Private ruling: Family Trust Election
Date of advice: 20 January 2017
Published: June 2017
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Commissioner accept that the Trustees' distribution of capital at vesting date is a distribution from the deceased's Estate and not from the W Trust? | A1: No | Q2: Is Family Trust Distribution Tax (FTDT) payable if a capital distribution is made by the Trustees for the W Trust to a remainder beneficiary who is not a member of the test individual's family group where a family trust election (FTE) has been made? | A2: Yes | Q3: Are the Trustees of the W Trust obliged to withhold and pay dividend withholding tax (DWT) in respect of fully franked dividends where the recipient of the dividends is a non-resident and is unable to avail themselves of the benefits of franking credits because of not satisfying the 'qualified person' rule in Division 1A of former Part IIII of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: No

Relevant facts and circumstances: X died a number of years ago. The Will of X (the deceased) was granted probate. The Trustees of the Estate of deceased has provided a copy of the deceased's Will. The terms of the Will created the W Trust. The remainder beneficiaries are defined in Clause X of the Will to mean such of the following who shall be alive on the vesting date namely the: ● Grandchildren of the deceased's children ● Grandchildren of a distant relative of the deceased's children. The vesting date is defined in the Will to mean the earliest to occur of: ● the attainment of the age of 21 years by the youngest of the remainder beneficiaries; and ● 80 years from the date of the Will The W Trust W is a child of the deceased and is a non-resident of Australia for tax purposes. W has Y children who have all attained the age of 21. Clause U of the Will provides the following: ● The Trustees shall hold the general assets upon trust to invest and accumulate 20% of the income of the W Trust and the other 80% is to be paid to W until each of W's children turn 21 years of age. ● Upon and after the attainment of 21 by all of the children W will be entitled to 40% of the income of the W Trust during W's life time and each child (or the survivor or survivors of then) will be entitled to a share of half of the income (80%) of the W Trust. ● The other 20% of the trust income remain accumulated in the W Trust. Under Clause Z of the Will the Trustees shall on the vesting date hold the corpus of the deceased's assets upon trust absolutely for the remainder beneficiaries as tenants in common in equal shares. W does not have any grandchildren. The investments of the W Trust include shares in publicly listed companies which pay franked dividends. The Trustees of the W Trust have not lodged a family trust election under section 272-80 Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) but are considering it.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 128B | Income Tax Assessment Act 1936 Paragraph 128B(3)(ga) | Income Tax Assessment Act 1936 Section 271-15 of Schedule 2F | Income Tax Assessment Act 1936 Section 272-75 of Schedule 2F | Income Tax Assessment Act 1936 Section 272-75 of Schedule 2F | Income Tax Assessment Act 1936 Section 272-80 of Schedule 2F | Income Tax Assessment Act 1936 Section 272-95 of Schedule 2F | Income Tax Assessment Act 1936 Former Division 1A Part IIIAA

Reasons for decision: Detailed Reasoning - Family trust election: A FTE is an optional declaration made to the Australian Tax Office. Section 272-75 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) provides that a trust is a family trust at any time when a family trust election in respect of the trust is in force. To qualify as a family trust, the trustee is required to make a family trust election under section 272-80 of Schedule 2F to the ITAA 1936. An election will satisfy section 272-80 of Schedule 2F to the ITAA 1936 where: a) there is a nominated test individual in relation to whom the family group is to be taken into account for the basis of the tests applicable to the trust; b) the trust is able to pass the family control test; and c) it is made in writing in the approved form. The term 'family group' is defined in section 272-95 of Schedule 2F to the ITAA 1936 and it does not include aunts, uncles, cousins and friends. Family trust distribution tax (FTDT) applies if at any time while an FTE is in force, the trust confers a present entitlement to or distributes income or capital of the trust to a person that is not a member of the 'family group' of the specified individual in the FTE: section 271-15 of Schedule 2F to the ITAA 1936. Pursuant to section 272-45 of Schedule 2F to the ITAA 1936 a trustee distributes income or capital to a person if it pays or credits money to the person, transfers property to the person, or deals with the income or capital on behalf of the person or applies it for the benefit of the person in their capacity as a beneficiary. | Detailed Reasoning - Application to the W Trust: The Trustees have argued that Clause Z of the Will gives rise to the possibility that at vesting date all or part of the corpus of the W Trust is part of the deceased's Estate as a matter of law without the Trustees having to do anything such as making a distribution. Accordingly any distribution to the remainder beneficiaries under the Will who are not members of a family group of a specified test individual of the W Trust is a distribution from the deceased's Estate and not from the W Trust. The W Trust was created over certain assets from the Estate of the deceased. These assets were subjected to the specific terms of the deceased's Will. Specially Paragraphs X(b) and (d), and Clauses U and V of the Will created the W Trust and all these provisions govern the life of the trust as to: ● what assets constitute the capital of the trust - paragraphs X(b) and (d); ● how the income of the trust is to be distributed - Clause U; and ● what happens to the capital of the trust on the vesting date - Clause Z. It is true that the destination of the capital of the trust is pre-determined under Clause Z of the Will, rather than being a decision of the Trustees. However, the Trustees are bound by the rules of equity and by statutory rules to give effect to the directions contained in the trust instrument. The governing trust instrument in this case is the Will of the deceased. This means that, on the vesting date, the Trustees are obliged to hold for each remainder beneficiary their equal share on trust absolutely for them. When the trusts vest the Trustees will then need to do something such as transfer property or write a cheque drawn from the trust's account to meet the beneficiaries' entitlement. Any such action will be a 'distribution' as defined in section 272-45 of Schedule 2F of the ITAA 1936. Based on the foregoing, it is our view that any distribution made by the Trustees from the capital of the W Trust is a distribution from that said named trust created by the Will of the deceased and not from the Estate of the deceased. Family trust election The Trustees for the W Trust are considering lodging a FTE and nominating W as the test individual of the family group. As noted above the lodging of a FTE is an optional declaration made to the Australian Taxation Office. The decision to lodge a FTE is to be made by the Trustees of the W Trust as it is a matter for their judgement as to whether any potential FTDT liability will outweigh the likely franking credit benefits. If a FTE is made in respect of the W Trust which satisfies the requirements of section 272-80 of Schedule 2F to the ITAA 1936, the normal consequences will apply when a distribution is made outside the family group of the specified individual in the FTE. That is, any distribution paid to a beneficiary who is not a member of the family group of the W Trust will trigger an FTDT liability under section 271-15 of Schedule 2F to the ITAA 1936. Note: The Commissioner has no discretion under the current law not to impose FTDT where a FTE is in force and a distribution is made outside the family group of the specified individual. | Detailed Reasoning - Non-resident withholding tax: Section 128B of the ITAA 1936 sets out the circumstances in which withholding tax is payable in respect of dividend (including non-share dividend), interest and royalty income derived by non-residents and the specific exemptions from withholding tax. If a dividend is fully franked, no amount needs to be withheld. If a dividend is partially or completely unfranked, an amount must be withheld from the unfranked amount. Franked dividends are specifically excluded from the operation of section 128B of the ITAA 1936 by paragraph 128B(3)(ga) of the ITAA 1936. Under paragraph 207-145(1)(a) of the ITAA 1997, 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 to gross up their income for the franking credit received, nor claim a tax offset equal to the franking credit. A similar result applies to entities in which franked distributions flow indirectly (section 207-150 of the ITAA 1997). However, even if the entity receiving the franked distribution is unable to avail the benefits of the franking credits because of not satisfying the 'qualified person' rule in Division 1A of former Part III of the ITAA 1936, the distribution is still franked. In this case, the Trustees of the W Trust are not obliged to withhold and pay DWT on fully franked dividends where the recipient of the dividends is a non-resident and is unable to avail the benefits of franking credits because of not satisfying the 'qualified person' rule in Division 1A of former Part IIII of the ITAA 1936.