Private ruling: Derivation of income
Date of advice: 7 February 2024
Published: 25 March 2024
Ruling period: Year ending 30 June 20xy.
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you assessable on the interest derived on a term deposit that was from YY's share of funds that you invested, in a bare trust arrangement, on their behalf? | A1: No.

Relevant facts and circumstances: You have a Memorandum of Understanding of Trustee for the Trust signed by you (as Trustee of the Trust) and YY (as Beneficiary of the Trust) that states you have invested funds from a trust distribution to YY on behalf of YY in a term deposit and that you have no interest YY portion of the funds held in the term deposit, other than as trustee.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5(1) | Income Tax Assessment Act 1997 section 6-5(2) | Income Tax Assessment Act 1997 section 6-5(4)

Reasons for decision: Summary: You are not assessable on the interest derived on a term deposit that was from YY's share of funds that you invested, in a bare trust arrangement, on their behalf. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(1)of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts (called ordinary income). Subsection 6-5(2) of the ITAA 1997 states that as an Australian resident, your assessable income includes ordinary income you derive either directly or indirectly, from all sources whether in or out of Australia, during the income year. Subsection 6-5(4) of the ITAA 1997 states that when working out whether you have derived an amount of ordinary income, and when it was derived , you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. You have a Memorandum of Understanding signed by both you and YY, stating that you held and continued to hold and invest YY's share of the funds from the Trust distribution on their behalf and for their benefit, at all times during the financial year and that you have no interest in YY's portion of the funds held in the term deposit, that you invested on their behalf, other than as trustee. Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 at paragraph 35 states: 35. It is said that a bare trust is one where the trustee has no active duties to perform. In Herdegen v. Federal Commissioner of Taxation (1988) 20 ATR 24; 88 ATC 4995, Gummow J said at ATR 32; ATC 5003: Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party. The beneficiary may of course hold the equitable interest upon a sub-trust for others or himself and others: see Halsbury's Laws of England, 4th ed., Vol. 48, 'Trusts', para. 938. The term is usually used in relation to trusts created by express declaration. But it has been said that the assignor under an agreement for value for assignment of so-called 'future'' property becomes, on acquisition of the title to the property, trustee of that property for the assignee (Palette Shoes Pty Ltd v. Krohn (1937) 58 CLR 1 at p. 27) and this trust would answer the description of a bare trust. Also, the term 'bare trust' may be used fairly to describe the position occupied by a person holding the title to property under a resulting trust flowing from the provision by the beneficiary of the purchase money for the property. | Detailed Reasoning - In GST RulingGSTR 2008/3 Goods and services tax: dealings in real property by bare trusts paragraph 337 states:: 37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. In your situation, your duties as trustee involved depositing the funds on behalf of YY, in term deposits in a banking institution. You did not need to perform any other duties or actively manage the funds in any other way. Therefore, we accept that a bare trust arrangement was in place, and that you dealt with YY's share of the funds on their behalf. The interest amounts earned on YY's share of the funds you invested in the term deposits on their behalf are not assessable to you in the financial year.