2 Will the Commissioner exercise the discretion under subsection 99A(2) of the ITAA 1936 to tax the net income of the trust estate to which no beneficiary is presently entitled under section 99 of the ITAA 1936? Summary 2 The Commissioner will exercise the discretion under subsection 99A(2) of the ITAA 1936 to tax the net income of the trust estate to which no beneficiary is presently entitled under section 99 of the ITAA 1936 because he is of the opinion that it would be unreasonable that section 99A should apply. This private ruling applies for the following period: 1 July 20XX to 30 June 20XX The scheme commenced on: 1 July 20XX
made in any given income year. Although the Trustee is themselves a beneficiary, they are not in a position to demand immediate payment of the net income of the Trust because until a final decision has been made in any given income year about appointment or distribution - or that of not appointing or distributing - their interest remains contingent, and therefore defeasible. Accordingly, because for each income year in the Ruling Period no beneficiary has present entitlement to the net income of the Trust (other than that which was distributed to them at the discretion of the Trustee), the Trustee is liable to be assessed under section 99A, unless the Commissioner is of the opinion that it would be unreasonable that section 99A should apply and that section 99 should apply instead. Qualifying for consideration of the discretion under subsection 99A(2) Under subsection 99A(2), 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 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). 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) and include a trust estate that resulted from a will (subparagraph 99A(2)(a)(i)).
The necessity for the creation of the Trust - and the use of a testamentary trust as the vehicle - was dictated by paragraph 4 of the Will. There appears to be no other or ancillary reason for its existence. Accordingly, it can be said that the Trust was created under the terms of the Will of the Deceased and therefore is considered to be a 'trust estate ... that resulted from a will' for the purposes of subparagraph 99A(2)(a)(i). Forming an opinion for the purposes of subsection 99A(2) In forming the opinion for the purposes of subsection 99A(2), 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. Purpose of section 99A of the ITAA 1936 Section 99A of the ITAA 1936 was introduced by the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 . In its original form, it did not apply to deceased estates. When section 99A of the ITAA 1936 was amended in 1979 to apply to deceased estates, the EM to the Income Tax Assessment Amendment Bill (No. 6) 1979 stated (in relation to the exercise of the discretion in subsection 99A(2)): The criteria that the Commissioner is to use in considering whether it would be unreasonable that section 99A of the ITAA 1936 should apply in these cases will remain essentially the same as at present (sub-section 99A(3)). This will enable the result that, unless there are tax avoidance connotations
, accumulating income in these cases will continue to be taxed under section 99, on the same basis as at present. (Because there had been tax avoidance exploitation of an earlier exclusion of deceased estates from the ambit of section 99A, those estates were, by section 6 of the Income Tax Assessment Amendment Act (No. 2) 1977 , in that year brought within its scope.) [Note to Clause 13] [ Emphasis added ] In the High Court case of Giris Pty. Ltd. V. Federal Commissioner Of Taxation ( Giris ) Windeyer J described the purpose of section 99A of the ITAA 1936 as: That purpose I take it is to enable the Commissioner to keep s. 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose. [at 384] This view was confirmed by Stephen J in the High Court case of Perron (as trustee for the L.M. Brennan Trust) v. Federal Commissioner of Taxation : The views of Windeyer J. in the Giris case regarding the legislative purpose given effect to by sec. 99A(2) have already been quoted in the Commissioner's letter. I would, with respect, adopt those views of that legislative purpose. [at 4171]
Therefore, it is reasonable to conclude that the purpose of section 99A is to prevent the use of trusts to avoid tax. The language of the text contained in section 99A, and case law, confirms that the type of tax avoidance at which section 99A is directed is broader than that facilitated by the use of multiple trusts. In Giris , the High court commented that: • ' ... the discretion is wide and though being really legislative in nature, what is relevant to its formation may range over an extremely wide spectrum of fact and consideration ...' [per Barwick J., at 374] • 'Here the Commissioner's discretion is apparently at large... I assume that [the Commissioner] is to be guided and controlled by the policy and purpose of the enactment, so far as that is manifest in it. ... ' [Per Windeyer J., at 384] ATO Guidance Public Information Bulletin PIB No. 4: Income of a trust estate to which no beneficiary is presently entitled was published by the ATO in April 1965.
Although PIB No. 4 is relevant when considering the way in which the Commissioner considers the exercise of the discretion in subsection 99A(2) of the ITAA 1936, its relevance is diminished due to events subsequent to its issue such as: • Legislative amendments to section 99A; and • Court and Board of Review decisions on s 99A(2). For instance, the Commissioner is required to consider the matters in subsections 99(3) and 99(3A) of the ITAA 1936 in forming his opinion for the purposes of the discretion in subsection 99A(2). It is noted that subsection 99(3A) was inserted into the ITAA 1936 in 1980. Consideration of paragraphs 99A(3)(a) and (b) Assets held by the Trustee consists only of: (i) property vested in the Trustee under the terms of the Will; (ii) property that represents accumulations of income or capital from property that satisfies the requirement in (i); (iii) property from the sale of these assets of the Trustee; and (iv) property from the re-investment of property that satisfies the requirement in (iii). In addition, 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. No property has been transferred or lent to the Trust, nor any specifical rights, privileges or benefits conferred upon the Trust. Consideration of paragraph 99A(3)(c) 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) are encapsulated by the matters enunciated by Member Thompson in Case A50 (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: Based on the information available, the Trustee has not used their powers under to avoid tax.
The interests of taxpayers generally should be protected: In considering the exercise of the discretion in subsection 99A(2) 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 its powers 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 necessity for the creation of the Trust - and the use of a testamentary trust as the vehicle - was dictated by paragraph 4 of the Will. There appears to be no other or ancillary reason for its existence. Accordingly, the arrangements the Trustee has made appear to be legitimate and reasonable. 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 consideration. 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 consideration. 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) 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 • the manner in which the arrangement is administered. In relation to these 'surrounding circumstances' it is again noted that the circumstances in this case support a favourable exercise of the Commissioner's discretion: • the bringing into existence of the Trust delivers the Deceased's wishes;
• the absolute discretion of the Trustee to implement the terms of the Will is appropriate in terms of the circumstances of the beneficiaries and the overall effect to be achieved upon the tax affairs of all affected parties - any such effect is subordinate and incidental to the primary aim of appropriate financial support for various categories of beneficiary, per the Deceased's wishes; and • the manner in which the Trustee has administered the Trust appears at all times to have been concerned only with fulfilling the above. Conclusion as to whether it is unreasonable for section 99A to apply to the Trust for Ruling Period The matters that are considered to be particularly relevant to forming the opinion for the purposes of subsection 99A(2) are: • The Trust resulted from a will and satisfies the requirement of paragraph 99A(2)(a)(i). • For the 2026 income year, and for the prospective income years in the Ruling Period: o The Trustee has retained, and may retain, Trust income. o Tax has not been avoided, and will not be avoided, by the exercise of the powers available to the Trustee.
o The Trust has been, and will be, administered in a conventional manner by the Trustee and not as a tax avoidance device. o The Trustee has not entered into, 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. o The assets held by the Trustee consist of: - assets vested in the Trustee and/or - property from the sale of the assets of the Trust that has been reinvested or held as cash. o The assets held by the Trustee do not, and 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. Having regard to the above matters, and the legislated purpose of section 99A 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 period to which this decision applies.
This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. Find out more about when you can rely on your private ruling at ato.gov.au/relyonprivateruling . 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: • Request for a private ruling, dated XX/XX/XXX. • Request from the ATO for further information, dated XX/XX/XXXX. • Electronic response to the request from the ATO for further information, dated XX/XX/XXXX, including various attached documents such as a copy of the Grant of Probate with full inventory of the deceased's assets at the time of death of the deceased. The late Person A (the Deceased) died on XX/XX/XXXX. The Will of the Deceased (the Will) was dated XX/XX/XXXX. Probate was granted in respect of the Will on XX/XX/XXXX and the assets of the Deceased (the Estate) at the time of death were inventoried.
Paragraph 4 of the Will - 'Trusts for my Children' - contains clauses that provide for the creation of testamentary trusts. Relevantly, clauses 4.1 and 4.2(a)(i) of the will state: 4.1 My Trustee shall hold the rest of my estate (the "Balance") on trust. 4.2 My Trustee shall divide the Balance into one or more equal parts (the number of parts being determined by (a) and (b) below) and hold and dispose of such parts (and sections of parts, where applicable) as follows:- (a) (i) one part (a "Trust Fund") shall be held on trust ("Trust") with respect to Person B provided she is alive at the time of such determination... The Person B to whom the Will refers is a child of the Deceased who was alive at the date of death of the Deceased. Appointed under Clause 3 of the Will, Person B was co-trustee of the Estate, along with their sibling. The Person B Testamentary Trust (the Trust) was established in the income year ended 30 June 20XX, with Person B as sole Trustee (the Trustee).
Clause 4.3 of the Will grants the Trustee absolute discretion to 'pay, apply or distribute all or any part of the capital or income of the Trust Fund to any one or more' of various categories of beneficiaries, including, in Person B's case, themselves and their children. In the establishment of the Trust, assets owned by the Deceased at the time of death devolved to the Trust, as follows: • the ownership of 50% of an existing investment portfolio was transferred; and • 50% of a refunded nursing home accommodation bond was invested in a new investment portfolio in the name of the Trustee. The trust deed (the Trust Deed) of the Trust has not been amended. No person has at any time, directly or indirectly, conferred any benefits on the Trust. No person has at any time, directly or indirectly, 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 - whether or not the right or privilege has been exercised - on or to property of the Trust.
The Trustee does not hold shares, units or other similar interests that carry rights to receive discretionary distributions of income or capital. The Trustee is not a discretionary object in relation to another trust. The property held by the Trustee consists only of: (i) property vested in the Trustee as the result of the terms of Will; (ii) property that represents accumulations of income or capital from property that satisfies the requirement in (i); (iii) property from the sale of these assets of the Trust; and (iv) property from the re-investment of property that satisfies the requirement in (iii). The assets of the Trustee consist only of public company shares or other interests in widely-held entities. The property held by the Trustee does not consist of any: • shares in any private companies or units in any private trusts; • other property acquired at non-arm's length value; or • loans provided to related parties. Assumptions The period to which this ruling applies (the Ruling Period) contains a prospective portion, up until the end of the income year ending 30 June 20XX.
In order to make a private ruling a Ruling Period that contains a prospective portion, the Commissioner may make Assumptions about a future event or other matter (section 357-110 of the Taxation Administration Act 1953). In this case, the following Assumptions have been agreed upon: Throughout the Ruling period: (a) The Trust Deed will not be amended. (b) The property of the Trust will consist only of: (i) property vested in the Trustee (that was vested in the Executor of the Estate and listed in the Inventory of Property annexed to the Grant of Probate document) under the terms of the Will; (ii) property that represents accumulations of income or capital from property that satisfies the requirement in (i); (iii) property from the sale of these assets of the Trust; and (iv) property from the re-investment of property that satisfies the requirement in (iii). (c) The assets of the Trust will consist only of: • public company shares or other direct, or indirect, interests in widely-held entities (including managed funds and fixed interest securities); • Australian real property; and • Cash. (d)
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. (e) The Trustee will not be a discretionary object of any discretionary trust and will not receive a distribution from any discretionary trust. (f) The Trustee will administer the Trust in a conventional manner (as a testamentary trust) and not as a tax avoidance device. (g) The Trustee will not enter into arrangements beyond the purpose for which section 99 of the ITAA 1936 was retained or of a type that the Commissioner will seek to discourage.
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)(ii) 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) Detailed reasoning All references are to the ITAA 1936 unless otherwise stated. Subsection 98(1) applies to assess a trustee on a beneficiary's share of income where a beneficiary is presently entitled and is under a legal disability. Where no beneficiary is presently entitled in the relevant year of inc