Corporate trustee - assessable income

1 Is an amount of the trust's net income for the XXXX income year included in the unitholders' assessable income under section 97?

No Question 2 Is the company, in its capacity as trustee of the trust, assessable and liable to pay tax on the trust's net income for the XXXX income year under subsection 99A(4)? Answer Yes Question 3 Are the deed administrators required to retain tax or other amounts from income, profits, or gains derived by the trust under section 254? Answer No This ruling applies for the following period: 1 July XXXX to 30 June YYYY

1.          The trust has X unitholders. 2.          None of the trust's unitholders are under a legal disability. 3.          The trust wasn't established under any court order, will, codicil, intestacy, or for a bankruptcy, wasn't administered under Part XI of the Bankruptcy Act, and its property wasn't of a kind reference in paragraph 102AG(2)(c) of the ITAA 1936 (broadly about compensation from damages, death, family breakdowns etc). 4.          The company is the corporate trustee of the trust. 5.          The trust acquired real property. 6.          The company, in its capacity as trustee for the trust, began to develop the property. 7.          The company, in both its personal capacity and in its capacity as trustee of the trust, refinanced an existing secured loan facility by entering a secured loan facility with Secured Creditor A. (We call this arrangement the Pre-Appointment Facility.) 8.          Secured Creditor A enforced its security by appointing voluntary administrators for the company.

9.          The administrators entered a funding and indemnity arrangement with Secured Creditor A to allow them to continue the development project uninterrupted while the administrators completed a sale or recapitalisation process. (We call this arrangement the Post-Appointment Facility. ) 10.       A creditors meeting resolved that the company would execute a DOCA proposal from Secured Creditor A. 11.       The company and its creditors executed the DOCA and appointed the administrators as deed administrators (under Part 5.3A of the Corporations Act ). 12.       The applicant gave us a copy of the DOCA. We'll treat the DOCA as being incorporated into these facts in full, but we'll paraphrase a few relevant clauses for convenience in Table 1. (The full terms prevail over Table 1 if there's any inconsistency.) Table 1: relevant clauses in the DOCA Parties The company, both in its personal capacity and its capacity as trustee. The administrators/deed administrators. Secured Creditor A. Effect of deed and persons bound The DOCA is binding on and effective on the deed effective date (the date the DOCA is executed by the last of the parties).

The DOCA binds Secured Creditor A, the administrators/deed administrators, all creditors, the company, and all members and officers. Secured creditors who vote in favour of the DOCA are bound from the deed effective date. Otherwise, nothing in the DOCA restricts or otherwise affects any secured creditor's right to realise or otherwise deal with the security. While the DOCA is in force, no creditor, officer, or member may seek to wind up the company, take action against property, seek to enforce a guarantee, or exercise any right against the company, or take action to recover a claim, except with leave from a court. Deed fund Secured Creditor A commits to make a deed fund available, comprised of: •       $X to pay the amounts under clause X <to the deed fund creditors> •       the amount required to be paid under clauses X <trading costs and liabilities in the administration period; administrator's and deed administrator's costs and remuneration; priority employee creditors>. Distribution and release of claims The deed fund can be distributed in this order. 1.     trading costs and liabilities of the company for the administration period*

2.     administrator/deed administrator's costs and remuneration 3.     priority employee claims 4.     deed fund creditors to the extent that the fund pool amounts are available to the pool fund creditors If there's any surplus after all deed fund creditors have received 100 cents in the dollar on admitted claims, and the deed administrators haven't made an indemnity claim, then the surplus can be paid: 5.     first, to the first ranking secured creditors 6.     second, to the members of the company (as an equity return). *administration period means from the date the company entered administration to the date the DOCA was executed. Release of creditors' claims) All creditor claims are released, discharged, and extinguished in full. The company can plead the DOCA as an absolute bar/defence to a creditor claim. Anyone who doesn't prove a claim is taken to have abandoned it. Nothing in the DOCA affects the rights of owners or lessors of property. Nothing in the deed affects the company's liability to a secured creditor to the extent permitted by the Corporations Act . For the avoidance of doubt: •       nothing in the deed affects any claim or security interest of Secured Creditor A

•       all Secured Creditor A's rights in the company's property are expressly preserved •       nothing in the DOCA affects any claim of Secured Creditor A or the head builder for the development project •       the net sale proceeds will be applied as a priority to satisfy all amounts owed by the company to Secured Creditor A. 13.       The DOCA resolved all the company's outstanding liabilities at the appointment date, except for secured debts it owed to Secured Creditor A and to the head builder for the development project. 14.       The trust completed the development project. 15.       The trust's subsidiary started operating certain activities at the developed premises, but the deed administrators don't expect the subsidiary to derive material profits over the ruling period. 16.       The deed administrators sold the property for about $X in the XXXX income year. 17.       In the XXXX income year, the trust also received about $X from a builder commercial settlement and expects to treat this amount as assessable income. 18.       The trustees applied (or will apply) the property sale proceeds and commercial settlement proceeds (together totalling about $X million) this way.

•            They paid $X million to Secured Creditor A for principal and accrued interest under the secured Pre-Appointment Facility and Post-Appointment Facility. •            They will release the $X million held on trust (to pay costs for rectifying defects under the sale contract) 12 months from practical completion to the extent the purchaser doesn't make claims against it under the sale contract. •            They will retain $X million to settle actual and forecast trading liabilities (we call these the retention funds ). •            They will remit any residual proceeds from the retention funds to Secured Creditor A and apply them against the secured Pre-Appointment Facility and Post-Appointment Funds. 19.       Secured Creditor A' loan statement at 30 June XXXX suggests the trust owed Secured Creditor A about $X million under the combined secured Pre-Appointment Facility and Post-Appointment Facility loans. The deed administrators expect this outstanding amount to grow to $X million by the end of the ZZZZ calendar year after applying certain accrued fees and charges the administrators incurred during the term of the facilities. (We call all these amounts the

Gross Exposure. ) 20.       After effecting the DOCA, liquidating the company, and winding up the trust, the deed administrators expect to realise all trust assets and use the funds to partly repay the trust's secured debt owing to Secured Creditor A. 21.       The trust's assets will be insufficient to pay the secured debt, and the deed administrators expect that Secured Creditor A will write off any remaining debt. 22.       The trust's net position shortly before 30 June XXXX was about a $X million deficit after deducting accrued unpaid and forecast administration trading liabilities of $X million and the Gross Exposure. 23.       On 30 June XXXX, the deed administrators, on behalf of the company in its capacity as trustee for the trust, executed a resolution. The deed administrators resolved that, under clause X of the trust deed: •            the trustee should determine the net income of the trust for the XXXX income year to be nil •            no interim or final distribution will be made to any holder for the XXXX financial year. 24.       The trustee hasn't appointed an auditor and the holders haven't requested the trustee to appoint an auditor.

25.       The applicants gave us a copy of the trust deed. We'll treat the trust deed as being incorporated into these facts in full, but we'll paraphrase a few relevant clauses for convenience in Table 2. (The full terms prevail over Table 2 if there's any inconsistency.) Table 2: trust deed summary Topic and clause Details Definition of net income 'Net income' for a financial year means the net income of the trust fund calculated under accounting standards. Unit trust The beneficial interest of the trust is divided into units. Trust income and losses (a)   The trustee must collect all rent, fees, interest, and other income of the fund, including the income of any business carried on by the trustee. (b)   The trustee may apply the income of the trust to, or to make provision for, any accounting loss incurred or which, in the trustee's reasonable opinion, may be incurred.

(c)   The trustee may, with the prior consent of all holders, accumulate all or any part of the net income of the fund for a financial year, and the amount of any accumulation will be dealt with as an accretion to the fund, but such that the trustee may at any time pay or apply the whole or any part of the accumulation as if it were income of the fund. Obligation to distribute net income The trustee must distribute the net income to holders within X days (to the extent it hasn't been distributed under clauses about redemption or interim distributions, or accumulated), proportionately to their number of units. Trustee's power to characterise amounts as income or capital Clause X allows the trustee to determine the type or source of income to be included in distributable income or capital, including any amounts with separately identifiable taxation consequences. (e.g. dividends, foreign tax credits, capital profits or gains, exempt income, Australian source, foreign source, etc.)

Clause X allows the trustee to make any accounting provision it considers proper, and to identify and distinguish whether any receipt, outgoing money, or investment is on capital account or is included in net income. (If an auditor has been appointed, the trustee must act on the auditor's advice.) Right/obligation to appoint an auditor Clause X allows the trustee to appoint an auditor, and requires it to appoint an auditor if the holders request it. Assumptions •       After calculating the trust's net income for the income year ended 30 June XXXX under Australian accounting standards, and after applying accounting losses from previous periods, the trust's net income was less than or equal to zero. •       The trust will have no funds remaining after the deed administrators pay all secured creditors.

Income Tax Assessment Act 1936 Section 95 Section 97 Section 99 Section 99A Section 254

Question 1 Is an amount of the trust's net income for the XXXX income year included in the unitholders' assessable income under section 97? Answer No Summary 26.       Broadly, section 97 can only assess beneficiaries on a share of the trust's net income (under section 95) where they are presently entitled to a share of the income of the trust estate (or distributable income). 27.       We're satisfied that the trust deed authorises the trustee to reduce accounting profits by losses from previous periods when determining distributable income, and we've assumed that the trust's distributable income will be nil after applying losses in that way. 28.       If the trust's distributable income is nil, the beneficiary's share of distributable income must also be nil, so section 97 can't apply to include any amount in a beneficiary's assessable income. Explanation Presently entitled beneficiaries include a share of the trust's section 95 net income in their assessable income, determined by their share of the trust's distributable income.

29.       Under section 95, the net income (of a trust estate) means the total assessable income of the trust estate calculated as if the trustee were a taxpayer, less allowable deductions. 30.       Section 97 includes a share of the net income of the trust estate in the assessable income of a beneficiary where the beneficiary isn't under a legal disability and is presently entitled to a share of the income of the trust estate. 31.       TR 2012/D1 [1] gives the ATO view on the meaning of 'income of the trust estate' in Division 6. We'll paraphrase some relevant points. •            In the Division 6 context, 'income of the trust estate' means the net amount of income available for distribution to beneficiaries or accumulation, often known as 'distributable income'. [12] •            Regardless of how a trust deed defines income, 'income of the trust estate' for Division 6 purposes is capped at the net accretion to the trust estate for the period. Income of a trust estate can't be more than accretions to the trust estate, less unallocated accretions, less depletions chargeable against income. [13] 32.       TD 2012/22 [2]

gives the ATO view about the proportionate approach to working out a beneficiary's share of the net income of the trust estate. It says the beneficiary must: •            calculate how much of the income of the trust estate they are (or are taken to be) presently entitled to, as a percentage share of that income, and •            apply that percentage to the net income of the trust estate. Here, the beneficiaries have no share of the trust's net income under section 97 because the trust had no distributable income to distribute to them. 33.       Under the trust deed, net income means net income calculated under accounting standards. 34.       However, the trust deed contains several clauses that may authorise net income to depart from accounting standards. •            Paragraph X says the trustee must apply the income of the trust to, or to make provision for, any accounting loss incurred or which, in the trustee's reasonable opinion, may be incurred.

•            Paragraph X says the trustee may determine the type or source of income or capital to be paid or applied under clause X (for example, franked or unfranked dividends, or any amounts with separately identifiable taxation consequence or benefits attached). •            Paragraph X says the trustee may identify and distinguish whether any receipt, outgoing money, or investment is on capital account or is included in net income. 35.       Therefore, determining whether the deed administrators correctly calculated or determined the trust's net income (as in trust income or distributable income) may depend both on accounting standards and the scope of the trustee's power to characterise amounts under the trust deed. 36.       We're satisfied that paragraph X allows the trustee to reduce accounting profits by accounting losses from previous periods when determining net income. •            The words authorising the trustee to apply the income of the trust to any accounting loss incurred are consistent with this being a step in determining net income.

•            If it simply meant that the net income didn't need to be distributed to beneficiaries to the extent that it could be applied against a previous loss, we think it would have used clearer language. •            Paragraph X isn't limited to accounting losses of the current accounting period and doesn't expressly exclude previous periods. •            Therefore, we think the trustee can rely on paragraph X to reduce a current year accounting profit by previous year accounting losses when determining net income. 37.       We've assumed that after applying accounting losses from previous accounting periods, the trust's net income for the XXXX income year will be less than or equal to zero. 38.       With that assumption, since paragraph X allows the trustee to reduce current year accounting profit by previous year accounting losses when determining net income, it follows that there was no net income for the XXXX income year. 39.       This means the beneficiaries can't be assessed under section 97.

•            A beneficiary works out their section 97 share by first, calculating their entitlement to distributable income (income of the trust estate) as a percentage share, and second, applying that percentage to the section 95 net income. (See TD 2012/22) •            Here, there's no distributable income (as net trust income is nil or negative), so there's no entitlement to a share of distributable income. •            Section 97 turns on the presently entitled beneficiary having a share of distributable income. •            If there's no distributable income, whatever the section 95 net income, the section 97 assessment must also be nil. (Section 95 net income multiplied by 0% = $0) Question 2 Is the company, in its capacity as trustee of the trust, assessable and liable to pay tax on the trust's net income for the XXXX income year under subsection 99A(4)? Answer Yes Summary 40.       Broadly, section 99A assesses the trustee on net income of a trust estate that hasn't been assessed to a trustee or beneficiary under sections 97, 98, or 99.

41.       Section 99A applies here. Sections 97 and 98 won't apply because no beneficiary is presently entitled to distributable income. The trust doesn't fall in a category of trust estate that could be covered by section 99. It follows that any section 95 net income must be assessed under section 99A. Explanation The trustee will be assessed on any section 95 net income under section 99A rather than section 99. 42.       Sections 99 and 99A assess the trustee for net income of a trust estate that: •            isn't assessed to a beneficiary under section 97 •            isn't assessed to the trustee under section 98 •            doesn't represent income to which a beneficiary is presently entitled that's 1) attributable to a period when the beneficiary wasn't a resident, and 2) also attributable to sources outside Australia. 43.       Section 98 assesses trustees in several circumstances. •            First, under subsection 98(1), where a beneficiary under a legal disability is presently entitled to a share of the income of the trust estate.

•            Second, under subsection 98(2), where a beneficiary is deemed presently entitled to a share of the trust estate under subsection 95A(2), [3] but not under a legal disability. •            Third, under subsections 98(2A) and (3), if a non-resident beneficiary is presently entitled to a share of income of the trust estate. •            Fourth, under subsection 98(4), where another trust estate, which has a non-resident trustee, is presently entitled to a share of income of the first trust estate. 44.       These threshold conditions for sections 99 or 99A to apply are met. •            We concluded in Question 1 that no amount will be assessed to a beneficiary under section 97. •            The trustee won't be assessed under section 98. Subsections 98(1), (2), (2A), and (4) all depend on a beneficiary being presently entitled to a share of the income of a trust estate. Section 98 can't apply for the same reason that section 97 can't apply: if there's no distributable income (or income of the trust estate), no beneficiary can be presently entitled to a share of that distributable income.

•            The facts don't disclose that any trust income could be attributable to foreign sources. 45.       Broadly, section 99A assesses the trustee at the top marginal rate, while section 99 applies standard marginal rates. [4] 46.       Section 99 only applies where section 99A doesn't apply: see subsection 99(1). 47.       Section 99A doesn't apply to certain prescribed trust estates where the Commissioner forms the opinion that it would be unreasonable for section 99A to apply. The prescribed types of trust estates, in subsection 99A(2), includes trust estates that resulted from a will, consists of a bankrupt estate, or property deriving from the investment of certain compensation payments listed in paragraph 102AG(2)(c). 48.       Section 99A will apply rather than section 99. The facts say the trust wasn't established under a will, bankrupt estate, court order, and doesn't consist of property referenced in paragraph 102AG(2)(c). Therefore, there's no scope for the Commissioner to form the opinion under subsection 99A(2) that section 99A shouldn't apply.

49.       Since none of sections 97, 98, and 99 apply, any section 95 net income will be assessed to the trustee under section 99A. Question 3 Are the deed administrators required to retain tax or other amounts from income, profits, or gains derived by the trust under section 254? Answer No Summary 50.       Broadly, the ATO view is that an agent or trustee's obligations to retain under section 254 is limited to the amounts the Commissioner is authorised to be paid under general law priority rules. 51.       On the facts of this ruling, there will be no residual sale proceeds after Secured Creditor A has enforced its security as a secured creditor. 52.       Since we're satisfied that Secured Creditor A will rank ahead of the Commissioner under general law priority rules, the trustee has no obligation to retain under section 254. Explanation Section 254 requires agents and trustees to retain money they receive in their trustee capacity to pay tax liabilities, but generally only from what remains after paying secured creditors.

53.       Paragraph 254(d) requires agents and trustees to retain money to pay tax liabilities. Read in the context of section 254, it authorises and requires every agent and every trustee to retain out of any money, coming to him or her in a representative capacity, so much as is sufficient to pay tax which is or will become due in respect of income, profits, or gains (derived by him or her in a representative capacity). 54.       Section 6 gives an extended definition of trustee, that includes: •            an executor or administrator, guardian, committee, receiver, or liquidator, and •            every person having or taking the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control, or management of the income of any person under any legal or other disability. 55.       ATO ID 2003/506 [5] says a company administrator appointed under Part 5.3A of the Corporations Act is a trustee under paragraph (b) of the definition, as a person acting in any fiduciary capacity. 56.       TD 2021/5 [6]

explains the Commissioner's view of a receiver's obligation to retain money under section 254 where the entity has an assessed post-appointment tax liability. •            TD 2021/5 at paragraph 2 says where income, profits, or gains of a capital nature are derived by an entity through the actions of a receiver acting as the entity's agent, the receiver must retain enough money to pay the tax that has been assessed. •            Examples 1 and 2 of TD 2021/5 are about the obligations for a receiver appointed by a secured creditor when selling secured property. Paragraphs 8 and 15 say that where the Commissioner doesn't have a right to be paid before a secured creditor, the receiver's obligation to retain under paragraph 254(1)(d) is limited to sale proceeds after meeting any secured debts. •            Paragraph 20 says where the receivers actions create a primary tax liability, section 254 creates a secondary liability, limited to the amount the receiver must retain under paragraph 254(1)(d).

•            Paragraph 25 of TD 2021/5 says if the Commissioner has no enforceable right to be paid before a secured creditor, then the receiver's obligation under section 254 relates only to the amount that the Commissioner is entitled to be paid after the secured creditors are paid. It adds that if, on the particular facts, the amount is zero, there is no obligation to retain. 57.       Following ATO ID 2003/506, the deed administrators would be trustees under the extended definition in section 6. 58.       This means that whether the deed administrators have an obligation to retain depends on whether the Commissioner has an enforceable right to be paid before Secured Creditor A. 59.       We're satisfied that Secured Creditor A ranks ahead of the Commissioner on these facts. Secured Creditor A is a secured creditor, and the Commissioner is an unsecured creditor. We see nothing in the DOCA that waives or extinguishes Secured Creditor A's right to enforce its security, and clause X of the DOCA expressly preserves that right. Nothing in the facts and circumstances of the scheme suggest Secured Creditor A has waived or extinguished its security rights or its position as creditor.

60.       The deed administrators have no obligation to retain. Secured Creditor A is entitled to be paid ahead of the Commissioner. No funds will remain after Secured Creditor A is paid. Following the approach in TD 2021/5, on these facts, there's no obligation to retain under section 254. > [1] Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions. [2] Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled? [3] This deeming applies where a beneficiary has a vested and indefeasible interest in any income of the trust estate but isn't presently entitled to that income. [4] See Income Tax Rates Act 1986 subsections 12(6) and 12(9), read with Schedule 10. [5] ATO Interpretative Decision ATO ID 2003/506 Income tax: Taxation obligations of company administrators. [6] Taxation Determination TD 2021/5

Income tax: a receiver's obligation to retain money for post-appointment tax liabilities under section 254 of the Income Tax Assessment Act 1936.