Private ruling: Interest income- present entitlement
Published: July 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Q1: Is the interest income for the 2009-10 and 2010-11 financial years assessable to the rulee who held the funds in trust? | A1: The interest income is assessable to the rulee as trustee under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) for the financial years that no beneficiary was presently entitled.

Relevant facts and circumstances: The net proceeds from the sale of the former matrimonial home became the subject of a Family Court dispute between the spouses. The proceeds where placed into an interest bearing trust account held by the rulee. At all material times the ownership of the funds in the trust account was under dispute. Some years later the Family Court determined one spouse was ultimately entitled to all the proceeds from the sale including all accumulated interest. The rulee transferred all proceeds in the trust account to the spouse that became ultimate beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 97(1)(a) .

Reasons for decision: Summary: Paragraph 97(1)(a) of the ITAA 1936 states that the assessable income of a beneficiary who is presently entitled to a share of the net income of a trust and is not under a legal disability shall include: The share of the net income that is attributable to a period when the beneficiary was a resident, whatever the source of the income, and The share of the net income that is attributable to a period when the beneficiary was not a resident and that is also attributable to sources in Australia The net income of a trust to which no beneficiary is presently entitled is taxed in the hands of the trustee in accordance with section 99A of the ITAA 1936. The High Court has in Harmers & Ors v Federal Commissioner of Taxation (1991) 22 ATR 726 at 271 (Harmer) held that, a beneficiary is presently entitled to a share of the income of a trust estate if at least by the end of the year of income: The beneficiary has an interest in the income which is both vested in interest and vested in possession; and The beneficiary has a present legal right to demand and receive payment of the income. This includes beneficiaries that, but for their legal disability, are vested in interest and possession to that income. Harmer strengthened the principles of present entitlement by confirming that the beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. The interest must not be contingent but must be such that the beneficiary may demand immediate payment of that income. If the beneficiary is under a legal disability such as infancy or insanity, the interest must be such that the beneficiary would have been able to demand immediate payment of the income had there been no disability or incapacity. In the Full High Court decision in Harmers , it was held that no beneficiary was presently entitled to Court Order money which was invested in a building society account. The taxpayers were solicitors acting for parties in dispute over certain moneys. Subsequently, the Court ordered that the money be paid out to the solicitors to be invested with a building society in the names of the claimants' solicitors to be held on trust by them pending determination of the proceedings. It was held by the High Court that the interest derived on the moneys deposited into the bank account before the making of any order was interest to which no beneficiary was presently entitled. It was determined that the respective interests of the individual claimants were, at best, contingent, upon an order being made in his or her favour. Unless and until such and an order was made, no claimant had a vested interest in the moneys lodged with the building society or in the interest earned on it. It follows that none of the claimants were 'presently entitled' to the income of the fund and, accordingly, the solicitors were assessable pursuant to section 99A of the ITAA 1936 in respect of the interest earned during those financial years in which no beneficiary was presently entitled. In applying the principles of Harmer , while the ownership of the net proceeds from the sale of the matrimonial home was in dispute it was considered that neither of the spouses were presently entitled to the funds held in the trust account by the rulee. As the interests of the claimants were contingent upon the Court order being made in his or her favour, it is determined that the interest income accrued on the sale proceeds is assessable to the rulee as trustee for the spouses for the financial years that no beneficiaries were presently entitled.

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