ATO Interpretative Decision
ATO ID 2009/144
Income Tax
Capital gains tax: testamentary trust - trustee can choose to be assessed on capital gainsFOI status: may be released
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Note: This ATO ID contains a view in respect of subsection 115-230 of the Income Tax Assessment Act 1997 as it operated prior to amendments introduced by the Tax Law Amendment (2011 Measures No. 5) Act 2011. Except in the case of some early balancing trusts and managed investment trusts, those amendments take effect from the 2010-11 and later income years.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the trustee assessable under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) on that share of the net income of the trust estate representing capital gains in the circumstances of this case?
Decision
No. As the trustee has not made a choice under subsection 115-230(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to be taxed on that share of the trust's net income, it will be assessable to the beneficiary that is presently entitled to the trust income.
Facts
A trust was established under the terms of a deceased person's will. The trustee of the trust is resident in Australia. The trust property consists mainly of shares.
During the 2008-09 income year, the trustee derived dividends and made capital gains from sales of shares.
The deceased's child (the life tenant) is entitled to all of the income of the trust for their lifetime. The life tenant is an Australian resident.
Income is not defined for the purposes of the trust (either expressly or by implication and the trustee does not have the authority to determine what is income) and so takes its ordinary meaning.
The deceased's grandchildren have a contingent interest in the trust capital. That is, such of the grandchildren as survive the life tenant will be entitled to share equally in the trust capital. If none of the grandchildren survive the life tenant, then the capital passes to a charity.
The trustee has not made a choice to be taxed (instead of the life tenant) on the capital gains of the trust.
Reasons for Decision
The net income of a trust estate for a particular year is calculated in accordance with section 95 of the ITAA 1936. Broadly, it is the amount that would have been the trustee's taxable income if it were assumed that the trustee was a resident taxpayer. The net income is assessed to the trustee or to beneficiaries of the trust in accordance with the rules set out in Division 6 of Part III of the ITAA 1936.
Section 97 of the ITAA 1936 provides (subject to certain exceptions not relevant in this case) that a beneficiary who is presently entitled to a share of the income of a trust estate must include in their assessable income that share of the net income of the trust estate.
In this case, the life tenant is presently entitled to all of the income of the trust and so prima facie they should be assessed on the entire net income of the trust (including the capital gains). This is the case even though the life tenant cannot benefit from those capital gains.
However, section 115-230 of the ITAA 1997 applies with respect to the 2005-06 and later income years. It allows the trustee of a testamentary trust to choose to be assessed on the share of the trust net income attributable to capital gains if a beneficiary who would otherwise be assessed under section 97 of the ITAA 1936 on that share of the net income does not have a vested and indefeasible interest in trust property representing that share, nor has had such property paid or applied for its benefit.
The trustee must choose to be assessed no later than the deadline in subsection 115-230(5) of the ITAA 1997. That deadline is the day two months after the last day of the relevant income year or such later day as the Commissioner allows.
As the trustee in this case has not chosen that section 115-230 of the ITAA 1997 apply, or sought an extension of time in which to make the choice, the whole of the net income is properly assessed to the life tenant.
If the trustee were to seek, and be granted, an extension of time in which to make the choice, the capital gains would be assessed to the trustee under section 99A of the ITAA 1936 or, at the Commissioner's discretion, section 99 of the ITAA 1936.
Date of decision: 16 November 2009Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1936
section 95
section 97
section 99
section 99A
section 115-230
subsection 115-230(3)
subsection 115-230(5)
Keywords
Capital gains
CGT choice
Income
Net income of a trust
Testamentary trusts
ISSN: 1445-2782