ATO Interpretative Decision
ATO ID 2014/3
Income Tax
Family Trust Election: individual specified in election is deceased when election madeThis 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Are the requirements of subsection 272-80(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) met if the trustee of a trust specifies an individual in a family trust election (FTE) who is deceased at the time of making the election?
Decision
No, the individual specified in the FTE must be alive at the time the trustee of the trust makes the election for subsection 272-80(3) of Schedule 2F to the ITAA 1936 to be satisfied.
Facts
The trustee of the X Family Trust proposes to make an FTE specifying Mr X as the individual whose family group would be taken into account in relation to the election.
The 2007 income year is to be the specified income year.
Mr X is deceased.
Reasons for Decision
A trust is a family trust at any time when an FTE is in force (section 272-75 of Schedule 2F to the ITAA 1936).
The requirements for making an FTE are set out in section 272-80 of Schedule 2F to the ITAA 1936.
Subsection 272-80(3) of Schedule 2F to the ITAA 1936 requires that the trustee of the trust specify an individual whose family group will be taken into account in relation to the election. It is not clear from the wording of subsection 272-80(3) of Schedule 2F to the ITAA 1936 if the individual specified by the trustee can include someone who is deceased at that time.
'Individual' is not defined in the ITAA 1936.
The term is defined in section 2B of the Acts Interpretation Act 1901 to mean a 'natural person'. The Macquarie Dictionary (Online) defines a natural person as an 'individual human being (as opposed to an artificial person)'.
There is no contrary intention discernible from the terms of section 272-80 of Schedule 2F to the ITAA 1936 or its surrounding context that 'individual' means other than a natural person. However, the definition can be seen as simply distinguishing legal persons according to how they have come into existence - naturally or by law.
We consider that the reference to 'individual' in subsection 272-80(3) of Schedule 2F to the ITAA 1936 should be interpreted having regard to its ordinary meaning in the context in which it is used.
The Macquarie Dictionary (Online) defines 'individual', when used as a noun, as '7. a single human being, as distinguished from a group'.
Having regard to the terms of section 272-80 of Schedule 2F to the ITAA 1936 and its surrounding context, we consider that 'individual' means a living human being.
Amendments to the definition of 'family' in section 272-95 in Schedule 2F to the ITAA 1936 (contained in Tax Laws Amendment (2007 Measures No. 4) Act 2007) confirm this to be the correct interpretative approach. The amendments include as a family member any lineal descendant of a child, nephew or niece of the specified individual or the individual's spouse. As the individual specified in an FTE forms the point of reference for defining the family group, the size of the group could increase exponentially if a trustee were able to specify a deceased person. This would create the potential for the family group to be sufficiently large such that integrity measures, such as the family trust distribution tax which taxes distributions made outside of the family group, could be circumvented.
Accordingly, the trustee of the X Family Trust must specify an individual who is alive at the time of making the FTE in order for the election to be valid.
Note: the death of an individual specified in an FTE of a family trust does not prevent any other trust, company or partnership from making an interposed entity election (IEE) to be included in the individual's family group. This is because the nature of an IEE is different from an FTE - it is the family trust to which the IEE relates and the individual specified for the purposes of that trust's FTE that is relevant for an IEE.
Date of decision: 5 February 2014Year of income: Years ended 30 June 2006 to 30 June 2014
Legislative References:
Income Tax Assessment Act 1936
Schedule 2F
section 272-75
section 272-80
subsection 272-80(3)
section 272-95
Section 2B Tax Laws Amendment (2007 Measures No. 4) Act 2007
The Act
Other References:
The Macquarie Dictionary Online
Keywords
Family group
Family trusts
Family trust election
Specified individual
Interposed entity election
Date reviewed: 17 January 2017
ISSN: 1445-2782