ATO Interpretative Decision

ATO ID 2004/311

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

If the right of the taxpayer, a beneficiary of a trust which is being wound up, to receive a share of the net income of the trust is transferred to a third party who is an associate of the taxpayer, is that share of the net income still included in the assessable income of the taxpayer by virtue of subsection 102B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. If the right of the taxpayer, a beneficiary of a trust which is being wound up, to receive a share of the net income of the trust is transferred to a third party who is an associate of the taxpayer, that share of the net income is still included in the assessable income of the taxpayer by virtue of subsection 102B(1) of the ITAA 1936 because the period of transfer will terminate before the 'prescribed date'.

Facts

The taxpayer, a beneficiary of a trust, is presently entitled to a share of the net income of an inter vivos trust.

The taxpayer entered into an agreement with the trustee and a third party, who is an associate of the taxpayer, to transfer the taxpayer's right to their share of the income of the trust to the third party.

The right to the share of the net income was to be transferred for the period from the date of the agreement, to the date all of the assets of the trust had been distributed to the taxpayer.

The trustee had begun to wind up the trust prior to the date of the agreement, and expected all assets of the trust to be sold or distributed within 12 months of the date of the agreement.

The transfer of the right to receive a share of the net income of the trust to the third party is a valid assignment for general law purposes.

Reasons for Decision

Subsection 102B(1) of the ITAA 1936 applies where a right to receive income from property is transferred, other than by will or codicil, by a person to an associate of the person for a period that will or may terminate (other than by death of any person or the associate becoming under a legal disability) before the 'prescribed date'.

The 'prescribed date' is defined in subsection 102A(1) of the ITAA 1936 to be the day before the expiration of 7 years from the time the income was first paid to the transferee. In such cases, the income derived by the property is treated as if the transfer had not been made and remains the income of the transferor.

The transfer of the right to receive a share of the net income of the trust to the third party is a valid assignment for general law purposes. However, a valid assignment under general law may not be effective for tax purposes.

As stated above, for a transfer of income to be effective for tax purposes it must not contravene subsection 102B(1) of the ITAA 1936. In order for the transfer, the subject of the agreement between the parties, to be effective for tax purposes, the right to receive the income would have had to be transferred to an associate for at least seven years from the time the income was first paid to the transferee.

The taxpayer's right to a share of the net income of the trust, and therefore the period of the transfer of that income, only existed to the date the trust was wound up. At the date of the agreement, the trustee had already begun to wind up the estate and expected that the process of winding up would take no longer than 12 months. In these circumstances the right to the share of the net trust income would be expected to be extinguished within approximately 12 months and therefore, the period of the transfer of the right to a share of the net trust income would terminate before the passing of seven years.

Accordingly, under these circumstances, subsection 102B(1) of the ITAA 1936 provides that the net income of the trust should be treated as if the transfer had not been made. Therefore, the share of the net income of the trust will remain the assessable income of the taxpayer.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   subsection 97(1)
   subsection 102A(1)
   subsection 102B(1)

Keywords
Associate
Consideration for assignment
Deceased estates
Dividend income
Entities & taxpayer groups
Equitable interests
Express trusts
Franked dividends
Income alienation
Inter vivos trusts
Life interests
Net income of a trust
Rights to dividends
Trust assets
Trust beneficiaries
Trust deeds
Trust distributions
Trust documentation
Trust income
Trustees
Trusts

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  2 April 2004

ISSN: 1445-2782