Private ruling: Trust income
Published: September 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the trustee assessed on the income received from the investment of the proceeds of the deceased estate to which no one is presently entitled? | A1: Yes.

Relevant facts and circumstances: The deceased left a sum of money, to be held in trust for the beneficiary, should he/she attain the age of 21. Should he/she not reach 21 then the funds would go into the residue of the estate. Clause 5 of the will gives the Executors the power to apply for the maintenance, education or benefit of any beneficiary, the income and capital of the estate to which that beneficiary is or may in the future be entitled to. A bank account was established, and a tax file number issued, for the trust. The beneficiary was under the age of 18 years in the 2013-14 financial year. In the 2013-14 financial year, none of the funds were applied for the benefit of the beneficiary.

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

Reasons for decision: Detailed Reasoning - Taxation of trust income: The taxation of the net income of a trust is determined under the following sections of the Income Tax Assessment Act 1936 (ITAA 1936): • Section 97 applies where a beneficiary is presently entitled to a share of the net income and is not under a legal disability; • Section 98 applies where a beneficiary is presently entitled but is under a legal disability; and • Sections 99A and 99 apply where there is an absence of present entitlement of the beneficiary to all or some of the net income of a trust estate. | Detailed Reasoning - Legal disability: A beneficiary is under a legal disability if they are a minor at general law. Under the Age of Majority Act of each state, the age at which a minor will achieve legal competence is 18 years of age. The beneficiary, in this case, is under a legal disability as he/she is under 18 years of age. | Detailed Reasoning - Present entitlement: There is no definition of the term 'presently entitled' in the income tax legislation; therefore, it is necessary to look at the meaning given to the term by the courts and further discussed in Taxation Ruling IT 319. In particular, in Taylor v. FCT (1970) 119 CLR 444; 1 ATR 582; 44 ALJR 148; 70 ATC 4026 (Taylor's Case) the meaning of present entitlement was considered for a beneficiary who was under a legal disability. Under the terms of the trust settlement in Taylor's case, the trust funds were to be used for the beneficiary's maintenance and education. Any excess income was to be accumulated and invested for the beneficiary until he attained 21 years of age or, if the beneficiary died before then, the funds would pass to the beneficiary's estate. In the relevant year the trustees did not exercise their discretion to pay out any part of the trust income and the whole amount was accumulated within the trust. The court found that the beneficiary was presently entitled to trust income even though the beneficiary was under a legal disability because: • the beneficiary had an absolutely vested interest in the accumulated income. That is, the beneficiary's interest was absolutely vested because the income passed to the beneficiary's estate if the beneficiary died before attaining 21 years of age and as such was indefeasible. • the beneficiary would have succeeded in an action to recover the income from the trustees had it not been for the legal disability. For a beneficiary to be presently entitled, therefore, they must have an absolute and indefeasible vested interest in the trust income. Where a beneficiary's interest in the trust income is contingent they will not be presently entitled. In this case, the beneficiary does not have an absolute and indefeasible vested interest in the trust funds as the funds will be returned to the deceased's residual estate should the beneficiary not attaining the age of 21 years. Therefore, in this case the trustee will be assessed under sections 99 or 99A of the ITAA 1936. The general practice is to assess the income of a deceased estate trust under section 99 of the ITAA 1936 unless there is tax avoidance involved. Deceased estates of the 'ordinary and traditional' kind (whose assets come directly from the assets of the deceased) are assessed under that section.