Private ruling: Exercise of the Commissioner's discretion
Published: December 2014
Ruling period: Years ended 30 June 2014 and 30 June 2015
Date scheme commenced: Prior to 1 July 2013

Ruling: Q1: Will the Commissioner form the opinion pursuant to subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) that it would be unreasonable for section 99A to apply to the income of the Estate of X? | A1: Yes | Q2: Subject to Question 1, will section 99 of the ITAA 1936 apply to the Trustee of the Estate of X? | A2: Yes

Relevant facts and circumstances: 1. X passed away some time before 1 July 2013 and probate was granted a number of months after X's death. 2. X drafted the Will. Broadly, the Will provides for specified bequeaths to identified individuals as well as the establishment of charitable bequests. 3. As a consequence of X having drafted their Will, there has been considerable debate on the exact meaning and legality of some of its provisions as well as identifying some of the Estate's beneficiaries. Due to this, you explain that the Executors have had to seek legal advice on several clauses of the Will, which has delayed the winding up of the Estate. 4. The Estate's assets consist solely of assets acquired by X, or funds received on the disposal of the assets by the executors of the Estate. There are no properties that been transferred nor have loans been granted by the Estate. 5. The main reason why no beneficiary is presently entitled to the income of the Estate for the year ended 30 June 2014 is because the residuary beneficiary has not been determined. 6. The applicant claims that it would be unreasonable for the Commissioner not to exercise his discretion pursuant to subsection 99A(2) of the ITAA 1936 because: a. the Estate of X resulted from a Will b. the assets of the Estate were acquired by the deceased or are funds received by the Executors of the Estate upon disposal of assets held by the Estate c. the executors have not been able to wind up the Estate within 3 years due to complexities of the Will. In particular, the wording of the Will is ambiguous and has required the Executors to seek legal advice d. due to the ambiguities in the wording of the Will there has been delay in administering the Estate which has been outside the Executors' control e. there is only one remaining ambiguity, pertaining to the residuary beneficiary f. it is anticipated that this outstanding ambiguity will be resolved within the next 12 months, and g. until such a time that a residuary beneficiary is determined, there will be no beneficiary presently entitled to the income of the Estate.

Relevant legislative provisions: Section 99 of the Income Tax Assessment Act 1936 | Section 99A of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Will the Commissioner form the opinion pursuant to subsection 99A(2) of the ITAA 1936 that it would be unreasonable for section 99A to apply to the income of the Estate of X? | Detailed Reasoning - CERTAIN TRUST INCOME TO BE TAXED AT SPECIAL RATE: 7. Broadly, section 99A of the ITAA 1936 provides certain circumstances in which a trustee of a trust estate will be liable to pay tax on the net income of the trust estate at a rate declared by Parliament. 8. Subsection 99A(2) of the ITAA 1936 provides that section 99A will not apply to a trust estate if, among other things, the trust resulted from a will or codicil and the Commissioner is of the opinion that it would be unreasonable that section 99A apply to the trust. 9. In forming the opinion, subsection 99A(3) of the ITAA 1936 provides that: (a) the Commissioner shall have regard to the circumstances in which the condition, if any, upon which, at any time property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised; (b) if a person who has, at any time, directly or indirectly: (i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or (ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised; has not, at any time, directly or indirectly: (iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or (iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised; the Commissioner shall have regard to that fact; and (c) the Commissioner shall have regard to such other matters, if any, as he or she thinks fit. 10. Consequently, as explained by Menzies J in Giris Pty Ltd v Federal Commissioner of Taxation 69 ATC 4015 (1969) ( Giris ) 1 , section 99A of the ITAA 1936 will apply to trust income unless the Commissioner forms the opinion that it would be unreasonable for the section to apply. That is, it is necessary for the Commissioner to form the opinion otherwise section 99A will apply in the relevant year. | Detailed Reasoning - Meaning of the term "unreasonable": 11. Although subsection 99A(3) of the ITAA 1936 specifies some circumstances to which the Commissioner shall have regard in forming his opinion pursuant to subsection 99A(2), the legislation does not prescribe the weight to be given to these specified factors. As stated by Menzies J in Giris , the legislation provides "no guidance upon what significance should be given to the presence or absence of the fact" to those circumstances. Furthermore, the legislation does not prescribe a full set of facts and circumstances in which the opinion should or should not be formed. Rather, paragraph 99A(3)(b) merely provides that the Commissioner shall consider such matters as he thinks fit. 12. Windeyer J in Giris states "[the legislative purpose] I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose". 13. This purpose is reproduced by the Explanatory Memorandum (EM) to the Income Tax Laws Amendment Act 1980 , which substituted the current subsection 99A(2) of the ITAA 1936. The EM explains that the introduction of the then new law was to give effect to the policy that only in limited circumstances would accumulated trust income be taxed pursuant to section 99 rather than section 99A. It states that by the Commissioner considering whether it would be unreasonable for section 99A to apply the new law will enable the result that unless there are tax avoidance connotations, income of a trust estate will continue to be taxed pursuant to section 99 on the same basis as prior to the new law. 14. The EM also states that the purpose behind the amendments to the former section 99A was to broaden the imposition of the maximum individual tax rate on trust income where there is no beneficiary presently entitled to that trust income. | Detailed Reasoning - Application to your circumstances: 15. X passed away some time before 1 July 2013 and probate was granted a number of months after their death. 16. No beneficiary is presently entitled to the income of the Estate for the year ended 30 June 2014 because the residuary beneficiary has not been determined. Ordinarily, section 99A of the ITAA 1936 would apply to income of a trust estate to which no beneficiary is presently entitled. 17. However, the Estate of X satisfies the requirements of paragraph 99A(2)(a) of the ITAA 1936 as it resulted from a Will or codicil. Consequently, section 99A may not apply to the trust estate if the Commissioner considers it unreasonable for that section to apply. 18. With regards to those factors the Commissioner shall have regard to as required by subsection 99A(3) of the ITAA 1936 in forming his opinion about whether it would be unreasonable for section 99A to apply, the applicant states that: a. the late X drafted the Will without obtaining legal advice b. there has been considerable debate on the exact meaning and legality of some of the Will's provisions as well as in identifying some of the Estate's beneficiaries c. the Executors of the Estate have not been able to wind up the Estate within 3 years due to complexities with the Will. They have had to seek legal advice on several clauses of the Will d. the delay in administering the Estate has been outside of the Executors control and are due to the ambiguities of the wording of the Will e. the Executors are currently in the process of applying to the Courts to have a determination made about the one remaining unresolved ambiguity, which pertains to the residuary beneficiary i. it is anticipated this issue will be resolved within the next 12 months. f. until such a time that a residuary beneficiary is determined, there will be no beneficiary presently entitled to the income of the Estate g. the main reason why there is no beneficiary presently entitled to the income of the Estate for the year ended 30 June 2014 is because the residuary beneficiary has not been established h. the Estate of X has assets consisting solely of assets acquired by X, or funds received on the disposal of the assets by the executors of the Estate, and i. that no properties have been transferred nor have loans been granted by the Estate. 19. Given the above factors, there is no evidence to suggest to the Commissioner that the circumstances of the Estate are such that the trust is being used as an instrument to avoid tax. Nor are any of the circumstances described in paragraphs 99A(3)(a) or 99A(3)(b) of the ITAA 1936 present in this case. 20. Moreover, the reason why no beneficiary is presently entitled to the income of the Estate is due to ambiguities in the manner in which the late X's Will was drafted, something that is outside the control of the Executors. The Executors have sought legal advice for resolution which is expected in the next 12 months, and a beneficiary may become presently entitled to income of the Estate in the future. 21. As a result of the above, the Commissioner considers that it would be unreasonable for section 99A of the ITAA 1936 to apply to the Trustee of the Estate's circumstances for the years ending 30 June 2014 and 30 June 2015. | Detailed Reasoning - Question 2: Subject to Question 1, will section 99 of the ITAA 1936 apply to the Trustee of the Estate of X? | Detailed Reasoning - Certain trust income to be taxed as income of an individual: 22. Where the Commissioner has formed the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply to income of a trust estate for a particular year, section 99 will be applicable. Broadly, section 99 provides that if there is no beneficiary presently entitled to the income of the trust estate, the trustee is liable to tax on the net income of the trust estate as if it were income of a resident individual (and not subject to any deduction). | Detailed Reasoning - Application to your circumstances: 23. As the Commissioner considers that it would be unreasonable for section 99A of the ITAA 1936 to apply to the Trustee of the Estate of X, section 99 will instead apply to income of the Estate to which no beneficiary is presently entitled for the years ended 30 June 2014 and 30 June 2015. 1 It should be noted that the High Court decision reached in Giris was made in relation the constitutional validity of former sections 99 and 99A of the ITAA 1936. Although these sections have been since amended, the requirement for the Commissioner to form an opinion that that it would be unreasonable for section 99A to apply remains the same in the current provisions.