Private ruling: trust income
Published: December 2013
Ruling period: Year ended 30 June 2010
Date scheme commenced: The scheme has already commenced

Ruling: Q1: Will section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the receivers such that they will be liable to pay tax on the taxable income derived in their representative capacity as receivers and managers appointed to the part of the trust property formerly owned by Company A? | A1: Yes | Q2: If the answer to Question 1 is yes, will section 115-222 or the former version of section 115-225 of the Income Tax Assessment Act 1997 (ITAA 1997) operate to deny the application of the general capital gains tax discount ('CGT discount')? | A2: Yes. | Q3: Will section 99A of the ITAA 1936 apply to the receivers such that they will be liable to pay tax on the taxable income derived in their representative capacity as receivers and managers appointed to the part of the trust property formerly owned by Company B? | A3: Yes | Q4: If the answer to Question 3 is yes, will section 115-222 or the former version of section 115-225 of the ITAA 1997 operate to deny the application of the CGT discount? | A4: Yes | Q5: In relation to the rental income and capital gain derived by Company B on the rental and sale of the trust property, will the Commissioner look to the liquidator rather than the receivers for lodgement of returns and payment of the tax in accordance with Taxation Determination TD 94/68? | A5: Decline to rule as the liquidator is not a rulee of this private ruling application. However, general advice is given for guidance. | Q6: Pursuant to the Commissioner's determination in the previous private ruling, will the Commissioner retrospectively apply the preliminary views in Draft Taxation Determination TD 2012/D7 that the gross sale proceeds are the amount that 'come to' a receiver as agent for the debtor with the consequence that the amount the receivers were required to retain under paragraph 254(1)(d) of the ITAA 1936 takes precedence over the rights of the secured creditor? | A6: Decline to rule. However, general advice is given for guidance. | Q7: Will the issuance of the default assessment by the Commissioner on Company A relieve the receivers of their obligation to lodge tax returns for Company A under section 254(1) ITAA 1936? | A7: No

Relevant facts and circumstances: Company A is the trustee for Family Trust A and Company B is the trustee for Family Trust B. Company B is in liquidation. The trust deeds for both trusts are practically identical in all aspects other than the elemental features such as names of the trustees and beneficiaries. Each of the trust deeds contains a clause which provides that, in the absence of any act or conduct by the trustee to make a determination to distribute the trust income in any year, the default beneficiaries will be entitled to an equal share of the income. In the early 1990s the two trustee companies formed a partnership and purchased a property ('the trust property'). In the 2009-2010 income year, the rulee and another individual ('the receivers') were appointed as receivers of rents of the trust property by the mortgagee. They were later appointed as receivers and managers of the property. There were two deeds of appointment, one in respect of the rental income and the other in respect of the property. The terms of the Deed of Appointment provide that, to the full extent permitted by law, the receivers will act as the agent for the mortgagor and otherwise the receivers will be the agent of the mortgagee. From the time of their appointment to the time when the receivers disposed of the trust property, the receivers received net rental income and the sale of the property led to a net capital gain. The receivers paid off the debt to the mortgagee. The balance of the proceeds, together with rents collected, are held by the receivers in an interest bearing deposit account pending the outcome of the current private ruling ('PBR'). In the 2010-2011 year, the receivers applied for a private ruling and one of the questions related to the obligation of a receiver under section 254 of the ITAA 1936. The private ruling confirmed that the receivers had a personal liability to retain and pay tax in their representative capacity as Receivers and Managers appointed in respect of the trust property under section 254 of the ITAA 1936. Some of the questions were not ruled on due to a lack of sufficient information provided. The receivers have now applied for a second private ruling (the current PBR) to follow up on the remaining questions, in particular, whether the two receivers still have an obligation to lodge income tax returns and pay the tax if the beneficiaries are presently entitled to the income of the trusts. The applicant advises that the trust property was held by the trustees for long term gains and not for a profit making purpose.

Relevant legislative provisions: Section 99A of the ITAA 1936 | Section 101 of the ITAA 1936 | Section 254 of the ITAA 1936 | Section 115-222 of the ITAA 1997 | Section 115-225 of the ITAA 1997

Reasons for decision: Summary: The principal taxing provisions of the income of trusts are contained in Division 6. Specifically, section 97 provides that where a beneficiary who is not under a legal disability is presently entitled to a share of the income of a trust estate, the assessable income of the beneficiary will include that share of the net income calculated under section 95. However, in a discretionary trust, beneficiaries do not have absolute entitlement to the trust income. Their interest is contingent on the trustee making a determination in their favour. Net income to which no beneficiary is presently entitled is assessable to the trustee under section 99A. Based on these principles, the question of whether the receivers have a liability to pay the tax in their representative capacity as receivers and managers appointed to the trust property would depend on whether the trustees have a liability to taxation on the disposal proceeds and rental income from the property. This would, in turn, depend on whether there are beneficiaries who are presently entitled to the income of the trusts. A beneficiary can become presently entitled to an amount of income from a trust pursuant to a direct term of the relevant trust deed, or as a consequence of the trustee exercising a power under the trust deed, usually by way of a resolution to distribute income. However, under section 101, irrespective of whether a trustee makes a resolution, if the trustee makes a payment to or applies income for the benefit of a beneficiary, a beneficiary in whose favour the trustee makes the payment is deemed to be presently entitled to the amount so paid or applied. For section 101 to apply, there must be an effective exercise by the trustee of the discretion to pay or apply income for the benefit of the beneficiaries before the end of the income year in which the trust income is derived. In the present case, there is no evidence that the trustee exercised its discretion to distribute the trust income to any beneficiary during the 2009-2010 year by way of a resolution or as a result of the payment or application of trust income. The applicant has advised that there are no trust records including trustee resolutions in the possession of the receivers. As the receivers were appointed solely in respect of the trust property, they do not have access to any resolutions of the trustee or the records of the beneficiaries. They also have no knowledge of any determination made by the trustee in relation to the profit from the sale of the property. The trustee's former accountants have informed the receivers that they are not aware of any resolutions in the relevant income year. The receivers believe there has never been any trust resolution. In the absence of any applicable trustee resolution or payment or accumulation of income, reference is made to the terms of the two trust deeds. While one of the clauses of the trust deeds confers a power on the trustee to accumulate income, it is uncertain whether the trustees exercised this power of accumulation. The default beneficiary clause in each of the above trusts provides that where the trustee fails to make a determination to distribute trust income by no later than one month before the end of the year of income, the default beneficiaries are deemed to be entitled to the income of the trust in equal shares. The critical question in the present case, therefore, becomes whether the trust had trust income in the relevant year such that the default clause could have application. There is no specific definition given to trust income in either of the deeds and accordingly takes the ordinary meaning of income. However, each of the trust deeds contains a clause which gives the trustee the authority to determine whether any receipts are on account of capital or revenue. As noted above, the receivers have submitted that they have no knowledge of any determination made by the trustee in relation to the profit from the sale of the property in this regard. Accordingly, under the ordinary meaning of income, the profit from the sale of the property would not form part of the income of the trust. However, the applicant maintains that during the period from when the receivers were appointed, to the time when the property was sold, the trusts had derived net rental income and, as such, there was distributable income (being rental income that is income according to ordinary concepts) to which the beneficiaries were presently entitled under the default clause. We do not accept the fact that positive rental received during a six month period is conclusive evidence that there was distributable income for the whole year. This is because there is no certainty that the trust had made no losses in the remaining months of the year and/or from prior years. Under either scenario, there would be no distributable income to which a beneficiary could be presently entitled under the default clause for the purposes in determining present entitlement to the income of the trust under section 97. In summary, there is insufficient information to support the claim that the beneficiaries are presently entitled to the income of the trust for the 2009-2010 year because: - there is no evidence of any trustee resolution in favour of the beneficiaries; - there is no evidence that the trustee paid or applied any amount in favour of any beneficiary; - there is insufficient evidence to determine whether there was a positive amount of rental income in the year to which the beneficiaries could be presently entitled under the default clause. Where no beneficiary is presently entitled to the trust income, section 99A would have application and the trustees being Company A and Company B would be assessable in proportion to their interest on the rental income and capital gain relating to the property. As determined in the previous private ruling issued to the applicant, the receivers are agents of the trustees for the purposes of section 254. Therefore, to the extent that the trustees have a liability to tax on the trust net income, the receivers will be liable to pay tax on the trust net income derived in their representative capacity as receivers and managers appointed to the part of the trust property formerly owned by Company A. Subdivision 115-B sets out how the discount percentage as applied to a discount capital gain is determined. Subsection 115-100 allows a discount percentage of 50% if a capital gain is made by an individual or by a trust (other than a trust that is a complying superannuation entity or FHSA trust, in which case the applicable discount percentage is 33 1/3%). The former version of section 115-225 which was effective until 28 June 2011 details the methodology which modifies the application of section 99A when assessing a trustee and the purpose is to remove the benefit of any CGT discount. The former subsection 115-225(2) sets out the mechanism which would deny a trustee who is liable to be assessed under section 99A the general CGT discount and/or small business 50% reduction available under subsection 102-5(1) and Subdivision 152-C respectively. Under the former paragraph 115-225(2)(a), if a capital gain of the trust is reduced for either the CGT discount or the small business reduction, the trustee is assessed and liable to pay tax under section 99A as if that part of the amount that is attributable to the trust's capital gain were twice the actual amount. If the capital gain of the trust is reduced for both the CGT discount and the small business reduction, then the trustee is assessed under section 99A as if that part of the amount that is attributable to the trust's capital gain were four times the amount that it actually is: former paragraph 115-225(2)(b). As determined in Question 1 above, to the extent that the trustees have a liability to tax on the trust net income, the receivers will be liable to pay tax on the trust net income derived in their representative capacity as receivers and managers appointed to the part of the trust property formerly owned by Company A. Therefore, former subsection 115-225(2) will operate to deny the application of the general CGT discount. The trust deeds for both trusts are practically identical in all aspects other than the elemental features such as names of the trustees and beneficiaries. Therefore, the explanations set out in Question 1 concerning Family Trust A are equally applicable to Family Trust B. A difference, however, is that Company B is in liquidation and liquidators have been appointed. Notwithstanding the above, to the extent that there is insufficient information to indicate that the beneficiaries of Company B are presently entitled to the income of the trust and section 99A therefore applies, the receivers will be liable to pay tax on the taxable income derived in their representative capacity as receivers and managers appointed to that part of the trust property formerly owned by Company B. Where the trustee is assessed under section 99A in respect of the capital gain on the disposal of the trust property, the former version of section 115-225 will apply to deny the trustee the general CGT discount. In this regard, refer to the reasoning set out in respect of Question 2. Where a receiver is appointed, paragraph 254(1)(b) requires the receiver to make a return and be assessed thereon in respect of income, profits or gains in his representative capacity. However, where a liquidator is appointed, the Commissioner's view as stated in TD 94/68 is that each is legally responsible for lodging the return under the provisions of paragraphs 254(1)(a) and(b). Whilst each is legally responsible, the Commissioner acknowledges that under certain appointments, the receiver does not have control of the financial records. In these cases, the Commissioner would look to the liquidator for lodgement. In other cases where both the receiver and liquidator have equal control of the financial records, the Commissioner accepts the usual commercial practice that the liquidator lodges the return. Paragraph 254(1)(d) provides that a receiver is liable in his representative capacity to pay the tax that may fall due in respect of the aforementioned income, profits or gains. This is consistent with the answers provided to Questions 1 and 3 above. Provision of a private ruling in respect of the Commissioner's view on how he may administer the tax law, amounts to a purely academic exercise which, would not have any practical consequences for the receivers. In the private ruling issued previously to the applicant, it was already determined that the gross sale proceeds 'come to' the receivers and that is the money from which an amount sufficient to pay the tax liability must be retained under section 254. However, the following information is provided for guidance: The obligation of an agent or trustee to withhold and pay tax has been a longstanding requirement under section 254. The Commissioner has on a number of occasions confirmed that section 254 also applies to a receiver (acting as an agent for a trustee) in respect of the disposal by the receiver of a CGT asset. However, until draft Taxation Determination TD 2012/D7 Income tax: does a receiver who disposes of a CGT asset as the agent for a debtor have an obligation under section 254 of the Income Tax Assessment Act 1936 to retain from sale proceeds sufficient money to pay tax which is or will become due as a result of disposing of that asset was published on 19 September 2012, the ATO had not issued a public view product on this point, although the same reasoning as appears in the TD had applied prior to the date of issue. While TD 2012/D7 proposes that the final ruling will only apply after the date of issue, there is no element of retrospectivity in its interpretation or application. The interpretation contained in TD 2012/D7 is the interpretation of an existing law, not a new law, and in the view of the Commissioner, the correct interpretation. It would not be appropriate to interpret the law differently, and in a manner that the Commissioner considers to be incorrect, prior to the date of application of the ATO view product. In Federal Commissioner of Taxation v. Park and Anor [2012] FCAFC 122, the Court considered the mutual obligations of vendor and purchaser to each other, and the obligations, if any, of a purchaser to a secured creditor of the vendor. The decision recognised that there was no obligation owed by the purchaser to a creditor with security over the asset, and that no agreement between the vendor and the purchaser could deprive the secured creditor of its security. In the case of the disposal of an asset by a receiver, this suggests that the sale proceeds are owed by the purchaser to the receiver (as agent for the debtor), and not to any secured creditor of the debtor. The sale proceeds in the hands of the receiver are then subject to any obligations imposed on the debtor and the receiver in respect of those proceeds. The obligation to a secured creditor is one such responsibility. The obligation to retain under paragraph 254(1)(d) is another, and it is not subject to any security that was held over the disposed asset. Where a receiver carries on the business of the debtor or collects rent on the mortgaged property, the income generated is the income of the debtor and, until duly applied to the satisfaction of the debt of the secured creditor, the fund of the mortgagor: Visboard v. Federal Commissioner of Taxation (1943) 68 CLR 354 per Latham CJ, Starke J; White v. Metcalf [1903] 2 Ch 567 at 572. Similarly, sale proceeds from disposal of the secured asset would be received as agent for the debtor. The fact that the receiver is bound to apply the money received in meeting secured debts does not constitute the receiver as trustee for the secured creditor in respect of the receipt of those monies, nor as agent for the secured creditor: Buckeridge and Ors v. Mercantile Credits Ltd (1981) 147 CLR 654. Therefore the Commissioner maintains the view in TD 2012/D7 that it is the gross sale proceeds that 'come to' the receiver and from which they should retain sufficient funds to pay the tax. Note: TD 2012/D7 was not intended to cover the situations for a beneficiary or the interaction between section 254 and sections 97 or 99, hence it did not define a trustee. The draft TD is restricted to only address the responsibility of a receiver when one is appointed and does not go beyond what the responsibility of the receiver is in respect of the retainment of funds (on the sale of a CGT asset). The receivers of Company A are required to lodge a tax return for the income year covering the period of their appointment. This is consistent with paragraph 254(1)(b) which requires a receiver to make the return and be assessed thereon, in their representative capacity as receiver, in respect of the income derived from profits or gains. TD 94/68 has no application to Company A.

Subject: trust income: All legislative references are to the ITAA 1936 unless otherwise stated.