Private ruling: Statutory trust
Published: September 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Is the interest income derived on the proceeds of sale held on trust by the statutory trust for sale included in the assessable income of the statutory trust? | A3: No

Relevant facts and circumstances: Trustee A as trustee for Trust A and Trustee B as trustee for the Trust B each owned an interest in a property (the Property) as tenants in common. You were appointed by Court order as Trustees for sale of the Property. A liquidator had been appointed over Trustee A and the liquidator was the first plaintiff in this court case. The Court order includes that the Plaintiff would be justified in selling the Property, that the Property be vested in the Trustees to be held by the Trustees upon statutory trust for sale. In carrying out the statutory trust for sale the Trustees had the following powers: a. to conduct the sale and to sell the Land either by public auction or by private contract on such terms as the Trustee may see fit; b. to fix a reserve or a minimum price; c. to collect the sale proceeds; d. to settle the particulars and conditions of sale; e. to fix the remuneration to be allowed to any auctioneer, real estate agent or other person. Clause 5 of the Court order provides that the Trustees are required to distribute the sale proceeds of the Property in the following manner: a. in payment and discharge of all mortgages and other encumbrances registered on the title of the Property; b. in payment of the Trustees commission and costs for time in attendance up to completion of the sale; c. in payment of the other costs of sale including, but not limited to legal costs, advertising costs and agents commission d. in payment of expenses incurred by the Trustees for the purpose of bringing the Property up to a condition which would facilitate sale; e. in payment of all rates, taxes and insurance and other outgoings on the Property f. in the payment of the plaintiffs costs of the proceedings; g. in payment of the balance of the following shares to each of the plaintiff and the defendant: i. Plaintiff: 7/10ths ii. Defendant: 3/10ths In the relevant financial year, the sale proceeds were received. Due to the Trustee's concerns regarding the potential tax implications of the sale, the net proceeds were not immediately distributed to the owners. They were held in an interest bearing account until advice was received. During the period that the settlement funds were held on trust in the Trustee's bank account, interest income was received. The property owners will be presently entitled to the interest in the account.

Relevant legislative provisions: Taxation Administration Act 1953 - Part 2-5 of Sch 1 | Taxation Administration Act 1953 - Section 10-5 of Sch 1 | Taxation Administration Act 1953 - Section 12-175 of Sch 1 | Taxation Administration Act 1953 - Section 12-180 of Sch 1 | Income Tax Assessment Act 1936 - Section 97 | Income Tax Assessment Act 1936 - Section 102UC | Income Tax Assessment Act 1936 - Section 102UE | Income Tax Assessment Act 1936 - Section 102UG | Income Tax Assessment Act 1936 - Section 161 | Income Tax Assessment Act 1936 - Subsection 254(1)

Reasons for decision: Summary: A court may appoint a trustee and vest the co-owned property in that trustee on a 'statutory trust for sale' (or on 'statutory trust for partition'). In Dixon v Roy (1991) 5 BPR 11,655, Young J held that trustees for sale appointed under section 66G of the Conveyancing Act 1919 have all the ordinary duties and obligations of trustees, including to get the best price, to make appropriate inquiries and to take expert advice and to act on it if they consider that appropriate [see also Goldberg v Goldberg [2000] NSW SC 399 (Young CJ in Eq)]. Your responsibilities as Trustees are similar those of trustees appointed under section 66 of the Conveyancing Act 1919 . Accordingly, you are a trustee for the purposes of the definition of 'trustee' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). An agent or trustee is required to furnish tax returns and to retain out of money which he or she receives as agent or trustee an amount sufficient to pay tax that is or will become due in respect of the income or such profits or gains. He or she is personally liable for any tax payable to the extent of any amount that has been retained or should have been retained, but not otherwise (emphasis added). | Detailed Reasoning - Interest income: As interest income has been derived by the statutory trust in its years of operation, this income is included in the assessable income of the trust. Under section 161 of the ITAA 1936, there is an obligation upon you to lodge a trust tax return (Table L of the legislative instrument that sets out lodgement obligations each income year states that a trust must have derived income for a lodgement obligation to arise). | Detailed Reasoning - Withholding Tax: The PAYG withholding system, contained in Part 2-5 in Schedule 1 to the Taxation Administration Act 1953 (TAA), was introduced for paying instalments during the income year towards an expected income tax liability for any business and investment income. Section 10-5 of Schedule 1 of the TAA has a summary of withholding payments which includes: 14A A trustee of a closely held trust distributing an amount from the trust income to a beneficiary, where the beneficiary does not quote its tax file number Section 12-175 of Sch 1 of the TAA 14B A beneficiary of a closely held trust becoming presently entitled to income of the trust, where the beneficiary does not quote its tax file number Section 12-180 of Sch 1 of the TAA | Detailed Reasoning - Closely held trust: A 'closely held trust' is defined in subsection 102UC(1) of the ITAA 36 as a trust where an individual has, or up to 20 individuals have between them, directly or indirectly, and for their own benefit, fixed entitlements to a 75% or greater share of the income, or a 75% or greater share of the capital, of the trust. Subsection 102UC(2) of the ITAA 36 states that if a trustee of a discretionary trust holds a fixed entitlement to a share of the income or capital of the trust directly or indirectly; and no person holds that fixed entitlement directly or indirectly through the discretionary trust; the trustee is taken to hold that fixed entitlement directly or indirectly as an individual and for the individual's own benefit. In this case, the trustee beneficiaries of the statutory trust are 'individuals' by virtue of subsection 102UC(2) of the ITAA 36. As the 'individuals' cumulatively hold 100% of the fixed entitlements to income or capital of the statutory trust, the statutory trust is a closely held trust pursuant to subsection 102UC(1) of the ITAA 36 because fewer than 20 individuals have a fixed entitlement to greater than 75% of the income or capital. | Detailed Reasoning - Sections 12-175 and 12-180 of Sch 1 of the TAA: Under sections 12-175 and 12-180 of Sch 1 of the TAA, a trustee is must withhold an amount from a distribution where, amongst other things, the trustee is not required to make a correct TB statement under Division 6D of Part III of the ITAA 1936 (about trustee beneficiary non-disclosure tax) in connection with the distribution. A trustee is required to make a correct TB statement, pursuant to section 102UG of the TAA 36, where the trust is a closely held trust and a share of its net income is included in the assessable income of a trustee beneficiary pursuant to section 97 ITAA 36, and the share includes an untaxed part. In this case, the statutory trust's income is interest income, which is an untaxed part pursuant to section 102UE of the ITAA 36. | Detailed Reasoning - Conclusion: The trustees of the statutory trust are not required to withhold from the distributions of interest income, however, they are required to make a correct TB statement in connection with the distributions.

2. Are you required to lodge trust tax returns for the statutory trust? | 3. If the interest is assessable to the statutory trust, are the trustees required to withhold tax from the interest portions of the distributions?