Edited version of private ruling

Authorisation Number: 1011557787906

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Subject: assessment of net income of trust

Question 1

Whether beneficiary Y, would be required to include an amount in their assessable income under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Whether a beneficiary Y, would be required to include an amount in their assessable income under subdivision 104E of part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

This was not considered as beneficiary Y is assessable under section 97 of the ITAA 1936 on their share of the net income of the trust.

Question 3

Whether a beneficiary Y, would be required to include an amount in their assessable income under section 99B of the ITAA 1936;

Answer

This was not considered as the beneficiary Y is assessable under section 97 of the ITAA 1936 on their share of the net income of the trust.

Question 4

Whether the Commissioner would apply section 100A to impose a liability upon the trustee under section 99A of the ITAA 1936?

Answer

This was not considered as the beneficiary Y is assessable under section 97 of the ITAA 1936 on their share of the net income of the trust.

Question 5

Whether Part IVA would apply to the proposed distribution of the capital gain to the beneficiary Y?

Answer

This was not considered as the beneficiary Y is assessable under section 97 of the ITAA 1936 on their share of the net income of the trust.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

Relevant facts and circumstances

Trust A acquired a property in 1998.

Trust A transferred the property to the applicant as trustee of Trust B for a consideration

Between the date of the acquisition by the trustee of Trust B and the date of the contract of sale, the Trustee incurred further costs which costs included renovations, rates, land tax and maintenance.

The property was used for private storage purposes and was not used for income producing purposes of any kind save and except for the present income year where the property was rented for a short period. Interest income was also derived from depositing the proceeds of sale.
The trustee entered into a contract for the sale of the property.

A capital gain was derived by the applicant as trustee of the Trust B.

The trustee of the Trust B resolved as at 30 June 2010 to distribute the whole of the rental and interest income derived to beneficiary X (a tax exempt charity), plus approximately 10% of the capital gain.

The trustee of the Trust B has resolved as at 30 June 2010 to distribute the balance of the capital gain (the net capital gain and the discount amount) to beneficiary Y.

In accordance with the provisions of the trust deed, the trustee of Trust B has:

In its financial account kept the ordinary rental income and interest income of Trust B separate and distinct from the gain made upon the disposal of the property.

Resolved to distribute 100% of the ordinary rental income and interest income and approximately 10% of the capital gain to beneficiary X (a tax exempt charity) and the balance of the capital gain to beneficiary Y.

A clause in the trust deed recognizes that (in relation to default objects) categories of income and capital shall retain their separate identity when they pass through the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 97.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

A beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate:section 97 of the ITAA 1936.

In Commissioner of Taxation v. Phillip Bamford & Ors; Phillip Bamford & Anor v Commissioner of Taxation [2010] HCA 10;2010 ATC 20-170;75 ATR 1 (Bamford) the Court observed that as to the processes of administration by which is identified the 'share' of income of the trust estate to which a beneficiary is 'presently entitled', the High Court endorsed the statement of the Full Federal Court in Federal Federal Commissioner of Taxation v. Totledge Pty Ltd (1982) 40 ALR 385;82 ATC 4168;12 ATR 830 ('Totledge') that:

A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income... [h]e is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee's proper costs, expenses and outgoings.

The Court in Bamford further observed that Sundberg J's approach in Zeta Force Pty Ltd v. Commissioner of Taxation (1998) 84 FCR 70; (1982);12 ATR 830;(1982) 82 ATC 4168 (' Zeta Force') to the question of the meaning of income for the purposes of section 97 was 'to like effect':

The words 'income of the trust estate' in the opening part of subsection 97(1) refer to distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument ... The beneficiary's 'share' is his share of the distributable income.

The Court in Bamford recognised that the subsection 97(1) income and the [tax] net income were 'two subject matters which do not correspond'.

Consistently with the decision of Sundberg J in Zeta Force , the Court in Bamford held that the words 'that share' of the [tax] net income (being an 'artificial tax amount') relate back to the beneficiary's 'share' of the subsection 97(1) distributable income with the consequence that 'share' is to be construed as taking its natural meaning of 'proportion', rather that 'part' or 'portion'.

Thus 'once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate'.

The ATO Decision Impact Statement regarding Bamford states that for practical purposes this means that:

· a provision of a trust instrument, or a trustee acting in accordance with a trust instrument, may treat the whole or part of a receipt as income of a period and it will thereby constitute 'income of the trust estate' for the purposes of section 97;

· if a trust instrument does not specify when a receipt is to be treated as income of a period, and the trustee does not have any special power to characterise receipts, then the question of whether the whole or part of a receipt constitutes 'income of the «trust» estate' for the purposes of section 97 will fall to be determined in accordance with the general presumptions of trust law;

· similarly, the provisions of a trust instrument, or a trustee acting in accordance with a trust instrument, may determine whether an outgoing is properly chargeable against the income of a period (absent which the question will fall to be determined in accordance with the general presumptions of trust law); and

· subject to the possible operation of provisions outside Division 6, the amount included in a beneficiary's assessable income under section 97 consists of an un-dissected or un-allocated proportionate share of the entirety of the [tax] net income.

Application to your circumstances

An examination of the relevant clauses in the trust deed found that anything that was not capital must be income of the trust.

The reference to income of the trust as defined in the Income Tax Assessment Act in the trust deed, is considered to be a reference to the net income of the trust for the purposes of section 95 of the ITAA 1936. Thus, a capital gain to the extent that it forms part of the section 95 net income is not capital of the trust; and 'by implication' is therefore 'income' of the trust.

This interpretation (that capital gains are income of the trust) is supported by clause _ of the trust deed which, when referring to the different categories of income that the trustee may keep in the books of account, refers to ' income including capital gains…'.

The trustee has a power to determine whether any increase in value or receipt from, for, or in connection with any real or personal property shall be treated as capital or income of the trust fund; and generally to determine all matters as to which any doubt difficulty or question may arise under or in relation to the execution of the trust and powers of the settlement. It is considered that this clause does not give the trustee an absolute discretion to treat amounts as income or capital; but rather gives the trustee the power to make a decision where there is some uncertainty.

In any event, there is no evidence that the trustee has made a determination to treat the gain as being on capital account. In fact, the trustee resolution is to the contrary. It is made pursuant to the income clause.

Beneficiary Y is presently entitled to income of the trust on the basis that the trustee has made a resolution to distribute the balance of the capital gain to them.

As Beneficiary Y is a beneficiary of the trust who is presently entitled to a share of the income of a trust they must include in their assessable income their proportionate share of the net income of the trust pursuant to section 97 of the ITAA 1936.

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