Private ruling: Commissioner's discretion - testamentary trust
Date of advice: 18 November 2022
Published: 16 January 2023
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX | Income year ending 30 June 20XX

Ruling: Q1: Will the Commissioner exercise the discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the net income to which no beneficiary is presently entitled, under section 99 of the ITAA 1936, for the Testamentary Trust? | A1: Yes. | Q2: Is a family trust election required where there is no beneficiary presently entitled to the net income of the trust estate and the Trustee of the Testamentary Trust is being assessed for tax (under section 99 or section 99A of the ITAA 1936) for the purposes of obtaining franking credit offsets? | A2: No.

Relevant facts and circumstances: Mr. A. is an Australian resident for tax purposes, and for the period from the 20XX income year to the 20XX income year Mr. A received income from dividends, gross rental income, partnership and trust distributions, capital gains, and foreign source income. Mr A. died in 20XX. At the time of this private ruling there are living beneficiaries, including children, their spouses, and grandchildren. According to Mr. A's Will, some assets and gifts were given to certain beneficiaries. Other assets, including shares, property and cash will be transferred to multiple testamentary trusts from which certain beneficiaries will benefit. The Schedule to the Will provides wide various powers to trustees in their absolute discretion to do such acts, including lending, acquiring, entering into contracts, changing trust assets, accumulating income and acquiring investments with respect to the Trust Fund. The trustees will have the power to guarantee, indemnify or provide security over the trust assets and to indemnify themselves from and make good any loss they thereby suffer or any liability they thereby incur out of the trust assets. Clause N provides that, subject to Clause O, the trustees may prior to the Vesting Date revoke, add to or vary any of the terms or conditions of the Trust Fund without affecting the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation, alteration, or addition. Clause O restricts the exercise of the trustee's powers if that exercise would infringe "the rule against the delegation of will-making power; or the rule against perpetuities or remoteness of vesting." In the 20XX income year the Testamentary Trust received trust distributions and dividend income from investments. In the 20XX income year, most of assets of the Estate have been transferred to the various testamentary trusts. It is anticipated that the final transfers will be made in the 20XX income year.

Relevant legislative provisions: 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 1936 subsection 99A(2) | Income Tax Assessment Act 1936 subparagraph 99A(2)(a)(i) | Income Tax Assessment Act 1936 subparagraph 99A(2)(a)(ii) | Income Tax Assessment Act 1936 paragraph 99A(2)(b) | Income Tax Assessment Act 1936 paragraph 99A(2)(c) | Income Tax Assessment Act 1936 paragraph 99A(2)(d) | Income Tax Assessment Act 1936 subsection 99A(3) | Income Tax Assessment Act 1936 paragraph 99A(3)(a) | Income Tax Assessment Act 1936 paragraph 99A(3)(b) | Income Tax Assessment Act 1936 paragraph 99A(3)(c) | Income Tax Assessment Act 1936 subsection 99A(3A) | Income Tax Assessment Act 1936 paragraph 102AG(2)(c) | Income Tax Assessment Act 1936 Division 1A of former Part IIIAA | Income Tax Assessment Act 1997 Subdivision 207-B | Income Tax Assessment Act 1997 section 207-45 | Income Tax Assessment Act 1997 subsection 207-50(2) | Income Tax Assessment Act 1997 subsection 207-50(3) | Income Tax Assessment Act 1997 subsection 207-50(4) | Income Tax Assessment Act 1997 section 207-55 | Income Tax Assessment Act 1997 Subdivision 207-D | Income Tax Assessment Act 1997 Subdivision 207-E | Income Tax Assessment Act 1997 Subdivision 207-F | Income Tax Assessment Act 1997 section 207-150 | Income Tax Assessment Act 1997 paragraph 207-150(1)(a)

Reasons for decision: Summary: Where the trustee of a Testamentary Trust is liable to pay tax on income to which no beneficiary is presently entitled, the Commissioner will exercise his discretion pursuant to subsection 99A(2) to assess the trustee under section 99 because he is of the opinion that it would be unreasonable to assess the trustee under section 99A. | Detailed Reasoning - Detailed reasoning: Section 99 and section 99A apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. Section 99A applies in relation to all trusts unless: Relevantly, subparagraph 99A(2)(a)(i) 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. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will. As a consequence of the favourable exercise of the Commissioner's discretion under subsection 99A(2), the highest rate of income tax does not apply to such a trust estate. In forming an opinion pursuant to subsection 99A(2) whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) to have regard to certain matters. These are: • the circumstances in which and the conditions, if any, upon which, at any time: o property (including money) was acquired by or lent to the trust estate o income was derived by the trust estate o benefits were conferred on the trust estate, or o special rights or privileges, irrespective of whether they have been exercised, were conferred on, or attached to property of the trust estate (paragraph 99A(3)(a)) • whether any person, who has at any time, directly or indirectly: o transferred or lent any property (including money) to, or conferred any benefits on, the trust estate, or o conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate, whether or not the right or privilege has been exercised, has at any time, directly or indirectly, done any similar thing in relation to any other trust estate (paragraph 99A(3)(b)), and • such other matters, if any, as he thinks fit (paragraph 99A(3)(c)). In the case of a deceased estate the Commissioner is required to consider the application of paragraph 99A(3)(a) as they relate to the deceased person (subsection 99A(3A)). In determining the weight to be given to the matters described in subsection 99A(3), Windeyer J stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that: The Commissioner is to ask himself whether it would be unreasonable that sec. 99A should apply to any particular trust estate.... That purpose I take it is to enable the Commissioner to keep sec. 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose. In order for a trust to result from a will, it is necessary that the will should be the source of the funds and that the trust should be created in consequence of a provision in the will or court order itself ( Case P53 82 ATC 247). The Testamentary Trust was created through a will and is therefore the type of trust estate to which the Commissioner's discretion under section 99A may be exercised. Different assets were allocated to particular beneficiaries, however they came directly from the assets which the deceased accumulated prior to his death. The types of assets included publicly listed shares, properties, and shares in private companies. No person has directly or indirectly transferred money or property to any of the testamentary trusts. There is a definable relationship ordinarily of blood or marriage between the deceased and the beneficiaries of each of the testamentary trusts and there are no suggestions that the manner in which the Testamentary Trust was created was for any reason other than the ordinary and traditional kind. Therefore, under the circumstances, it would be reasonable for the Commissioner to apply his discretion to allow section 99 to apply where the Trustee of the Testamentary Trust is liable to pay tax on income to which no beneficiary is presently entitled. | Summary: The Trustee of the Testamentary Trust will be entitled to a tax offset equal to its share of the franking credits on a distribution where the Trustee is assessed on the net income of the trust estate under either section 99 or section 99A, provided the Trustee has held the shares for a minimum of 45 days. The Trustee is not required to make a family trust election to be entitled to the offset. | Detailed Reasoning - Detailed Reasoning: Subject to Subdivisions 207-D, 207-E and 207-F of the Income Tax Assessment Act 1997 (ITAA 1997), Subdivision 207-B of the ITAA 1997 sets out the effect of an entity receiving a franked distribution through one or more interposed partnerships or trusts. In certain circumstances, a franked distribution to a trust is treated as flowing indirectly to a trustee or beneficiary of the trust (or through the trust as an interposed entity). Subsection 207-50(4) of the ITAA 1997 states that a franked distribution flows indirectly to the trustee of a trust in an income year if, and only if: Where a franked distribution flows indirectly to a trustee and the trustee is liable to be assessed on a share of, or all or part of, the trust's net income under section 98, section 99, or section 99A, it is entitled to a tax offset for that income year that is equal to its share of the franking credit on the distribution (section 207-45 of the ITAA 1997). Section 207-150 of the ITAA 1997 (under Subdivision 207-F) modifies the treatment of franked distributions where the whole or part of a distribution is manipulated. In particular, paragraph 207-150(1)(a) of the ITAA 1997 states that if an entity to whom a franked distribution is made is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, they are not entitled claim a tax offset equal to the franking credit (as otherwise allowed under Subdivision 207-B). To be a qualified person in relation to a dividend, the relevant entity (in this case the trustee) must hold the relevant shares or interest at risk for the relevant qualification period of 45 days (or 90 days for preference shares) excluding the date of acquisition and the date of disposal. Where the Trustee of the Testamentary Trust satisfies the minimum holding period and is liable to be assessed on the dividend income under section 99 or section 99A, it will be entitled to an offset equal to its share of the franking credit on the distribution.

Reasons for decision: All subsequent legislative references are to the Income Tax Assessment Act 1936 . | the trust is a deceased estate (subparagraphs 99A(2)(a)(i) and (ii)); or | the trust is a bankrupt estate (paragraphs 99A(2)(b) and (c)); or | the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) (paragraph 99A(2)(d)); and | the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances. | during the income year, the distribution is made to the trustee of the trust, or flows indirectly to the trustee as a partner or beneficiary under subsection 207-50(2) or subsection 207-50(3) of the ITAA 1997 | the trustee is liable or, but for another provision of the Act, would be liable to be assessed under section 98, section 99, or section 99A in respect of an amount (the share amount) of the trust's net income for that income year, even if that amount does not become assessable income in the hands of the trustee, and | the trustee's share of the distribution under section 207-55 of the ITAA 1997 is a positive amount (whether or not the trustee actually receives any of that share).