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Is the trustee assessable under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on that share of the net income of the trust estate representing capital gains in the circumstances of this case?

No. As the trustee has not made a choice under subsection 115-230(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to be taxed on that share of the trust's net income, it will be assessable to the beneficiary that is presently entitled to the trust income.

A trust was established under the terms of a deceased person's will. The trustee of the trust is resident in Australia. The trust property consists mainly of shares.

During the 2008-09 income year, the trustee derived dividends and made capital gains from sales of shares.

The deceased's child (the life tenant) is entitled to all of the income of the trust for their lifetime. The life tenant is an Australian resident.

Income is not defined for the purposes of the trust (either expressly or by implication and the trustee does not have the authority to determine what is income) and so takes its ordinary meaning.

The deceased's grandchildren have a contingent interest in the trust capital. That is, such of the grandchildren as survive the life tenant will be entitled to share equally in the trust capital. If none of the grandchildren survive the life tenant, then the capital passes to a charity.

The trustee has not made a choice to be taxed (instead of the life tenant) on the capital gains of the trust.

The net income of a trust estate for a particular year is calculated in accordance with section 95 of the ITAA 1936. Broadly, it is the amount that would have been the trustee's taxable income if it were assumed that the trustee was a resident taxpayer. The net income is assessed to the trustee or to beneficiaries of the trust in accordance with the rules set out in Division 6 of Part III of the ITAA 1936.

Section 97 of the ITAA 1936 provides (subject to certain exceptions not relevant in this case) that a beneficiary who is presently entitled to a share of the income of a trust estate must include in their assessable income that share of the net income of the trust estate.

In this case, the life tenant is presently entitled to all of the income of the trust and so prima facie they should be assessed on the entire net income of the trust (including the capital gains). This is the case even though the life tenant cannot benefit from those capital gains.

However, section 115-230 of the ITAA 1997 applies with respect to the 2005-06 and later income years. It allows the trustee of a testamentary trust to choose to be assessed on the share of the trust net income attributable to capital gains if a beneficiary who would otherwise be assessed under section 97 of the ITAA 1936 on that share of the net income does not have a vested and indefeasible interest in trust property representing that share, nor has had such property paid or applied for its benefit.

The trustee must choose to be assessed no later than the deadline in subsection 115-230(5) of the ITAA 1997. That deadline is the day two months after the last day of the relevant income year or such later day as the Commissioner allows.

As the trustee in this case has not chosen that section 115-230 of the ITAA 1997 apply, or sought an extension of time in which to make the choice, the whole of the net income is properly assessed to the life tenant.

If the trustee were to seek, and be granted, an extension of time in which to make the choice, the capital gains would be assessed to the trustee under section 99A of the ITAA 1936 or, at the Commissioner's discretion, section 99 of the ITAA 1936.