Private ruling: Taxation of trust issues
Published: January 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the conclusion regarding the operation of section 100AB of the Income Tax Assessment Act 1936 (ITAA 1936) and the taxing of the Trustee under section 99A correct? | A1: Yes | Q2: Will the Commissioner exercise his discretion under subsection 100AB(5) of the ITAA 1936 to not apply the anti-avoidance provisions in this particular circumstance? | A2: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Since its inception the family discretionary trust has always distributed income to a religious entity which is an exempt entity and to family members. A charity or religious body, institution or church is a general beneficiary per clause 1(8)(d)(iii) of the deed. The trustee operates a business deriving its income from commercial arms length activity. For the 2011-12 financial year the trustee did not derive any dividend income or capital gains. There has usually been a discrepancy between trust income and net income because of timing differences caused by bringing work-in-progress into account. The trust is not a managed investment trust. The trust deed at clause 3(6)(b)(i) gives the Trustee the power to classify any receipt as capital or income. The applicant states this has never been done and there is no intention of doing so. All allocations of income have been accompanied by physical distributions so there are no unpaid present entitlements.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 100AB | Income Tax Assessment Act 1936 Subsection 95(1) | Income Tax Assessment Act 1936 Subsection 97(1)

Reasons for decision: Summary: Section 100AB of the ITAA 1936 is an integrity measure which applies in a case where an exempt entity is a beneficiary of a trust (which is not a managed investment trust) and receives a disproportionate share of the trust's net (taxable) income relative to its trust entitlement. This is done by treating the exempt entity as not having a present entitlement to the excess amount which is then assessed to the trustee. | Detailed Reasoning - Commissioner's discretion: As the applicant has correctly identified the effect of the provision, it is necessary to determine if it is appropriate to exercise the discretion provided by subsection 100AB(5) of the ITAA 1936. To do that it is appropriate to identify the mischief the provision is intended to counter. The second reading speech to the Bill says: This schedule also amends division 6 of part III of the Income Tax Assessment Act 1936 to include specific anti-avoidance rules to address the inappropriate use of exempt entities to 'shelter' the taxable income of a trust. The EM at paragraph 2.3 says: Schedule 2 also amends Division 6 … to include specific anti-avoidance rules to address the potential opportunities for tax manipulation that can result from the inappropriate use of exempt entities as beneficiaries. No examples of tax manipulation are provided but in the comparison of key features following paragraph 2.24 it states with the left column being 'new law' and the right column being 'current law'. Where an exempt entity is used to 'shelter' a share of the taxable income of a trust that exceeds the exempt entity's entitlement to the net accretions to the trust underlying that taxable income (whether 'income' or 'capital' of the trust), that excess is assessed to the trustee. An exempt entity can be made presently entitled to all of the income of a trust estate (as calculated under trust law) resulting in the trust's total taxable income becoming exempt - even where the entity is not entitled to receive all of the net taxable accretions to the trust underlying that taxable income (whether 'income' or 'capital' of the trust). In the present case there is no evidence of any manipulation. The religious entity has always received its entitlement. As such, the Commissioner will exercise his discretion under subsection 100AB(5) of the ITAA 1936 to not apply the anti-avoidance provisions in this instance for the 2011-12 financial year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.