Private ruling: Trust income
Date of advice: 15 September 2015
Published: September 2015
Ruling period: Year ended 30 June 20YY to year ended 30 June 2022
Date scheme commenced: 1 July 20XX

Ruling: Q1: Where the Trustees of the Trust apply or use part of a beneficiary's share in the Trust in accordance with clause 2.3(c) of the Trust Deed (to meet any costs and expenses in connection with the maintenance, education, advancement or benefit of the beneficiary as the Trustees in their absolute discretion determine), then is the beneficiary deemed to be presently entitled to the amount so applied or used in exercise of that discretion, as a result of the operation of section 101 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: To the extent that the net income of the Trust in a year of income exceeds the aggregate amounts to which the beneficiaries are presently entitled to (whether deemed or otherwise), then is the Commissioner of the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply? | A2: Yes.

Relevant facts and circumstances: The deceased had several children. The deceased passed away in 200X. The deceased died intestate, and by order of the Court, Letters of Administration of the estate were granted to two individuals. The estate was to be held for the use and benefit of the children. In early 20XX, the executors began to instruct lawyers to formally establish a trust for the benefit of the children in accordance with the Letters of Administration granted by the Court. The Trust Deed to establish the Trust was executed in 20XX. All monies held by the trust were proceeds from the sale of the deceased assets. No other funds have either been contributed or lent to the trust. Under the Trust Deed all moneys and investments are held by the Trustees for the benefit of the children in equal portions, until the earlier of their death or attaining the age of 18 years, to meet any costs and expense in connection with their maintenance, education, advancement or benefit. The Trust has since been operated exclusively for such purposes in accordance with the Deed, including funding the ongoing education of the children.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 section 101

Reasons for decision: Summary: Section 101 of the ITAA 1936 deals with the situation where a trustee has discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries (for example, by paying using the income to pay the beneficiaries' school fees), and exercises that discretion to pay or apply all or a part of that income to one or more of those specified beneficiaries. The provision subsequently deems a beneficiary to be presently entitled to the amount paid or applied for their benefit. In this case, the Trust Deed provides the trustee discretion to pay or apply the income of the trust estate for the benefit of the deceased's children. To the extent that the income of the trust has been applied for the benefit of the children section 101 of the ITAA 1936 will deem them to be presently entitled to that amount. 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 of the ITAA 1936. 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. 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) of the ITAA 1936 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 of the ITAA 1936 to apply. Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) of the ITAA 1936 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. Having regards to the circumstances the Commissioner will exercise the discretion to assess the income of the trust in accordance with section 99 of the ITAA 1936.