3. The nature of trust estates and why the continuity or termination of a particular trust estate is relevant for income tax purposes.

In the types of trusts considered here the trustee is the legal owner of property comprising the trust property. The beneficiaries have equitable rights to compel the trustee to exercise its ownership rights in accordance with the terms of the trust. These rights 'impressed upon' the trustee's ownership represent the beneficiaries' interests in the trust. They are enforceable against the trustee but attach to the trust property. The overall relationship between trustee and beneficiaries in respect of the trust property is characterised as a trust.

Division 6 provides rules for working out and assigning tax liability in respect of the 'net income of a trust estate'. The statutory scheme is to calculate the net income of a trust estate as though the trustee were a taxpayer in respect of the assessable income, and to allocate tax liability to the trustee or beneficiaries. Court authorities suggest that 'trust estate' may mean the trust property, but the structure of the legislation indicates that if so, it must be the property which is the subject matter of a particular trust relationship or 'trust'.

For this reason the ATO believes that if changes are such that a new trust relationship arises, there must also be a new trust estate for Division 6 purposes. If the trustee remains the same, it would dispose of the trust property in its capacity as trustee of one trust estate and reacquire it as trustee of another. The disposal would trigger consequences under the capital gains and other provisions of the tax legislation. A capital gains tax (CGT) event would occur, and United Kingdom court decisions on estate duty indicate that there would also be a passing of property at general law.

    Last modified: 20 Apr 2012QC 16266