1 Will you be assessable under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on a share of the capital gains that may result from your disposal of shares appropriated to you under the Will?
No. Question 2 Will you be entitled to a deduction under section 30-15 of the Income tax Assessment Act 1997 (ITAA 1997) for the amount paid or distributed to a deductible gift recipient pursuant to a Deed of Appointment made in accordance with Clause 5 (b)(iii) of the Will? Answer No. This ruling applies for the following period Income year ending 30 June 20XX The scheme commences on: 1 July 20XX
You are the executors (Executors) of the estate (Estate) of the late Person A (Deceased). The Deceased died on XX XXX 20XX and probate of their last will and testament dated XX XXX 20XX (Will) was granted on XX XXX 20XX to the Executors. The primary assets of the estate at death were: • the Deceased's residence • cash/term deposits • a portfolio of listed securities The portfolio of listed shares included shares acquired prior to 20 September 1985 and shares acquired after that date including some bonus shares in respect of pre 20 September 1985. Records exist that enable each acquisition of shares to be identified including the date of acquisition and their respective cost bases. The Will The Deceased's residence and contents are bequeathed to Person B and Person C (as tenants in common). This devise has been given effect and the residence has been transferred to them. Person D is bequeathed a pecuniary legacy of a sum equal to the value of the residence at the date of death of the Deceased, which has been paid. The balance of the estate is to be applied as follows: • the payment of debts, funeral and testamentary expenses of the estate; and
• the division of the residue into three equal parts and one of such equal parts to be applied as follows: - one to Person B and Person C (B and C Share) - one to Person D (D Share), and - one to such charitable bodies (Charitable Share) and purposes within Australia in such shares and subject to such powers and provisions and generally in such manner as the trustees shall by deed appoint, provided that one of the charitable bodies to benefit is the Charity A (the trusts herein described as the Charitable Trust). The Will provides as follows: I direct that my trustees may exercise any powers given them at law and without limitation may in their absolute discretion: • sell, call in and convert any property into money or postpone the sale calling in and conversion or retain any properly in the same state of investment without being responsible for loss • make loans to beneficiaries or others, secure or unsecured, with or without interest and on whatever terms • borrow money and secure loans howsoever on any property
• without the consent of a beneficiary partition or appropriate any property in or towards the satisfaction of a legacy or share of any beneficiary and determine the value of the property however they deem appropriate • invest or hold any asset as if they were beneficially entitled absolutely, and • purchase any properly from the estate at fair market value. Administration to date The Estate has been partly administered as described. Income tax returns as follows have been lodged. Proposed Completion of Administration of Estate The Executors propose to complete the administration of the Estate as follows: • pay all outstanding liabilities including tax • to the extent necessary, realise such assets as may be required to pay such liabilities and tax • appropriate one third of the shares in specie to the B and C Share • appropriate one third of the shares in specie to the D Share, and • appropriate one third of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.
The Executors are considering how the various parcels of shares will be allocated amongst the respective parts or shares. Proposed conduct of the Charitable Trust Once the shares are vested in the Executors as trustees of the Charitable Trust, they contemplate realising them over time and appointing and paying various cash amounts amongst a number of charitable bodies. Accordingly, the Charitable Share may be maintained over several years until all of the funds are appointed and distributed to the chosen charities. It is anticipated that many of those charities will be deductible gift recipients (DGRs). It is therefore anticipated that capital, capital gains and income will be distributed over this period amongst such charities. It is expected the Charitable Trust will make capital gains on the disposal of the shares and will also receive income from investments, including dividends, interest income and managed fund distributions. Other facts The Estate, the Charitable Trust and the individual beneficiaries of the Estate are Australian residents for tax purposes.
The Deed(s) of appointment will be used only to appoint one or more beneficiaries. They will not be used to specify any additional terms or powers for the Charitable Trust. There may be more than one Deed of appointment in any one financial year. The allocation and appropriation of shares is validly made in accordance with the Will. All the proceeds from the disposal of the shares will be validly appointed to a charitable body in accordance with the terms in the Model Deed Poll by 30 June in the year the CGT event happens in relation to the disposal of the shares The Charitable Trust will not choose to be assessed on a capital gain under section 115-230 for any period covered by the ruling. The trustee of the Charitable Trust will meet the notification requirements in subsection 100AA(1) for any exempt entity they make presently entitled to the income of the Charitable Trust unless the Commissioner has or does, in respect of a relevant year, exercise his discretion in subsection 100AA(4) to disregard any failure to meet the notification requirements in respect of such year.
The benchmark percentage prescribed by section 100AB will not be exceeded unless the Commissioner has or does, in respect of a relevant year, exercise his discretion in subsection 100AB(5) to disregard any failure to meet the benchmark requirements in respect of such year. Any distribution of income of the Charitable Trust will be made to an entity that is a resident of Australia for tax purposes. The Charitable Trust will not be registered with the Australian Charities and Not-for-profits Commission Act 2012. The Charitable Trust will not be endorsed as exempt from income tax under Subdivision 50-B. The Charitable Trust is not a private ancillary fund.
Income Tax Assessment Act 1997 Division 6 Income Tax Assessment Act 1997 Section 97 Income Tax Assessment Act 1997 Section 98 Income Tax Assessment Act 1997 Section 99 Income Tax Assessment Act 1997 Section 99A Income Tax Assessment Act 1997 Section 100AA Income Tax Assessment Act 1997 Section 100AA (1) Income Tax Assessment Act 1997 Section 100AA (2) Income Tax Assessment Act 1997 Section 100AA (3) Income Tax Assessment Act 1997 Section 100AB Income Tax Assessment Act 1997 Section 100AB (1) Income Tax Assessment Act 1997 Section 100AB (2) Income Tax Assessment Act 1997 Division 6E Income Tax Assessment Act 1997 Division 30 Income Tax Assessment Act 1997 Section 30-15 (1) Income Tax Assessment Act 1997 Section 30-15 (2) Income Tax Assessment Act 1997 Division 50 Income Tax Assessment Act 1
All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. Question 1 Will you be assessable under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on a share of the capital gains that may result from your disposal of shares appropriated to you under the Will? Summary No. Detailed reasoning Capital gains included in the net income of a trust are brought to tax in accordance with Subdivision 115-C. Division 6E of the ITAA 1936 adjusts the rules in Division 6 of the ITAA 1936 to ensure that capital gains are not taxed twice (that is, as a result of Subdivisions 115-C and Division 6 of the ITAA 1936). In broad terms the effect of Division 6E of the ITAA 1936 is to apply Division 6 of the ITAA 1936 on the assumption that net capital gains and franked distributions are excluded from the trust's net income, and any amount relating to these things is excluded from the income of the trust estate. However, for trustee assessments, Division 6E of the ITAA 1936 does not affect the amounts brought to tax under Subdivision 115-C.
For capital gains, section 115-220 operates to increase the amount the trustee is assessed upon under section 98 of the ITAA 1936 to reflect the beneficiary's attributable gain in respect of each capital gain of the trust where they are a non-resident beneficiary or a beneficiary under a legal disability. Any distribution of income of the Charitable Trust will be made to an entity that is a resident of Australia for tax purposes and accordingly, section 98 of the ITAA 1936 will not apply. Section 115-122 operates to increase the amount the trustee is assessed and liable to pay tax on under section 99 or 99A of the ITAA 1936 to reflect the trustee's share of each capital gain of the trust. This applies even if the only reason for the section 99 or 99A assessment is because the trustee has a share of a capital gain. Broadly sections 99 and 99A of the ITAA 1936 apply where there is no part of the income to which a beneficiary is presently entitled (section 97 of the ITAA 1936) or that is assessed under section 98.
The trustee of a resident trust may choose to be assessed on a capital gain of the trust under section 115-230, provided no beneficiary has received any amount referable to the gain during the income year or within two months of the end of the income year. The choice must be made in respect of the whole capital gain. If the trustee makes the choice, no beneficiary is treated as having an extra capital gain under Subdivision 115-C (subsection 115-230(4)). Instead, the trustee is assessed on the taxable income relating to the capital gain under section 99 or 99A of the ITAA 1936, as appropriate (by way of section 115-222). This is done by deeming the trustee to be specifically entitled to the capital gain (paragraph 115-230(4)(b)). Anti-avoidance provisions also apply to exempt entities made presently entitled to trust income, which would include charities that are exempt from income tax under Division 50.
Broadly, the first rule (section 100AA of the ITAA 1936) treats an exempt entity that has not been notified of their present entitlement to income of the trust estate within two months of the end of the income year, as not being presently entitled to that amount (subsections 100AA(1) to (3)). The second rule (section 100AB of the ITAA 1936) applies where an exempt entity's adjusted share of the income of the trust estate exceeds a prescribed benchmark percentage. Where this occurs, the exempt entity is treated as not being presently entitled to the 'excess' (subsections 100AB(1) and (2). Under both rules, the trustee is assessed under section 99A of the ITAA 1936 on that share of the trust's taxable income that corresponds to the share of the income to which the beneficiary is treated as not being presently entitled (subsections 100AA(3) and 100AB(2) of the ITAA 1936). These anti-avoidance rules will not apply as:
(a) the trustee of the Charitable Trust will meet the notification requirements in subsection 100AA(1) for any exempt entity they make presently entitled to the income of the Charitable Trust, unless the Commissioner has exercised the discretion under subsection 100AA(4) of the ITAA 1936, and (b) the benchmark percentage prescribed by section 100AB will not be exceeded unless the Commissioner has exercised discretion under subsection 100AB(5) of the ITAA 1936. The Charitable Trust will not choose to be assessed on a capital gain under section 115-230 for any period covered by the ruling. In summary, apart from when they make a choice to be assessed on the capital gain under section 115-230 or when the anti-avoidance rules in 100AA and 100AB of the ITAA 1936 apply, a trustee will only be assessable on a share of a capital gain to which: • there is no beneficiary specifically entitled to part (or all); and • there is a share of the income of the trust estate to which no beneficiary is presently entitled (after disregarding capital gains to which a beneficiary is specifically entitled) - or there is no trust income.
For a beneficiary to be specifically entitled to a capital gain from a trust, the following two conditions must be met (subsection 115-228(1)): Entitlement condition - the beneficiary must have received, or reasonably expect to receive, financial benefits that are 'referable to the capital gain' (reduced by directly relevant expenses). Recording condition - the beneficiary's entitlement to the amount must be 'recorded in its character' as an amount referable to the capital gain in the accounts or records of the trust. A beneficiary has received an amount if, for instance, it has been credited or distributed to them or paid or applied on their behalf, or for their benefit. A beneficiary can reasonably be expected to receive an amount if, for example: they have a present entitlement to the dollar amount they have a present entitlement to the amount as determined using a precise specified methodology the amount has been set aside exclusively for them the trustee has resolved to pay to them the amount of any gain made on an asset under a proposed sale. Under Clause F of the Model Deed, the Trustees will appoint to the intended beneficiary:
'...as beneficiary entitled to the capital and/or income being portion of the capital and/or income of the Charitable Share as the case may be as hereinafter set out. Clause 2 of the Model Deed will specify the amount appointed to the beneficiary as a sum of money, being: a) proceeds from the sale of securities set out hereunder; b) or a percentage of the proceeds of the sale of the securities as set out hereunder; and/or c) the franked dividends as set out hereunder; d) other income (current, or prior years' income that has been accumulated), as set out hereunder. Clause 3 of the Model Deed will state: a) The Trustees will as of the date of this Deed Poll set aside the amount or percentage so appointed in a separate account in the books of the Charitable Share in the name of the Beneficiary so that the Beneficiary has an immediate vested indefeasible interest in the amount or percentage so appointed and is therefore: i. specifically entitled to the amount or proportionate capital gain arising from the sale of the said securities;
ii. has an equivalent share of the net financial benefit referable to the capital gain arising from the sale of the said securities; iii. absolutely entitled to the discounted portion of the capital gain arising from the sale of the said securities; iv. specifically entitled to the franked distributions in the amounts or proportions indicated and the Beneficiary has an equivalent share of the net financial benefit referable to the franked dividends; and v. presently entitled to the other income included in the amount. b) Subject to the provisions of clause 4 below, the Trustees will as soon as practicable and in any event within two calendar months of the date of this Deed Poll transfer or pay to the Beneficiary the amount so appointed. c) This deed and the appointment hereby effected records the character of the amount attributable to the Beneficiary that is referable to: i. the capital gain arising from the sale of the said securities; and ii. to the franked dividends so appointed.
Where Deed Poll(s) are validly made in accordance with the above terms and by 30 June in the relevant income year, that appoint all the capital gains from the disposal of the shares to specified beneficiaries, those beneficiaries will be taken to be specifically entitled to all the net capital gains from those shares. As the beneficiaries will be taken to be specifically entitled to all of the capital gains from the disposal of the shares you won't be assessed under sections 99 or 99A of the ITAA 1936 on those amounts. And as stated above, nor will you be assessed under section 98 of ITAA 1936. Any other net income derived by the Charitable Trust is not covered by the ruling. If there are amounts of that income to which no beneficiary will be presently or specifically entitled to, this may be assessed to the trustee under section 99A of the ITAA 1936 (or section 99 of the ITAA 1936 if the Commissioner exercises his discretion under subsection 99A(2)). Question 2 Will you be entitled to a deduction under section 30-15 of the Income tax Assessment Act
1997 (ITAA 1997) for the amount paid or distributed to a deductible gift recipient pursuant to a Deed of Appointment made in accordance with Clause 5 (b)(iii) of the Will? Summary No. Detailed reasoning Subsection 30-15(1) provides that entities can deduct a gift in the situations set out in the table in section 30-15. The table sets out who the recipient of the gift can be, the type of gift that can be made, how much can be deducted and any special conditions that apply. Item 1 of the table sets out one of the situations in which a gift can be deducted. Under that item a gift of property must: (a) be made to a DGR that is in Australia (b) satisfy any gift conditions affecting the type of deductible gifts the recipient can receive, and (c) be property that is covered by one of the listed gift types. However, subsection 30-15(2) specifically provides that a testamentary gift or contribution is not deductible under section 30-15. ATO ID 2003/173 Income Tax: Gifts or contributions of money made by an executor under the terms of a will states
The Income tax legislation does not provide a definition of or any specific guidance as to what is meant by the word 'testamentary'. The word therefore bears its ordinary meaning. The Australian Oxford English Dictionary defines 'testamentary' to mean 'of or by or in a will.' The meaning of 'testamentary' was considered by Kekewich J in Re Clemow, Yeo v Clemow [1900] 2 Ch 182. He referred to the Century Dictionary definition of 'testamentary 'as 'relating or appertaining to a will or wills; also relating to administration of the estates of deceased persons.' The term 'will' is defined in the Butterworths Australian Legal Dictionary as: a legal document which a person, the testator, makes provision for an executor to be appointed to administer their estate after their death to discharge liabilities and to distribute property as directed to beneficiaries as specified. A gift made by an executor in accordance with the terms of a will is a testamentary gift or contribution. Consequently, a gift or contribution that is made under will is not deductible under section 30-15 of the ITAA 1997. Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift
(TR 2005/13) explains what is a gift for the purposes of Division 30. Relevantly it states: 12. The term 'gift' is not defined in the ITAA 1997. For the purposes of Division 30 of the ITAA 1997 the word 'gift' has its ordinary meaning. 13. Rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features: • there is a transfer of the beneficial interest in property; • the transfer is made voluntarily; • the transfer arises by way of benefaction; and • no material benefit or advantage is received by the giver by way of return. 14. In doing so, the courts have recognised that the criteria may not be absolute and may involve a matter of degree. 15. In determining whether a transfer is a gift it is necessary to consider the whole set of circumstances surrounding the transfer and this may include consideration of parties other than the giver and the DGR. It is the substance and reality of the transfer that has to be ascertained. It is therefore necessary to take account of those acts, transactions, arrangements and circumstances that provide the context and the explanation for the transfer.
TR 2005/13 further states: 16. The making of a gift to a DGR involves the transfer of a beneficial interest in property to that DGR. 17. It is a requirement that identifiable property has in fact been transferred to the DGR. 18. For there to be a transfer, the property which belonged to the giver must become the property of the DGR. A gift is effectual only where the giver has done everything that is necessary, in accordance with the relevant laws governing the transfer of that kind of property, to transfer ownership to the DGR... 23. In order for a transfer of property to be a gift it must be made voluntarily, that is, it must be the act and will of the giver, and there must be nothing to interfere with or control the exercise of that will. However, a transfer made under a sense of moral obligation is still made voluntarily. 24. A transfer is not made voluntarily if it is made for consideration or because of a prior obligation imposed on the giver by statute or by contract. Clause 5(b)(iii) of the Will provides the Charitable Share to be held
...upon trust for such charitable bodies and purposes within Australia in such shares and subject to such powers and provisions and generally in such manner as my trustee shall by deed appoint provided that one of the charitable bodies to benefit will be Charity A...' You are a trust established under clause 5(b)(iii) of the Will to hold the Charitable Share on trust for charitable bodies and are accordingly a testamentary trust. The beneficiaries of the Charitable Trust are charitable bodies with purposes within Australia, including Charity A. While a distribution from a trust to a beneficiary is commonly referred to as a gift, in FC of T v Carter & Ors 2022 ATC 20-822, Edelman J., observed at [40] that a trust is not the equivalent of a common law gift:
41... That premise ignores a fundamental difference between common law property rights and equitable rights under a trust. A gift at common law, such as a gift of a chattel, will involve a transfer of rights. But a declaration of trust involves a creation of equitable rights and obligations, not a transfer of rights [45]: " it is fundamental that the creation of a trust involves the creation of new equitable obligations, which are ' annexed to the trust property ' or ' engrafted ' or ' impressed upon it ' " [46]. As Maitland explained more than a century ago, it is because the creation of equitable rights does not involve the transfer of any property rights that the law of trusts does not contradict basic principles of the common law of property. When a beneficiary is presently entitled to an amount from a trust estate, it has an equitable right to that amount. That is, the beneficiary has rights in equity. The payment of money to the charitable trust merely satisfies its equitable entitlement.
The case authorities make it clear that for a transfer of property to be a gift it must be made voluntarily. A transfer will be voluntary if it is 'the act and will of the disponor and there was nothing to interfere with or control the exercise of that will' ( Cyprus Mines Corporation v. Federal Commissioner of Taxation 78 ATC 4468 at 4481; (1978) 9 ATR 33 at 48). Explanatory Memorandum to Taxation Laws Amendment Act (No. 3) 1998 states at [3.15]: Broadly speaking, these payments or transfers constitute a 'gift' where they are made without legal obligation, by way of benefaction and without any advantage of a material character being received in return. Clause 6(a) of the Will provides that the trustee may 'sell, call in and convert any property into money or postpone the sale calling in and conversion or retain any property in the same state of investment...' Once the shares are vested in you as trustees of the Charitable Trust, you contemplate realising them over time and appointing and paying various cash amounts amongst a number of charitable bodies.
You expect that the Charitable Trust may be maintained over several years until all of the funds are appointed and distributed to the chosen charities. Accordingly, it is not a perpetual trust. It is anticipated that many of those charities will be deductible gift recipients (DGRs). The Will prescribes that: (a) the remaining share be held for the benefit of Charitable bodies, (b) in such shares and subject to such shares as the trustee shall by deed appoint (c) provided one is for the benefit of the named charity. The terms of the Will impose an obligation on you, as the Trustee of the Charitable Trust, to apply the 'remaining share' to the benefit of Charitable bodies, including the named charity. The Will controls the exercise of the trustees powers and imposes an obligation on the trustees to act in accordance with the Will in making the Deed of Appointments for the benefits of charitable bodies. The acts of the Trustees in appointing amounts to charitable bodies are not voluntary. They are acts in carrying out their obligations as the Trustees in accordance with the Will.
Accordingly, for the reasons stated above, you do not make a voluntary gift as your actions are controlled by the Will and you have an obligation under the Will to make the donations to Charitable bodies with purposes in Australia, including Charity A. Accordingly, you do not make a gift for the purposes of Division 30 when you make a payment or a distribution to a DGR in accordance with the Will and thus such a payment/distribution is not deductible under section 30-15.