general law, the proceeds from the sale of land and other capital assets are not income. However, if a taxpayer that is carrying on a business sells property, the proceeds from that sale will be income only if the transaction: ● is within the ordinary course of the taxpayer’s business; or ● is not in the ordinary course of the taxpayers business, but was entered into with the intention or purpose of making a profit from the transaction (Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income ). As detailed in the facts, the primary business of the Trust was farming, and the land was purchased as a capital asset of that business. The farming business ceased. In the previous private ruling, the Commissioner accepted the Trustee’s view that in subdividing and selling the land: ● they were not carrying on a business, ● transactions in selling the land were not commercial transactions, entered into to make a profit, and ● the proceeds from the sale of land were the mere realisation of capital assets. As such, under the general law and for tax purposes, the proceeds from the sale of the land are of a capital nature. | Detailed Reasoning - ‘Income of the trust estate’: Section 97 of the ITAA 1936 uses the phrases ‘income of the trust estate’ and ‘net income of a trust estate’ to determine the amount on which beneficiaries will be assessed. The tax legislation defines ‘net income’ in relation to a trust estate for the purpose of section 97 of the ITAA 1936 (at subsection 95(1)), which is generally accepted as equivalent to a trust’s taxable income. The phrase ‘income of the trust estate’ is not defined in the tax legislation. However, the phrased has been subject of numerous cases decided in courts of law for income tax purposes and other purposes. Also, Draft Taxation Ruling TR 2012/D1 Income tax: meaning of ‘income of the trust estate’ in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions (TR 2012/D1) provides the Commissioner’s view on the meaning of the phrase. For Division 6 of the ITAA 1936, including section 97, the ‘income of the trust estate’ is the income to which one or more beneficiaries could be made presently entitled, commonly referred to as ‘distributable income’ (TR 2012/D1, paragraphs 12 and 13). For each particular trust, what this means will depend on: ● the terms of the trust (generally found in the trust deed or other trust instrument), and ● the general law of trusts (TR 2012/D1, paragraph 7). This reference to the general law of trusts encompasses: ● the general law, ● statutory law, ● trust accounting principles, ● any actions taken by the trustee in accordance with the trust deed (including resolutions to appoint income or capital to particular beneficiaries) and ● the settlor’s intention.’ (paragraph 64 of TR 2012/D1). | Detailed Reasoning - The terms of the trust: Ascertaining the terms of a trust is essentially an exercise in determining, and giving effect to, the settlor's intention (paragraph 65 of TR 2012/D1). In Re Gulbenkian's Settlement [1970] AC 508; [1968] 3 All ER 785 at AC 522; All ER 790, the task was described as follows: ‘There is no doubt that the first task is to try to ascertain the Settlor's intention, so to speak, without regard to the consequences... The court, whose task it is to discover that intention, starts by applying the usual canons of construction; words must be given their natural meaning, the clause should be read literally and in accordance with the ordinary rules of grammar. But very frequently, whether it be in wills, settlements or commercial agreements, the application of such fundamental canons leads nowhere, the draftsman has used words wrongly, his sentences border on the illiterate and his grammar may be appalling. It is then the duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense and desire to make sense of the settlor's and parties' expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it.’ | Detailed Reasoning - Definitions of ‘income’ for Trust purposes: Some trust deeds provide a definition of ‘income’ and/or related terms for the purpose of the relevant trust. Some definitions will specifically include capital gains in the income of the trust estate, or will equate the income of the trust estate with ‘net income’ as defined in subsection 95(1) of the ITAA 1936. Also, a trust deed may provide the trustee with a discretionary power to define the trust’s income. However, where income is not defined in the trust deed, or a trustee has not exercised a discretionary power to define income in a particular way, the general law regarding income according to ordinary concepts, as discussed above, applies. | Detailed Reasoning - The Trust Deed of the Trust: The Trust Deed of the Trust provides different rules in relation to income of the trust estate and capital of the trust estate: ● subclauses 2.1 to 2.4 of the Trust Deed provide for the distribution of income, and ● clause 3 provides for the distribution of capital. The Trust Deed of the Trust does not define ‘income’, ‘net income of the Trust Fund’, or ‘income of the Trust Fund’ as used in subclauses 2.1, 2.2 and 2.3. Under subclause 2.1 of the Trust Deed, the Trustee has absolute discretion to pay (or apply or set aside) the whole, or part of the net income of the Trust Fund in any financial year to or for the benefit of the beneficiaries, as it thinks fit. Further, under subclause 2.3 and 2.4 of the Trust Deed, any amount of ‘income of the Trust Fund’ that has not been paid, applied or set aside under the previous subclauses must, from 30 June in each year, be held by the Trustee for the named beneficiaries, Mr and Mrs X, as tenants in common in equal shares. Under subclause 2.3, on 30 June in each year, the named beneficiaries are deemed to be presently entitled to any amount of the ‘income of the Trust Fund’ that the Trustee has not paid, applied or set aside under the preceeding subclauses. Although subclause 2.1 of the Trust Deed uses the phrase ‘net income of the Trust Fund’, and subclauses 2.2 and 2.3 use the phrase ‘income of the Trust Fund’, the Commissioner accepts the EAs view that the Settlor’s intention was that all three subclauses were set out to deal with the same income, the ‘income of the Trust Fund’, being the income available for distribution to beneficiaries. The Commissioner accepts the EAs view that use of the phrase ‘net income of the Trust Fund’ in subclause 2.1 was not intended to equate the Trust income with ‘net income’ as defined in subsection 95(1) of the ITAA 1936. Under clause 3 of the Trust Deed, the Trustee has discretion to pay or apply the whole or any part or parts of the capital of the Trust Fund, to or for the benefit of the living general beneficiaries. Under clause 3 of the Trust Deed, there is no deemed present entitlement that arises if the Trustee does not exercise the power to distribute ca pital. As detailed in the facts, to the best of the EAs knowledge, the Trustee of the trust did not make any written resolutions to pay or apply any of the income or capital of the trust estate to any beneficiaries in relation to the relevant years. | Detailed Reasoning - Trust deed clauses empowering a trustee to treat receipts and outlays as income or capital: Trust deeds may contain clauses that allow the trustee to treat ‘capital’ receipts and outlays as ‘income’ receipts and outlays for trust purposes including distributing income to beneficiaries. Where no such clauses exist, or the clause is not validly exercised by the trustee, the general law applies. Although these clauses may be referred to as ‘re-characterisation clauses’, these clauses do not change the character of the receipts or outlays, but merely confer power on the trustee to determine whether the amounts will be treated as on account of: ● income, for beneficiaries the trust deed determines are entitled to income of the trust estate, or ● capital, for beneficiaries the trust deed determines are entitled to capital of the trust estate. Trust deed clauses that allow a trustee to treat capital as income were discussed in the Full Federal Court in Bamford & Ors v Federal Commissioner of Taxation [2009] FCAFC 66; 2009 ATC 20-105 ( Bamford ) (later upheld by the High Court in Bamford v FC of T 2010 ATC 20-170). In Bamford , at paragraph 59, Emmett J said: ‘59. … where a trust instrument permits the trustee to treat a capital receipt as income for the purposes of fixing the entitlements of beneficiaries to distributions, a beneficiary who thereby becomes entitled to a share of that capital gain is presently entitled, within the meaning of s 97, to that part of the income of the trust estate. The beneficiary must include that share of the net income of the trust estate in that beneficiary's assessable income and the trustee would not be liable to be assessed under s 99A.’ However, as discussed above, the Settlor’s true intention must be ascertained by considering all of the trust deeds provisions. In Forrest v FCT [2010] FCAFC 6; 2010 ATC 20-163 ( Forrest ), after considering all the provisions of the relevant trust deed, the Court was of the view that the Settlor’s primary intention was to create a fixed trust of income ‘other than capital’. All capital gains derived by the trust were held on a discretionary trust for the discretionary beneficiaries. As such, if the relevant clause in Forrest was able to confer the trustee with a discretionary power to change receipts from capital to income, this primary intention would be defeated. The Court found that the trust deed could not be exercised by the trustee to wrongly classify a receipt as a capital gain when the receipt was, in truth, income. The Court held that the relevant clause was, in fact, no more than an administrative power to honestly classify receipts according to law. | Detailed Reasoning - Subclause 9(g) of the Trust Deed: Subclause 9(g) of the Trust Deed of the Trust provides that the Company has uncontrolled discretion, and the power and authority to: ‘determine whether any sums received or disbursed are on account of capital or income or partly on account of one and partly on account of the other and in what proportions and the decision of the Trustee whether made in writing or implied from the acts of the Trustee shall be conclusive and binding.’ Subclause 9(g) of the Trust Deed provides that the subclause can be exercised by the Trustee either in writing or by acts that imply a determination or decision under the subclause was made. However, clause 7 of the Trust Deed requires that any determination or resolution of the Trustee, under any provision of the Trust Deed, is to be recorded in a written, signed minute. Although, subclause 9(g) of the Trust Deed provides that the actions of the Trustee can imply that a determination has be made, the requirements in clause 7 clearly expresses a contrary intention. As detailed in the facts, the Trustee did not make any written resolutions under subclause 9(g) of the Trust Deed to treat the land sales receipts and outlays as being on income account in respect of the relevant years. | Detailed Reasoning - How long does a trustee have to perform ‘acts’ that influence the ‘income of the trust estate’?: For the purposes of Division 6 of the ITAA 1936, a beneficiary’s present entitlement to income of the trust estate: ● ‘must arise, if at all, at the latest by the end of the year of income' ( Trustees of the Estate Mortgage Fighting Fund v. FC of T 2002 ATC 4525 at 4539; (2000) 102 FCR 15 at 38), and ● whether or not the precise entitlement can be ascertained before the end of the relevant year of income’ ( Federal Commissioner of Taxation v Harmer & Ors 90 ATC 4672 (Harmer)). In Wood v Inglis [2009] NSWSC 601 ( Wood v Inglis ), the Court accepted that the trustee had validly exercised a power in the trust deed to treat net capital receipts as income when the trustee accepted the financial accounts of the trust, which showed that treatment. The financial accounts were typically prepared and accepted by the trustee in March or April of the following year. This raises the question as to how long after the end of an income year a trustee has to determine the ‘precise entitlement’ of beneficiaries, including any deemed present entitlements. In relation to the Trust, clause 15 of the Trust Deed requires the Trustee to prepare written accounting reports ‘promptly’ after the close of each accounting period. Further, as discussed in the facts, the Trust income tax obligations required the Trustee to lodge trust tax returns by: ● 15 May 2014, for the year ended 30 June 2013, ● 31 October 2014, for the year ended 30 June 2014, and ● 2 November 2015, for the year ended 30 June 2015. These tasks require the Trustee to: ● make any necessary determinations about how receipts and outlays are treated in the accounts (ie. whether on income account or capital account), and ● calculate the specific amount of ‘income of the trust fund’. As a consequence, the specific amount of beneficiaries’ present entitlements (if any) would be ascertainable. The Trust Deed does not define the term ‘promptly’. However, the meaning of the word was considered in Nichols Global Enterprises Pty Ltd v Biviano [2000] NSWSC 956 ( Nichols ), where Young J said: [17] … The word "promptly" is a word of somewhat elastic meaning and must always be considered in all the circumstances of the case. [18] The general flavour of the word "promptly" is that in all the circumstances the thing required to be done is to be done with a little more expedition than a reasonable time . In Metropolitan Land Co v Manning 71 SW 696, 699 (Kansas CA) (1903), the Court made the sound point that as it was not necessary to include any adverb if something was to be done in a reasonable time, the addition of "promptly" usually means that the thing is to be done more expeditiously. [Emphasis added] The Macquarie Dictionary [Multimedia], version 5.0.0, 1/10/01 defines 'reasonable' as meaning 'endowed with reason'. 'Reason' is relevantly defined to mean: 1. a ground or cause, as for a belief, fact, event; 2 . a statement in justification. As such, what is a ‘reasonable’ time depends on the grounds or cause of the delay in the circumstances of the case ( Ganke v. D.F.C. of T. (No. 2) 82 ATC 4474 at pp. 4476-4477; (1982) 78 F.L.R. 455 at p. 458). In respect of a trustee’s discretionary power, after such ‘reasonable period’ has elapsed, the trustee’s discretion in respect thereof must be treated as being at an end ( Re Allen-Meyrick’s Will Trusts, Mangnall v Allen-Meyrick and Others [1966] 1All ER 740 ( Allen-Meyrick )). From 1 July 20XX to XX June 20XX, Mrs X maintain records of the receipts and outlays in relation to the sale of the Trust’s subdivided land in the MYOB accounting program, in a similar manner to the way they had recorded transactions from her previous businesses. However, in the previous private ruling application, the Trustee’s explained that, contrary to the method used for recording the transactions, they considered the land sales were not ‘income’ but were capital transactions. Further, the application stated that Mrs X used the MYOB accounting program as: ● they had it on their computer at home, ● they had used it before, and ● as a tool to merely record the details of the land subdivision transactions. As such, it is the Commissioner’s view that using MYOB to record the transactions in a business-like manner was not an act that implies that the Trustee made a decision to treat the capital receipts and outlays as being on income account for the purpose of distributing the amounts to beneficiaries. While the Trustee was in voluntary administration, the EAs were administering the Company. It is accepted that during this time, the EAs did not hold sufficient information about the financial position of the Company and Trust to prepare accurate accounting reports (as required under clause 13 of the Trust Deed) or to make any determinations on behalf of the Trustee regarding the treatment of the receipts and outlays from the land sales, and were not in a position to consider distributions to beneficiaries. While the DOCA was in operation, under the DOCA, the role of Trustee of the Trust and the responsibilities thereof were returned to the Company directors, Mr and Mrs X. There is no evidence of acts during this time that imply the Trustee made a decision in respect of the year ended 30 June 20XX and 30 June 20XX that the capital receipts and outlays from the sale of the subdivided land was treated as being on account of income for the purpose of distribution to beneficiaries. After the Company entered into liquidation, the EAs had administrative control as Trustee of the Trust and commenced action to wind-up the Company and the Trust. Draft financial statements for the Trust were first prepared 19 months later, using the accounts prepared by Mrs X in the MYOB accounting program. As discussed above, the Commissioner does not consider that these accounts imply that the Trustee made a decision to treat the capital receipts and outlays as being on income account for Trust purposes. Further, as at the date of this ruling, finalised financial accounts in respect of the relevant income years have not been prepared or accepted by the Trustee of the Trust. Although the Company entered into administration shortly before the end of the 20XX year, the Commissioner is not satisfied that reasonable grounds have been shown to explain why the Trustee did not prepare written accounts for the Trust: ● promptly after the close of the relevant income years, or ● by the relevant income tax return lodgment due dates. It is the Commissioner’s view that an unreasonable length of time has passed, during which no written determinations under subclause 9(g) were made, and no acts were undertaken, by the Trustee that imply the receipts and outlays from the sale of the subdivided land were treated as ‘income of the trust fund’ for the purpose of distributing the amounts to beneficiaries. Due to the length of time since 30 June 20XX and 30 June 20XX, the case of the Trust can be distinguished from that of Wood v Inglis. Further, applying the findings in Allen-Meyrick, the Trustee’s discretion to exercise subclause 9(g) of the Trust Deed has ended and the Trustee no longer has the power to treat capital receipts and outlays as income of the Trust Fund. Under general law principles, the receipts and outlays are of a capital nature and must be accounted for on capital account. As such, the net capital proceeds from the land sales in the relevant years are not ‘income of the trust estate’ for the purpose of section 97 of the ITAA 1936. | Summary: As no entity is specifically entitled to any part of the capital gains and the income of the Trust estate in each of the relevant years was nil, the Company in its capacity as Trustee of the Trust is liable to be assessed, and pay tax, on 100% of the capital gains under section 99A of the ITAA 1936, multiplied as required under subsection 115-222(4) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 115-C of the ITAA 1997 applies if a trust estate has a net capital gain for an income year that is taken into account in working out the ‘net income’ in relation to the trust estate as defined in subsection 95(1) of the ITAA 1936 (generally accepted as the trust’s taxable income). Subdivision 115-C of the ITAA 1997 sets out the rules for dealing with a trust’s capital gains and losses, and ensure that beneficiaries or trustees that are ‘specifically entitled’ to a share of the capital gains are taxed on their share. Division 6E of the ITAA 1936 prevents double taxation by providing that the amounts of any capital gains in the ‘net income’ of a trust estate are disregarded. By definition, the ‘net income’ of the Trust includes the net capital gains from selling the subdivided residential lots in the relevant years. As such, Subdivision 115-C applies to work out which entity is assessed on, and the assessable amount of, the capital gains. | Detailed Reasoning - Specific entitlement: A beneficiary of a trust estate is ‘specific entitled’ to an amount of a capital gain made by the trust estate in an income year if they: ● have received or ● can reasonably be expected to receive, all or part of the capital gain (section 115-228 of the ITAA 1997). A trustee of a trust estate will be specifically entitled to an amount of a capital gain if it makes a choice to be so under section 115-230 of the ITAA 1997 (section 115-228). As detailed in the facts, no beneficiary of the Trust has received, or can reasonably be expected to receive, any amount of the capital gains made by the Trust in the relevant years. Further, the Trustee has not made a choice to be specifically entitled to any of the capital gains under section 115-230 of the ITAA 1997. As such, neither the Trustee nor any beneficiary is specifically entitled to any amount of the capital gains made by the Trust. | Detailed Reasoning - Where no beneficiary or trustee is specifically entitled: Where there is an amount of a capital gain of a trust estate to which no entity is specifically entitled, the beneficiaries’ or trustee’s ‘share’ of the capital gain is determined by multiplying: ● the amount of the capital gain to which no entity is specifically entitled, by ● the relevant entity’s ‘adjusted Division 6 percentage’ of the income of the trust estate for the relevant income year. An entity’s ‘adjusted Division 6 percentage’ is defined in subsection 95(1) of the ITAA 1936 as the entity’s ‘Division 6 percentage’ of the income of the trust estate: ‘calculated on the assumption that the amount of a capital gain or franked distribution to which any beneficiary or the trustee of the trust estate is specifically entitled were disregarded in working out the income of the trust estate.’ As discussed in question three, the Trust Deed does not define income to include capital gains or equate income with the taxable income of the trust estate. Therefore, the ‘income of the trust estate’ for the Trust already excludes capital gains. Also, the Trust does not have any franked distribution included in the income of the trust estate in any of the relevant years. As such, the ‘adjusted Division 6 percentages’ of the beneficiaries and the Trustee is equal to their ‘Division 6 percentages’ of the income of the trust estate. Subsection 95(1) of the ITAA 1936 defines ‘Division 6 percentage’ in relation to beneficiaries, and the trustee, of a trust estate and explains that if the income of a trust estate is nil: ● a beneficiary of a trust estate has a Division 6 percentage of the income of the trust estate of 0%; and ● the trustee of a trust estate has a Division 6 percentage of the income of the trust estate of 100% (subsection 95(1) of the ITAA 1936). In each of the relevant years, the ‘income account’ of the Trust resulted in net losses. As there was no ‘income’ available for distribution to the beneficiaries, the ‘income of the trust estate’ in each of the relevant years was nil. This means: ● the beneficiaries of the Trust have Adjusted Division 6 percentages of 0%, and ● the Trustee of the Trust has an Adjusted Division 6 percentage of 100%. As such, the Trustee’s share of the capital gains made by the Trust is 100% of the capital gains. | Detailed Reasoning - The assessable amount: Where section 99A of the ITAA 1936 applies to the trustee of a trust estate, the trustee is not entitled to the discount capital gains 50% reduction, or the small business 50% reduction. To determine the assessable amount, steps 1-4 of the method statement in subsection 102-5(1) of the ITAA 1997 are applied to each capital gain (subsection 115-225(1)). Then, where the trustee has a 100% share of the capital gains, the amount of each gain remaining after applying steps 1-4 is adjusted as follows: ● if the capital gain was not reduced in respect of either discount capital gains or the small business 50% reduction – no change is made to the remaining amount, ● if the capital gain was reduced by either 50% in respect of discount capital gains or the small business 50% reduction – the remaining amount is multiplied by two, or ● if the capital gain was reduced by both 50% in respect of discount capital gains and the small business 50% reduction – the remaining amount is multiplied by four (subsection 115-222(4) of the ITAA 1997). The amount on which the trustee is assessable under section 99A of the ITAA 1936 (the section 99A assessable amount) is then increased by the adjusted amounts (subsection 115-222(4) of the ITAA 1997). The Trustee must increase the section 99A assessable amount even if it is nil (subsection 115-222(5) of the ITAA 1997). The amount of the increase is treated as being an amount in respect of which the trustee is liable to be assessed (and pay tax) under section 99A (subsection 95AAC(4) of the ITAA 1936). Applying subsection 115-222(4) of the ITAA 1997, the Company in its capacity as Trustee of the Trust must increase its section 99A assessable amount in respect of the relevant years in relation to 100% of the capital gains, multiplied as required under subsection 115-222(4) of the ITAA 1997. By virtue of subsection 95AAC(4) of the ITAA 1936, under section 99A, the Company in its capacity as Trustee is liable to be assessed (and pay tax) on the total amount of the increase in respect of the capital gains made by the Trust in the relevant years.

Bamford v FC of T 2010 ATC 20-170 ; (2010) 75 ATR 1 ; (2010) 240 CLR 481; | Cajkusic v Commissioner of Taxation [2006] FCAFC 164; 2006 ATC 4752 | Californian Copper Syndicate v Harris (1904) 5 TC 159 | Carver v. Duncan (Inspector of Taxes ) [1985] AC 1082; [1985] 2 WLR 1010 | Federal Commissioner of Taxation v Harmer & Ors 90 ATC 4672 Forrest v FCT [2010] FCAFC 6; 2010 ATC 20-163 Scott v C of T (NSW) (1935) 3 ATD 142 | Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363 | Ganke v. D.F.C. of T. (No. 2) 82 ATC 4474; (1982) 78 F.L.R. 455 | McClelland v FC of T 70 ATC 4115 | Scott v C of T (NSW) (1935) 3 ATD 142). | Trustees of the Estate Mortgage Fighting Fund v. Federal Commissioner of Taxation [2000] FCA 981; 2002 ATC 4525; (2000) 102 FCR 15