Will the Commissioner exercise the discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936), to tax the net income of the trust estate to which no beneficiary is presently entitled under section 99, for the income years ended DD MM YYYY to DD MM YYYY?
Yes. This ruling applies for the following periods : Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY Year ending DD MM YYYY The scheme commenced on: DD MM YYYY
This description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are: • Your Private Binding Ruling ('PBR') Application dated DD MM YYYY; • The email from the ATO on DD MM YYYY; and • The email to the ATO from XX (and attachments dated DD MM YYYY). The Late XX (the Deceased) died on DD MM YYYY. The Will of the Deceased (the Will) was dated DD MM YYYY (Copy provided). Probate was granted in respect of the Will on DD MM YYYY (Copy provided). The deceased's brother XX and the deceased's husband XX were appointed to be executors and trustees (the Trustee) in accordance with Clause XX of the Will.
Pursuant to Clause XX of the Will I give devise and bequeath the whole of this rest and residue of my real and personal estate of whatsoever nature and - wheresoever situate unto my trustees upon trust to pay my debts funeral and testamentary expenses and State and Federal probate duty and to invest the residue upon such investments as are by the law authorised and also upon such investments as my trustees shall in their absolute discretion think fit including shares in any Companies in which any money of mine may be invested at the date of my death with power to transfer or vary the same as they see fit. Pursuant to Clause XX of the Will I direct my trustees to stand possessed of the said investments upon trust -
(a) As to income to pay the income derived from the said investments in equal shares jointly to such of them my children as shall be living at my death during their respective lives. In the event of any child of mine predeceasing me leaving issue surviving me such issue shall take (and if more than one in....equal shares between them) the share in income which their parents [illegible]. In the event any child of mine dying after me but before the time hereinafter specified for the division of Corpus leaving issue her or him surviving such issue shall take (and if more than one in equal shares between them) the share in income which her or his parent would have been entitled to take has she or he continued to live. (b) As to Corpus to hold the said investments in trust for the children of my children (i.e. my grandchildren) living at the death of the survivor of my children per capita as tenants in common in equal shares.
Pursuant to Clause XX of the Will I declare that out of the income of the presumptive share of each child of mine who shall be under the age of 21 years mu trustees shall pay to my husband during his life the annual income to which such child would be entitled were he or she 21 years of age for the maintenance education or otherwise for the benefit of such child for the time being under age and in case of my husbands decease my trustees for the time being...shall pay or apply such income for the like purposes and may pay the same to any person or persons with whom such child may be living or by whom he or she may be maintained without any liability to account for the same and the surplus income (if any) of each minor childs share shall be accumulated in such mode of investment as herein authorised for trust funds and added to the original share but with power to my trustees to apply any part of such accumulation for the maintenance education or otherwise for the benefit of such child. A Trust Income Tax Return has been lodged by the Trustee for the income year ended DD MM YYYY.
We requested further information in our email DD MM YYYY. In our email we also asked you to, among other things confirm that: • The assets held by the Trustee consist of: assets vested in them that were assets of the Late XX; cash earned from holding those assets; and • The assets held by the Trustee do not consist of: investments in any private companies or private trusts; other assets acquired at non-arm's length value; or loans related to related parties In your email dated DD MM YYYY you have stated that for the year ended DD MM YYYY: a) The Trust's listed All Current Liabilities of $xxx relates to unpaid present entitlements as at DD MM YYYY owing to the income beneficiary totalling $yyy and a provision for the income tax liability of $xxx. The UPE owing to the beneficiary was paid on DD MM YYYY. 11. Certain Assumptions have been made for the purpose of making this private ruling.
Income Tax Assessment Act 1936 Section 99 Income Tax Assessment Act 1936 Section 99A Income Tax Assessment Act 1936 Subsection 99A(2) Income Tax Assessment Act 1936 Paragraph 99A(2)(a) Income Tax Assessment Act 1936 Subparagraph 99A(2)(a)(i) Income Tax Assessment Act 1936 Subsection 99A(3) Income Tax Assessment Act 1936 Paragraph 99A(3)(a) Income Tax Assessment Act 1936 Paragraph 99A(3)(b) Income Tax Assessment Act 1936 Paragraph 99A(3)(c) Income Tax Assessment Act 1936 Subsection 99A(3A) Income Tax Assessment Act 1936 Paragraph 102AG(2)(c)
Summary After consideration of the relevant factors, the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the Trust in relation to the income years ended DD MM YYYY to DD MM YYYY. Therefore, the Commissioner will exercise the discretion, under subsection 99A(2) of the ITAA 1936 to allow section 99 to apply where the Trustee of the Trust is liable to pay tax on income to which no beneficiary is presently entitled during the income years ended DD MM YYYY to DD MM YYYY. Detailed reasoning The relevant legislation Under subsection 99A(2) of the ITAA 1936, section 99A will not apply to the net income of a resident trust estate retained by certain trust estates where the '... Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income...'.
Instead section 99 of the ITAA 1936 will apply to that net income such that the net income of the trust will be taxed at the progressive rates applicable to certain individuals rather than at the flat top marginal tax rate (although, the availability of the tax-free threshold is only available to trustees of trusts where the relevant person died less than 3 years before the end of the relevant year of income). In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936. The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a)). In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matter subsections 99A(3) and (3A). These provide: 99A(3)
In forming an opinion for the purposes of subsection (2): (a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised; (b) if a person who has, at any time, directly or indirectly: (i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or (ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised; has not, at any time, directly or indirectly: (iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or
(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised; the Commissioner shall have regard to that fact; and (c) the Commissioner shall have regard to such other matters, if any, as he or she thinks fit. 99A(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose. Application of the legislation to the facts The Trust was created under the terms of the Will of the Late XX (dated DD MM YYYY) and is considered to be a 'trust estate ... that resulted from a will' for the purposes of subparagraph 99A(2)(a)(i) of the ITAA 1936. The Trustee has had retained net income during the income year ended DD MM YYYY.
The Trustee may retain net income in respect of an income year included in the Ruling Period. This net income will fall to be assessed to the Trustee under section 99A of the ITAA 1936 unless, '... the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.' (subsection 99A(2)) In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matters in subsection 99A(3) and 99A(3A). Consideration of paragraphs 99A(3)(a) and (b) of the ITAA 1936 You have advised that the income of the Trust during the income year ended DD MM YYYY ($xxx) consisted of interest, dividends and capital gains. Consideration of paragraph 99A(3)(c) of the ITAA 1936 In the current circumstances the 'other matters' that are considered to be relevant for the purposes of forming an opinion for the purposes of subsection 99A(2) of the ITAA 1936 are encapsulated by the matters enunciated by Member Thompson in Case A50 ((1969) 69 ATC 288).
Broadly, these matters involve the Commissioner having regard to the objects of the section in protecting, on the one hand, the revenue against tax avoiding devices and the interests of taxpayers generally in the equal distribution of the tax burden and, on the other hand, the right of the subject to make legitimate and reasonable family and business arrangements. Each of these matters will be considered in turn: The Revenue should be protected against tax avoiding devices: In considering whether to exercise his discretion under subsection 99A(2) of the ITAA 1936, the Commissioner must have regard to preventing the use of trusts for tax avoidance, in particular by allowing the lower tax rate under section 99 to apply to trusts that have a tax avoidance purpose. In this case, the Trustee has not used, and will not use, his powers under the Trust to avoid tax. The interests of taxpayers generally should be protected:
In considering the exercise of the discretion in subsection 99A(2) of the ITAA 1936 the Commissioner will consider whether the type of arrangement under consideration may cause the tax burden to fall unevenly on taxpayers. The discretion is to be exercised in way that will discourage arrangements that would otherwise result in tax avoidance. In this case, the Trustee has exercised, and will exercise, his powers under the Trust in a conventional manner (and not as a tax avoidance device). The right of the subject to make legitimate and reasonable arrangements relating to family and business matters should be protected: The Trust's assets consist of assets owned by the Deceased when they died. The Trust is being, and will be, administered by the Trustee in a conventional manner. Arrangements which are for the good of the public generally should not be discouraged: The Trust is not a trust of the type that is relevant to this matter. Trusts which arise out of the exercise of a public duty should not be penalised: The Trust is not a trust of the type that is relevant to this matter. Surrounding circumstances to also be considered In Case A50
Thompson suggested that [at 302 and 303], in the process of forming an opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner should undertake, '[a] wide survey and close scrutiny of all the surrounding circumstances , including, but not by any means limited to' [emphasis added]: • an examination of the terms of any relevant instrument; • the manner in which those terms have been or are capable of being implemented; • the circumstances under which the trust is called into being; • the overall effect achieved or sought to be achieved upon the tax affairs of all parties directly or indirectly affected by the trust; and • and the manner in which the arrangement is administered. In relation to these 'surrounding circumstances' it is noted that: • the Trust is a testamentary trust that resulted from the Will of the Late XX dated DD MM YYYY. Conclusion as to whether it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of the income years ended DD MM YYYY to DD MM YYYY inclusive
The matters that are considered to be particularly relevant to forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 are: • The Trust resulted from a will and satisfies the requirement of paragraph 99A(2)(a). • In the income years ending DD MM YYYY to DD MM YYYY: The Trust Deed will not be amended. The Trustee will retain an amount of trust income. Tax has not been, and will not be, avoided by the exercise of the powers available to the Trustee under the Will. The Trust has been, and will be, administered in a conventional manner by the Trustee and not as a tax avoidance device. The Trustee has not, and will not enter into arrangements beyond the purpose for which section 99 was retained in the ITAA 1936 of a type that the Commissioner will seek to discourage. • The property of the Trust will only consist of: property vested in the Trustee (that was vested in the Executor of the Estate of the Late XX and listed in the inventory of property annexed to the Grant of probate document) under the terms of the Last Will and Testament of the deceased individual;
property that represents accumulations of income or capital from property that satisfies the requirement in (i); property from the sale of these assets of the Trust; property from the re-investment of property that satisfies the requirement in (iii); and • The assets held by the Trustee will not consist of: investments in any private companies or private trusts; other assets acquired at non-arm's length value; or loans provided to related parties. • The distributions of income to the beneficiaries of the Trust will be paid out, or applied, to the relevant beneficiary within 2 years of the end of the relevant income year. • The Trustee will not avoid tax by exercising the powers available to them under the terms of the Trust Deed. Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A to apply to the Trust in respect of the income years ending DD MM YYYY to DD MM YYYY.