Private ruling: Trust Income
Date of advice: 17 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020.
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the trustee of the Trust assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the trustee of the Trust assessable on the income generated by investing the employer contributions given to the trust? | A2: No, except where earnings are not distributed to presently entitled beneficiaries by the end of the income year.

Relevant facts and circumstances: Employers are required to make contributions for employee entitlements to the Trust. The Trust will hold the contributions in the fund until the employee entitlement becomes payable under the Deed. A copy of the Deed has been provided. The Trustee of the Trust has the power to invest the trust funds. All investment income earned by the Fund is distributed to either the Employer or Member on or before 30 June each year, and no amounts remain in the Revenue Account. All amounts in the Member Balances are amounts that are owed to employees (that is, the employee has met the conditions of release), but where the amounts have not physically been paid to the relevant employee (or their legal personal representative).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1936 Section 98 | Income Tax Assessment Act 1936 Section 99 | Income Tax Assessment Act 1936 Section 99A

Reasons for decision: Summary: Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts (ordinary income). Ordinary Income is not defined in the taxation legislation. In Scott v. Federal Commissioner of Taxation (1966) 10 AITR 367; (1966) 117 CLR 514; (1966) 14 ATD 286 Windeyer J stated that: 'Whether or not a particular receipt is income depends upon its quality in the hands of the recipient' In G.P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413 the High Court considered the following factors important in determining the nature of a receipt: 'To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.' Contributions to the trust will be assessable income of the Trustee if they are income according to ordinary concepts under section 6-5 of the ITAA 1997. The purpose of trust is therefore to use the Contributions to protect employee entitlements under the various industrial instruments. Pursuant to the powers of investment in the Deed, the Trustee can invest the Contributions in their absolute discretion. The Trustee must return any income and receipts from these investment activities to the revenue account which, must be distributed to employers and/or members. The Contributions to trust are capital in nature and represent the corpus of the Trust. Accordingly, the Contributions are not assessable income of the Trustee under section 6-5 of the ITAA 1997. In broad terms the purpose of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) is to ensure the trustee or beneficiary pay the income tax on the net income of a trust in the income year in which it is derived. Where a beneficiary is presently entitled to a share of the net income of the trust, it will be the beneficiary that is taxed on that income under section 97 of the ITAA 1936 (unless they are under a legal disability). If the beneficiary is under a legal disability or, if there is net income of the trust to which no beneficiary is presently entitled, it will be the trustee of the trust that is assessed on that income (sections 98, 99 or 99A of the ITAA 1936). Thus, the concept of present entitlement will determine if the Trustee (on behalf of the Trust) or the beneficiary will be assessed on the income generated by investing the Contributions. There is no definition of the term 'presently entitled' in the ITAA 1936 or the ITAA 1997. It is therefore necessary to refer to the meaning which has been given to the term by the courts. The principal cases on the concept of present entitlement are the High Court decisions of Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 and Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444. A summary of the main principles emerging from the Whiting and Taylor cases follows. A beneficiary will be presently entitled if: (a) the beneficiary has an indefeasible, absolutely vested, beneficial interest in possession in trust law income; and (b) the beneficiary has a present legal right to demand and receive payment of the trust law income (or would but for a legal disability), whether or not the precise entitlement can be ascertained before the end of the year of income and whether or not the Trustee has the funds available for immediate payment. In a discretionary trust it is not possible for a beneficiary to be presently entitled until the trustee makes a resolution as to which beneficiaries, if any, will receive a distribution from the trust. Investment income of the trust is distributed to either the Employer or Member by crediting the amount to the respective accounts. No amounts are retained in the Revenue Account. Any investment income credited to the Member or Employer is available to be withdrawn. As all investment income is distributed to either the Employers, or to Members, and no amounts are retained in the Revenue Account, there will be no income of the trust to which no beneficiary is presently entitled. Therefore there will be no amounts assessable to the Trustee under section 99 or 99A of the ITAA 1936. However, if the trustee of the trust does not resolve to exercise their power to distribute amounts of investment earnings to employer and/or member balances there will be no beneficiary which is presently entitled to any investment earnings. In such cases there would be no presently entitled beneficiaries in respect to any amount remaining in the revenue account at the end of the financial year, and the trustee would be assessed on this amount under section 99A of the ITAA 1936.