Once it is accepted that the Beneficiary is liable (as opposed to the Trustee), then the substantive operative provisions would apply. 3. Substantive Operative Provisions The substantive operative provisions are actually quite common sense. They basically establish a logical and practical system for dealing with the following subject matter “proportionately”: “assessable income”; “exempt income”; and “non-assessable non-exempt income”. The method of apportionment takes into account the period of residence of the Beneficiary and the source of the income. When these references are omitted, the relevant proportion is “the individual interest of the Beneficiary”. It is submitted that this interest should reflect the actual amount distributed or deemed to be distributed to the Beneficiary. 4. Proposed Amendment of Prefatory Wording It is submitted that the intended role of the prefatory wording could be performed by adopting words that are neutral about the quantity or quantification of the amount or share or interest of the individual Beneficiary, e.g.,: “where a beneficiary of a Trust Estate who is not under any legal disability is presently entitled to any of the assessable or exempt income of the Trust Estate”. 4.1 “Assessable Income” Please note that I have referred to “assessable income”, because under section 6(1) of the 1997 Act, it incorporates both: “Ordinary income”; and “Statutory income”. 4.2 “Exempt Income” I have included “exempt income”, because under section 6(3) of the 1997 Act it does not form part of “assessable income”.
The purpose of this distinction is to establish that, if the only income of the Trust Estate is exempt income, the operative provisions will still apply. In particular, section 97(1)(b) would extend the exemption to the Beneficiary, even though there was no other assessable income (i.e., even though there was no other ordinary or statutory income). Currently, if the only income of the Trust Estate was exempt income, there is an argument that: section 97 does not apply (because the terms of the prefatory wording have not been satisfied); and section 97(1)(b) does not pass the exemption on to the Beneficiary. 4.3 Operative Provisions Once this prefatory wording is satisfied, paragraphs (a), (b) and (c) will apply to the Beneficiary. This makes it clear that the amount of the share or interest is irrelevant to the operation of the subsequent paragraphs. This simple amendment removes the distinction between: “distributable income”; and “assessable income” or “taxable income”. This distinction is and always has been a red herring. The Tax Legislation should be concerned with “assessable income” and “taxable income” in the same manner as it is with other entities. 5. Ordinary and Statutory Income I do not accept that there ever was a legitimate argument that section 97 applied only to ordinary income, and not to statutory income. Section 102-5 includes the Trust’s net capital gain in the assessable income of the Trust Estate. Section 115-215(2)(b)(i) of the 1997 Act envisages that the Beneficiary’s assessable income might include an amount (“a trust amount”) attributable to a capital gain of the Trust Estate as a result of the operation of section 97(1)(a). Thus, it is submitted that the correct interpretation of section 97 has always been that it was the vehicle for both ordinary and statutory income of the Trust Estate to get into the assessable income of the Beneficiary. However, to the extent that there is perceived to be any ambiguity or uncertainty, it should also be made clear that the section applies equally to ordinary and statutory income.
If there was a tax loss: it would be available to the single Absolutely Entitled Beneficiary, if section 106-50 applied; and it would be trapped in the Trust Estate and would not be available to any of the multiple Beneficiaries, if section 106-50 did not apply. Please note that the author does not agree with the ATO interpretation of section 106-50 with respect to multiple Beneficiaries. However, the purpose of the above comments is to suggest that, if section 97 is correctly applied, the section 106-50 issue mightn’t be as big an issue as it is made out to be. In other words, Bamford has pointed to a solution to the section 106-50 debate as well.