ATO Interpretative Decision

ATO ID 2011/46 (Withdrawn)

Income Tax

• This ATO Interpretative Decision is withdrawn from the database because it contains a view in respect of a provision of the Income Tax Assessment Act 1997 that doesn't apply after 2004-2005 income year. Despite its withdrawal from the database, this ATO Interpretative Decision continues to be a precedential view in respect of decisions for income years up to, and including, 2004-2005 income year.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does a disentitling event happen for the purposes of paragraph 385-163(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) when a person who is the object of a discretionary trust dies?

Decision

Yes, a disentitling event happens for the purposes of paragraph 385-163(3)(a) of the ITAA 1997 when a person who is the object of a discretionary trust dies.

Facts

The trustee of a discretionary family trust carries on a primary production business in Australia. In an income year the trustee made an election under section 385-110 of the ITAA 1997 to defer the profits from the forced disposal of live stock in that year. In a later income year, one of the objects of the trust, a person identified in the trust deed as a primary beneficiary, died.

At the time of the person's death there were unapplied tax profits from the forced disposal of live stock that was the subject of the election made in the earlier income year.

Reasons for Decision

Subdivision 385-E of the ITAA 1997 sets out the elections available to a primary producer on the forced disposal or death of livestock in certain circumstances (for example because of a notifiable contamination of property, disease or the loss of pasture or fodder due to fire, drought or flood). The election available under section 385-110 of the ITAA 1997 allows for the deferral of the assessment of profits from the forced disposal or death of livestock by using those profits to obtain replacement stock, with the unapplied balance generally being brought to account after 5 years.

Subdivision 385-H of the ITAA 1997 specifies common rules for making elections under Subdivisions 385-E, 385-F and 385-G of the ITAA 1997. Subdivisions 385-F and 385-G deal with elections about insurance recovery for the loss of live stock or trees, and double wool clips, respectively. In the case where a trustee carries on the primary production business, section 385-145 of the ITAA 1997 provides that only the trustee can make the election.

Where a disentitling event happens after a trustee makes an election under section 385-110, subsection 385-160(3) of the ITAA 1997 provides that the outstanding amounts of deferred assessable income are to be assessed in the income year in which the event happens. Paragraph 385-163(3)(a) of the ITAA 1997 provides that in the case of a trust, a disentitling event happens when a beneficiary dies.

As a disentitling event happens, in the case of a trust, on the death of a beneficiary, it is relevant to determine what is meant by that expression. 'Beneficiary' is not defined in the ITAA 1997 and therefore takes its ordinary meaning.

In Kafataris & Anor v. Deputy Commissioner of Taxation (2008) 172 FCR 242; [2008] FCA 1454; (2008) 2008 ATC 20-048; (2008) 73 ATR 531, Lindgren J considered whether a person was the sole beneficiary of a trust for the purposes of paragraph 104-55(5)(a) of the ITAA 1997 and stated at paragraphs 42 and 43:

According to the ordinary meaning of the word, a beneficiary is any person for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms....The word "beneficiary" reaches beyond a person who has a beneficial interest in the trust property.

Lindgren J noted at paragraph 44 that although the discretionary objects do not have a beneficial interest in any property the subject of a 'discretionary trust' prior to a distribution or appointment of income or capital, they are freely referred to as 'beneficiaries'. Further, provided that it can be said with certainty that any particular person is or is not within the class of discretionary beneficiaries, there is a trust, due administration of which can be enforced by discretionary beneficiaries.

There is no basis to interpret 'a beneficiary' more narrowly to confine its meaning to a beneficiary who is presently entitled to a share of the net income of the trust estate. Unlike the rewritten provisions under the Income Tax Assessment Act 1936 (ITAA 1936) that allowed a presently entitled beneficiary to make an election in conjunction with the trustee, Subdivision 385-H of the ITAA 1997 allows an election to be made by the trustee only. Subdivision 385-H also recasts many administrative discretions affecting the calculation of tax liability previously available under sections 26B, 26BA, 36, 36AAA and 36 AA of the ITAA 1936: repealed as of 14 September 2006. Neither the legislative context nor the language of the provisions supports an interpretation of 'a beneficiary' as it is used in paragraph 385-163(3)(a) of the ITAA 1997 that would restrict the operation of the disentitling event to the death of a presently entitled beneficiary.

Accordingly, a disentitling event happens for the purposes of paragraph 385-163(3)(a) of the ITAA 1997 when the person who is an object of the discretionary trust dies.

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   Subdivision 385-E
   Subdivision 385-F
   Subdivision 385-G
   Subdivision 385-H
   section 385-110
   section 385-145
   subsection 385-160(3)
   paragraph 385-163(3)(a)

Case References:
Kafataris & Anor v. Deputy Commissioner of Taxation
   (2008) 172 FCR 242
   [2008] FCA 1454
   (2008) 2008 ATC 20-048
   (2008) 73 ATR 531

Keywords
Beneficiaries
Deaths
Disposal of trading stock
Primary production
Taxpayer elections

Business Line:  Administration, Business and Personal Taxes Centre of Expertise

Date of publication:  10 June 2011

ISSN: 1445-2782