Private ruling: Trust income
Date of advice: 25 June 2015
Published: June 2015
Ruling period: Year ended 30 June 200X
Date scheme commenced: 1 July 200X

Ruling: Q1: Will the trustees of the Trust have any liability under Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the capital gains tax (CGT) event that occurred in the relevant financial year? | A1: No.

Relevant facts and circumstances: The Trust was created under the Will of the deceased. The beneficiaries of the Trust are the deceased's child, as a life tenant and the children of the life tenant as remaindermen. The life tenant is a resident beneficiary, not under any legal disability. The relevant property was vacant land which had been acquired by the deceased prior to 20 September 1985. The property was sold during the relevant financial year. The 200X return recognised a capital gain on the property together with interest derived during that year and distributed all income to the life tenant. The trustees have made no election for the purposes of 115-230(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to be assessed on the capital gain realised in the relevant financial year. The trustees have made no agreement in accordance with PSLA 2005/1.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act subsection 115-230(1)

Reasons for decision: Summary: The net income of a trust estate for a particular year is calculated in accordance with section 95 of the ITAA 1936. Broadly, it is the amount that would have been the trustee's taxable income if it were assumed that the trustee was a resident taxpayer. The net income is assessed to the trustee or to beneficiaries of the trust in accordance with the rules set out in Division 6 of Part III of the ITAA 1936. Section 97 of the ITAA 1936 provides (subject to certain exceptions not relevant in this case) that a beneficiary who is presently entitled to a share of the income of a trust estate must include in their assessable income that share of the net income of the trust estate. Section 98 of the ITAA 1936 applies to assess the trustee on the net income of the trust estate where a beneficiary is under a legal disability Section 99 and 99A of the ITAA 1936 also apply to assess the trustee when there is income of the trust in respect of which no beneficiary is presently entitled. Trustee election Under subsection 115-230(1) of the ITAA 1997 a trustee of a resident trust is allowed to make a choice that has the effect that the trustee will be assessed on a capital gain of the trust if no trust property representing the capital gain has been paid to or applied for the benefit of a beneficiary of the trust. ATO ID 2009/144 considers the capital gains tax implications for trustees of a testamentary trust. In that case, a trust was established under the terms of a deceased person's will. An Australian resident individual held a life interest and was entitled to all of the income of the trust for their lifetime. The trustee sold shares during the 2008-09 income year and made a capital gain but did not make a choice to be taxed (instead of the life tenant) on the capital gains of the trust under section 115-230 of the ITAA 1997. The reasons for decision in ATO ID 2009/144 state that: In this case, the life tenant is presently entitled to all of the income of the trust and so prima facie they should be assessed on the entire net income of the trust (including the capital gains). This is the case even though the life tenant cannot benefit from those capital gains. It was concluded that in the absence of the trustee making a choice under section 115-230 of the ITAA 1997, the amount was assessable to the beneficiary that was presently entitled to the trust income. Therefore, the trustee was not assessable on the share of the net income of the trust estate representing capital gains under section 99 or 99A of the ITAA 1936. | Detailed Reasoning - Application to your circumstances: In this case, the life tenant is presently entitled to all of the income of the trust. In the relevant financial year the property was sold and a capital gains was made. The proceeds from the sale of the asset were placed into an interest bearing account. The life tenant was entitled to 100% of the income earned from the investment of the capital proceeds. The life tenant was a resident beneficiary, not under any legal disability for the relevant financial year and was entitled to 100% of the income of the trust. It follows that for the relevant financial year, as per the principles outlined above, the life tenant was presently entitled to 100% of the trust's net income. The trustees have not made an election under subsection 115-230(1) of the ITAA 1997 to be assessed on the capital gain realised in the relevant financial year. Also, section 98 of the ITAA 1936 will have no application as the relevant beneficiary was not under a legal disability. Therefore, we consider that the trustees do not have any liability under Division 6 of the ITAA 1936 in respect of the capital gain.