Private ruling: Trust Distribution
Date of advice: 14 July 2016
Published: August 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers | 1. Is the trust distribution assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No | 2. Is the trust distribution assessable under section 6-10 of the ITAA 1997? | No | 3. Does section 99B of the Income Tax Assessment Act 1936 apply to the trust distribution? | Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5

Reasons for decision: Summary: Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included: • income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or • an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997). Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income derived directly or indirectly from all sources during the income year. Section 10-5 of the ITAA 1997 lists provisions which include statutory income in a taxpayer's assessable income. Included in this list are receipts of trust income not previously subject to tax under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936). Ordinary income Ordinary income has generally been held to include three categories, namely, income from rendering personal service, income from property and income from carrying on a business. The amount you received from the trusts is not any of these forms of income. Statutory Income Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary. Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either: • the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936) • amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and • amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936). Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936). Therefore, only income accumulated in the Trust paid to a taxpayer as a resident taxpayer that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to the taxpayer under subsection 99B(1) of the ITAA 1936. Accordingly, any portion of the distribution from the Trusts that would normally be assessable in Australia (i.e. interest or dividends) no matter when they were derived by the Trusts is included in your assessable income under subsection 99B(1) of the ITAA 1936. You may be entitled to a foreign income tax offset in relation to income tax paid by your relative on these amounts.

Relevant facts: You were entitled to receive amounts as a result of the death of your relative, who was a resident of Country X. | Community Property Trust (CPT) | Your relative created a CPT. | An article of the CPT Agreement provided that when your relative passed away, the Trustee shall make gifts of their property as provided in another Article. | The other article of the CPT Agreement provided that the Trustee shall distribute $X to you, this gift was reduced by the market value of the assets which are distributable under another Trust Agreement (B Trust). | Your relative created the B Trust, an article of the Trust Agreement states: | The balance of the Trust Estate, including any accrued or undistributed income not distributed pursuant to any other provisions of the Trust Agreement shall be distributed, free of trust, to the first of the following individuals, in the order named, who survives the surviving Trustor for thirty (30) days. | Your relative was the surviving Trustor and you were the named individual. | The market value of the assets distributable under the B Trust was $Y. | The gift under the CPT was $Y. | Until the death of your relative, income and capital gains generated by their share of assets in the CPT were taxed in their hands personally, as if the trust did not exist. | After your relatives' death, income generated by the assets of the Trusts was distributed to you. You have declared this income in your income tax return.