1 Will section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the distribution made to you from the Testamentary Trust?
Yes Question 2 Will the exception in subsection 99B(2)(a) apply to all of the distribution made to you from the Testamentary Trust? Answer No Question 3 Will the exception in subsection 99B(2)(a) apply to part of the distribution made to you from the Testamentary Trust? Answer Yes This ruling applies for the following period : Year ending 30 June 2023 The scheme commenced on: 15 February 1990
1. You are a resident of Australia for tax purposes and have lived in Australia since 20XX. 2. Your parent, Person A, a New Zealand resident, passed away on XXXX. 3. Person A had a Will dated XXXX and probate was granted on XXXX. 4. The original trustees of the Person A estate and of the Testamentary Trust created as part of their Last Will and Testament were Person B, and the Corporate Trustee. 5. Clause 5 of Peron A's Last Will and Testament created the Testamentary Trust. 6. Person B was Person A's spouse. 7. Person B did not remarry following Person A's death. Person B passed away in October 20XX. 8. Person A and Person B had three children, Person C, Person D, and you. You are all beneficiaries of the Testamentary Trust. 9. Person B was not replaced as a trustee of Testamentary Trust upon their passing. 10. The sole trustee of the Testamentary Trust following Person B's passing was the Corporate Trustee. 11. Under clause 5(a) of the Testamentary Trust, during their lifetime and as long as they remained a widow, Person B was entitled to the net annual income of the Testamentary Trust.
12. Under clause 5(b) of the Testamentary Trust, following Person Bs death, you, Person C, and Person D were entitled to share equally as tenants in common in the assets and income of the Testamentary Trust. Assets and Liabilities of the Testamentary Trust 13. The statement of Assets and Liabilities of Person A as at the date of their death sets out their net asset position as $X,XXX, XXX. 14. The Trustee of the Testamentary Trust, being the Corporate Trustee, did not maintain digital records of the financial information in relation to the Testamentary Trust between the date of Person A's death, and XXXX. 15. You have been unable to locate any information in relation to the assets and income of the Testamentary Trust for the period XXXX to XXXX. 16. As at XXXX the assets of the Testamentary Trust totalled $XXX,XXX. 17. As at XXXX, based on the Statement of Assets and XY, the Testamentary Trust held X number of shares. 18. Based on the Assets and Liabilities statement, the shares had a value at the date of death of $XXX,XXX.
19. The trustee of the Testamentary Trust have already, or intend to, sell all the shares (and other non-cash assets) held in the Testamentary Trust and convert same into cash. Thereafter the distribution to be made to you and the other beneficiaries will be made wholly in the form of cash. 20. Partial records are available of some shareholdings of XY which indicates that shares were either transferred to the Testamentary Trust and sold between XXXX and XXXX by the Trustees of the Testamentary Trust or sold between XXXX and XXXX with the proceeds contributed to the Testamentary Trust. 21. Based on the Assets and Liabilities Statement, the shares had a value at the date of death of $XXX,XXX. 22. As at the date of Person A's death they were also recorded as holding $XXX,XXX of Government Stock at 10% due to mature on XXXX. The value of these bonds as at the date of Peron A's death was $XXX,XXX. For the year ended XXXX the financial statements for XY indicates that some of the bonds appear to have been rolled over, with one redeemed.
23. There are also understood to have been other assets of Person A as at the date of their death that may have been contributed to the Testamentary Trust, however there is insufficient information to substantiate these assets or their value. 24. A vehicle was listed as an asset of the Testamentary Trust and having a market value of $XX,XXX. However, it appears that the vehicle was transferred to you, Person C and Person D in equal shares in XXXX. This would be considered an amount of the corpus of the Testamentary Trust previously distributed to the beneficiaries. 25. The investment listed, which included X,XXX "A" class shares, was also distributed during XXXX. As such that amount is not considered to be available as a corpus distribution in a subsequent period. 26. As at XXXX the Testamentary Trust has a value of $XXX,XXX. As a one third beneficiary, you are entitled to $XXX,XXX. 27. The trustee of the Testamentary Trust is expected to satisfy your entitlement by resolving to distribute specific amounts of trust corpus to you. The trustees' resolution is expected to express your entitlement to a corpus distribution by specifying the amounts set out in this ruling.
Assumptions 28. A X% interest in cash held in a joint term deposit totalling $XXX,XXX (including accrued interest) is assumed to have been transferred directly to Person B at some time between the date of Person A's death and the date of Person B's death, and was not transferred into the Testamentary Trust. This distribution reduced the net assets of the estate to at least $X,XXX,XXX. 29. It is assumed that Person A's Government Stocks were transferred to the Testamentary Trust as part of the residuary of the deceased estate. 30. The trustee of the Testamentary Trust is unable to accurately determine the value of the shares at the date they were acquired by Person A or the date they became corpus of the Testamentary Trust. However, it is assumed that the shares were acquired during XXXX and had the following values at the date of Person A's death (XXX) and the date from which digital records were maintained by the trustee (XXXX): Shares Acquisition price (XXX, $) Value at date of death (XXXX, $) Value at XXXX ($) XX shares in XXX $XX,XXX - - XX shares in XXX - $XX,XXX - XX shares in XXX $X,XXX $X,XXX - XX shares in XXX $XX,XXX $XX,XXX - XX shares in XXX - - $XXX XX shares in XXX
- $X,XXX - XX shares in XXX $XX,XXX - - XX shares in XXX $X,XXX - - XX shares in XXX - - - 31. It is assumed that the Surplus Assets listed represent the residuary of Person A's estate which was transferred to the Testamentary Trust.
Section 855-10 (ITAA 1936) Subsection 99B(1) (ITAA 1936) Paragraph 99B(2)(a) (ITAA 1936)
Section 99B: 1. Broadly, section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the receipt by a taxpayer of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives an amount from a foreign trust. 2. Subsection 99B(1) of the ITAA 1936 provides that where a beneficiary who was an Australian resident at any time during an income year, is paid an amount from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary in the income year it is paid. 3. However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in the beneficiary's assessable income under subsection 99B(1) by so much of that amount as represents, relevantly: a) corpus of the trust, (but not to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a taxpayer being a resident)... 4. The phrase 'a taxpayer being a resident' in paragraph 99B(2)(a) refers to a hypothetical taxpayer as explained in TD 2017/24:
...13. Paragraphs 99B(2)(a) and 99B(2)(b) posit a 'hypothetical taxpayer' who is a resident, but do not otherwise specify characteristics of that taxpayer. In the Commissioner's view, it cannot be assumed that this hypothetical taxpayer has other characteristics; for example, that it is an entity eligible for the CGT discount. 14. Paragraph 99B(2)(a) refers to an amount derived by 'the trust estate', but then hypothesises a scenario in which that amount was derived by 'a taxpayer being a resident'. It is evident from this language that the hypothetical taxpayer is not the trustee of the trust, but an entirely separate, fictional entity. There is support for this approach in Howard v. Federal Commissioner of Taxation where the Full Federal Court observed that the 'hypothesis posited is that the amount received by the [Esparto] trust estate was derived by a resident taxpayer', which was relevantly different from the actual characteristics of that trust and its trustee. 15. Moreover, paragraph 99B(2)(b) identifies the hypothetical taxpayer without reference to any trustee.
16. Both paragraphs 99B(2)(a) and 99B(2)(b) employ the indefinite article 'a' to identify a non-specific taxpayer deriving the amount in a non-specific year of income. This indicates that the hypothesis in these provisions is concerned with resident taxpayers generally, rather than a particular trustee or beneficiary. Nor do those paragraphs refer to any particular category of taxpayer.... 5. TD 2017/24 explains that the trustee of a foreign trust for CGT purposes does not include in the net income of the trust a capital gain from a CGT event happening to a CGT asset, which is non-taxable Australian property. Further, the amount is not treated as a capital gain of the trust's beneficiaries and no additional amounts are included in the assessable income of the trustee under Subdivision 115-C of ITAA 1997. 6. An amount attributable to the gain may nonetheless be assessable to the beneficiary under section 99B of ITAA 1936. 7. In your case, you are to receive a distribution from a foreign trust that has its origins attributable (in part) to proceeds from the disposal of shares which are non-taxable Australian property.
8. As capital gains from the disposal of CGT assets such as shares are included in the assessable income of Australian resident taxpayers, paragraph 99B(2)(a) of the ITAA 1936 operates so that the amount of the distribution received by you that is attributable to the foreign capital gain does not form part of the corpus of the trust. This amount is included in your assessable income under subsection 99B(1) of the ITAA 1936. 9. As stated above, an amount assessable under subsection 99B(1) of the ITAA 1936 does not have the character of capital for Australian tax purposes (in the hands of the beneficiary). Accordingly, the amount of the distribution from the Testamentary Trust which is included in your assessable income under section 99B(1) of the ITAA 1936 is not an amount of capital, it cannot be reduced by a current or earlier year capital loss and nor is the 50% CGT discount available. The proposed distribution:
10. The Trustee proposes to make the distribution to you of your one third share of the remainder of the Testamentary Trust, made up entirely of the original corpus of the testamentary trust - that is, the amounts or assets originally contributed to the Testamentary Trust when it was first settled. 11. However, it needs to be understood that the corpus of a trust is represented by whatever assets the trustee of the trust holds from time to time (consistent with the terms of the trust). While the starting point is to consider the corpus as being the property with which the trust was settled, the composition of corpus may change over the life of a trust. For example, when a trustee sells an asset, that asset is replaced in corpus by the cash proceeds from that sale. 12. The income of a trust estate can be distinguished as the amount(s) generated by the corpus. For example, when dividends are received in respect of shares which are the corpus of the trust.
13. As the original assets of the Testamentary Trust have either already been sold, or are intended to be sold by the trustee to make the distribution to you in cash, it is not the case that any part of the distribution to be made to you is attributable to original corpus of the trust estate. 14. Further, to determine whether an amount represents corpus, the assets representing corpus must be identifiable, and the amount of corpus must be ascertainable when the relevant amount of trust property is distributed to the beneficiary. It is crucial that a trustee is able to determine the composition of the distribution, such that it can be said that the distribution (or part of it) 'represents corpus of the trust estate'. Additionally, the Trust Deed must empower the Trustee to make such a distribution. 15. Helpful guidance on determining the attribution of a distribution is set out in the decision of the High Court in Archer Bros Pty Ltd (In Vol Liq) v FCT (1952-53) 90 CLR 140 at 155; 10 ATD 192 at 201 (Archer Brothers). The Court said, by way of obiter dicta:
By a proper system of bookkeeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that...distributions could be made wholly and exclusively out of...particular profits...or income... 16. Whilst this case related to a company in liquidation, whereby a liquidator is appointed to call in the company's assets and liabilities, settle affairs and distribute the remaining funds (if any) to shareholders, this scenario is analogous to that of winding up a trust, where similar considerations arise in relation to finalisation of the affairs of the trust and distribution of remaining funds to the beneficiaries. 17. TD 95/10 states that the Commissioner will only consider that Archer Brothers principle applies if: i. The company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and ii. It is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution. 18. The decision of the Administrative Appeals Tribunal in Campbell and Commissioner of Taxation
[2019] AATA 2043 also provides insight into the degree of evidence that would be required to trace a distribution to a source in corpus. While that case was, of course, decided on its facts, it did establish that in order to argue that the corpus exception applies, there must be sufficient records and corroborating explanation to establish the origin of a distribution for it to be accepted as corpus. 19. In your case, Testamentary Trust provides that the trustees are empowered in their discretion to partition or appropriate any real or personal property forming part of the residuary estate in its actual condition or state of investment in or towards satisfaction of the share of the beneficiaries in the residuary of the estate. The Trustee is given the power to determine the value of any real or personal property so partitioned or appropriated in such a manner as the trustee thinks fit. 20. This clause appears to allow the Trustee to distribute the residuary of the estate to the three beneficiaries in equal shares with the discretion to determine what components of the estate will make up those distributions.
21. However, in line with the Archer Brothers principle, for the Commissioner to accept that an amount is in fact corpus of the trust estate, the financial records must have been kept up to date and maintained over the life of the Testamentary Trust. This is to ensure specific amounts can be traced through from the start of the Testamentary Trust to the final winding up of the trust, when they are distributed to the beneficiaries. 22. In the case of the Testamentary Trust, the financial records were not maintained over the life of the Testamentary Trust. In particular the records from the date of death being XXXX and XXXX are missing. The result of the incomplete financial records is that the trustee cannot not clearly identify and appropriate specific amounts (either of capital proceeds or income) having their origin in particular assets of original corpus to you.
23. The distribution made to you cannot be said to be attributable solely to the value of the original corpus but will also include an amount attributable to assessable amounts such as the gains on the disposal of the shares and Government Stocks. The amount of the distribution made to you, which is attributable to these gains (or any other income or capital gain amount) will be assessable and must be included in your assessable income. In particular, to the extent that the distribution does represent proceeds from the disposal of shares and Government Stocks originally contributed to the Testamentary Trust: a. that portion of the proceeds which is not attributable to a capital gain is corpus and excluded under paragraph 99B(2)(a) of the ITAA 1936, and b. that portion of the proceeds which is attributable to a capital gain is not excluded by paragraph 99B(2)(a) and is assessable under subsection 99B(1) of the ITAA 1936.