Income tax: ultimate beneficiary - deductions

Where the trustee of a closely held trust (the head trust ) resolves in relation to the income year ended 30 June 2006 to make a trustee of another closely held trust (the interposed trust ) presently entitled to all of the income of the head trust, is the trustee of the interposed trust an ultimate beneficiary for the purposes of former section 102UE of Division 6D of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the whole or part of a share of the net income of the head trust where: (a) the trustee beneficiary is presently entitled to all of the income of the head trust; (b) an individual is presently entitled to all of the income of the interposed trust, and (c) the interposed trust has allowable deductions that do not exceed the share of the net income of the head trust included in the assessable income of the interposed trust.

No. Under one approach available under the former Division 6D of the ITAA 1936, it would be concluded that the trustee of the interposed trust was not an ultimate beneficiary for the purposes of section 102UE of the ITAA 1936 with respect to the share. Rather, there was only one ultimate beneficiary being the individual presently entitled to all of the income of the interposed trust.

However, the Commissioner accepts an approach equally available under the former Division 6D of the ITAA 1936 would lead to the conclusion that the trustee of the interposed trust was an ultimate beneficiary for the purposes of section 102UE of the ITAA 1936 to the extent of the allowable deductions that did not exceed the share of the net income of the head trust included in the assessable income of the interposed trust, with the individual being the ultimate beneficiary with respect to the remainder of the net income of the head trust.

Trust A (the head trust) is a closely held trust. The income of Trust A is $200, which also equals its net income for the purposes of section 95 of the ITAA 1936.

Trust B (the interposed trust) is also a closely held trust. The trustee of Trust B is presently entitled to 100% of the income of Trust A and, therefore, includes the same share of the net income of Trust A in its assessable income under subsection 97(1) of the ITAA 1936 (that is, $200).

Trust B has no other assessable income.

Trust B has allowable deductions, the total value of which ($50) is less than the trust's assessable income.

The deed to Trust B defines the income of the trust estate as being equal to the trust's net income for the purposes of section 95 of the ITAA 1936 (that is, $150).

Beneficiary A (an individual) is presently entitled to 100% of the income of Trust B.

These facts are illustrated in the diagram above.

All references are to the ITAA 1936.

Where a share of the net income of a closely held trust (as defined in section 102UC) was included under section 97 in the assessable income of a trustee beneficiary (as defined in section 102UD), Division 6D required the trustee of the closely held trust to provide the Commissioner with a correct UB statement containing the information set out in subsection 102UG(3) (specifically information about the 'ultimate beneficiaries' in respect of that share).

Failure to provide a correct UB statement exposed the members of the trustee group (as defined in subsection 102UK(3)) jointly and severally to a liability to pay ultimate beneficiary non-disclosure tax (subsection 102UK(2)).

Further, to the extent that there was no ultimate beneficiary with respect to a whole or a part of the share, the members of the trustee group were jointly and severally liable to pay ultimate beneficiary non-disclosure tax (subsection 102UM(2)).

Section 102UE defined the circumstances in which a person was an 'ultimate beneficiary' for the purposes of Division 6D in respect of the share or a part of the share (called a 'head trust amount' for the purposes of Division 6D). In particular, a person was an ultimate beneficiary if one of the tests in subsections (2), (3) or (4) of that section was satisfied.

If the whole of the share of Trust A's net income included in the assessable income of Trust B was considered under section 102UE, subsection 102UE(2) had the effect that the individual beneficiary of Trust B was the ultimate beneficiary in respect of that whole share (that is, $200).

Specifically, paragraph 102UE(2)(b) was satisfied because: • the individual was a listed person by reason of paragraph 102UF(a), and • being presently entitled to 100% of the income of Trust B (that is, indirectly entitled to 100% of the income of Trust A through Trust B), the individual was treated as presently entitled through Trust B to the whole of the net income of Trust A for the purposes of Division 6D. This follows from adopting a proportionate approach to the notion of 'share' used in subsection 102UJ(1) (which deems a present entitlement to a share of trust income to be a present entitlement to 'that share' of the net income of the trust) that is consistent with the approach taken by the High Court to the analogous concept in subsection 97(1) in Commissioner of Taxation v. Bamford ; Bamford v. Commissioner of Taxation [2010] HCA 10; (2010) 75 ATR 1; 2010 ATC 20-170.

However, the wording of section 102UE also enables an ultimate beneficiary to be determined in respect of a 'part' of the net income of the relevant closely held trust. If the various parts of the net income of Trust A included in the assessable income of Trust B are considered under section 102UE, namely a part that is fully absorbed by deductions in the calculation of Trust B's net income ($50), and the remainder ($150), then:

the individual is an ultimate beneficiary under subsection 102UE(2) as to the amount of the net income of Trust A included in the assessable income of Trust B to which they are presently entitled (that is, $150); and

the trustee of Trust B is an ultimate beneficiary under subsection 102UE(4) as to the amount absorbed by deductions in the calculation of its net income.

For the purposes of satisfying section 102UG, the Commissioner accepts that the trustee of a closely held trust would make a correct UB statement if the statement is prepared on the basis of either approach. Note : by reason of amendments made to Division 6D in 2007, the operation of that Division no longer relies on the concept of an ultimate beneficiary. The amendments to Division 6D apply in relation to income years that commence on or after 24 September 2007. It follows that the question considered in this ATO ID is only relevant to income years that commence before that date.