Exercise of the Commissioner's discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 - testamentary trusts

Is it appropriate for the Commissioner to exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) in order to assess the trustee of a testamentary trust under section 99 of the ITAA 1936 on the income of trust to which no beneficiary is presently entitled?

Yes. It is appropriate in the circumstances for the Commissioner to exercise his discretion to apply section 99 of the ITAA 1936 to the income of the testamentary trust to which no beneficiary is presently entitled.

A trust was established under the will of a deceased person where the beneficiaries are family members and a charitable organisation.

The trust is a discretionary trust.

The only assets of the trust are those that devolved on the trustee as a direct consequence of the will.

The estate of the deceased taxpayer has been fully administered.

Section 99A of the ITAA 1936 provides that a special rate of tax will apply to certain trust income. The special rate of tax will apply to a share of trust income to which no beneficiary is presently entitled. The applicable tax rate is the highest marginal rate of tax for resident individuals.

However, subparagraph 99A(2)(a)(i) of the ITAA 1936 provides that the special rate of tax will not apply to a trust estate that resulted from a will if the Commissioner is of the opinion that it would be unreasonable for the special rate of tax apply to that trust income.

If the Commissioner is of the opinion that it would be unreasonable for the special rate of tax apply to the trust income, then more concessional rates of tax will apply under section 99 of the ITAA 1936.

In forming his opinion, the Commissioner must have regard to the matters listed in subsection 99A(3) of the ITAA 1936. These matters include situations where an attempt has been made to increase the assets of the trust by, for example, granting of special rights or privileges to the trust, the transfer of the property to it, or the making of loans to it.

In determining the weight to be given to the matters described in subsection 99A(3) of the ITAA 1936, Windeyer J has stated in Giris Pty Ltd v. FC of T (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that: 'The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate. But the idea of reasonableness seems to be here amorphous....It does not clearly emerge from the Act in respect of what matter - or whose interest...he is to consider whether it would be reasonable or unreasonable to apply section 99A in the case of any particular trust estate. He is to have regard to certain stated matters; but what weight or influence each is to have is not made clear.....That [the Commissioner] has formulated certain considerations by which he is guided, and made them publicly known, may be important as showing that in the exercise of his statutory discretion he acts honestly, consistently and, as he thinks, in accordance with the legislative purpose. That 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.'

The testamentary trust was created from a deceased estate. There is no evidence that an attempt has been made to increase the assets of the trust.

In the circumstances, the Commissioner is of the opinion that it would be unreasonable to apply the special rate of tax under section 99A of the ITAA 1936 to the trust income to which no beneficiary is presently entitled. Accordingly, the Commissioner will exercise his discretion under subsection 99A(2) of the ITAA 1936 and assess the trust income under section 99 of the ITAA 1936.