Edited version of private ruling

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Ruling

Subject: Commissioner's discretion to assess trustee under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936)

Will the Commissioner exercise his discretion under section 99A(2) of the ITAA 1936 to tax the net income of the trust estate to which no beneficiary is presently entitled under section 99 of the ITAA 1936?

Yes.

Relevant facts and circumstances

You are the sole executrix and trustee for the deceased estate.

The administration of the deceased estate is finalised.

The Will states that the remaining part of the estate is left to the beneficiaries living at the time of the deceased's death and if there is more than one beneficiary they are to have equal shares as tenants in common upon reaching a certain age.

The money has been invested and earns interest.

Some of the beneficiaries are under that age.

The beneficiaries are not presently entitled to the money until they are a certain age.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 99A(2)

Income Tax Assessment Act 1936 Section 99.

Reasons for decision

Deceased estates and testamentary trusts

A deceased estate comes about because of a person's death and is merely about determining and distributing the net assets of the deceased. A testamentary trust is generally set up because of the deceased's instructions and goes beyond just determining and distributing net assets. It generally requires the retention of some or all of the assets for a specific time and purpose.

As outlined in Tax Ruling IT 2622, a deceased estate represents a legal entity or relationship quite separate from a testamentary trust.

In your case, you are sole executrix and trustee for the estate. The will states that the beneficiaries will each be paid their share of the estate upon the beneficiary attaining a certain age.

As the administration of the deceased estate is finalised, no further trust returns for the deceased estate is required and therefore no tax is payable by you as trustee of the deceased estate.

However, as money is to be kept in trust for the beneficiaries, a testamentary trust should be established.

Consequently a tax file number issued for a deceased estate should not be used for a testamentary trust as the two trusts are separate and distinct entities. It is appropriate to request a new tax file number for a testamentary trust.

Tax on trust income

The method of taxing trust income varies according to whether or not a beneficiary of a trust is 'presently entitled' to the income of the trust and if they are under a legal disability or not.

Beneficiaries are presently entitled to the income of a deceased estate if they have an indefeasible, absolutely vested interest in the income. In other words, the beneficiaries have a claim or interest in the income that cannot be defeated by another person. They must also be able to demand immediate payment of the income. This means that beneficiaries can be presently entitled even though they may not have actually received an income distribution.

Under the terms of the Will, part of the estate is for the beneficiaries who shall be living at the date of death and attain a certain age and if more than one then equally.

As the income is not paid to the beneficiaries if they do not attain a certain age, the beneficiary's right to income is contingent only. In other words, the interest in the trust can be taken away if the minor does not attain that age.

Therefore, as the beneficiaries do not have an absolute, vested indefeasible interest in the trust, they are considered not to be presently entitled to the net income of the trust prior to them turning a certain age.

As some beneficiaries are not presently entitled to the income, the income of the trust is assessed to the trustee either under section 99A of the ITAA 1936 or section 99 of the ITAA 1936.

Please note that when a beneficiary attains that age, they are presently entitled to their share of the trust income and therefore will be assessable on that income from that date.

Initially, all net income of a trust to which no beneficiary is presently entitled falls under section 99A of the ITAA 1936 and is taxed at the maximum rate of personal tax.

However, subparagraph 99A(2)(a)(i) of the ITAA 1936 provides that the maximum rate of personal tax will not apply to a trust estate that resulted from a Will if the Commissioner is of the opinion that it would be unreasonable for the special rate of tax to apply to that trust income. If the Commissioner is of the opinion that it would be unreasonable for the maximum rate of personal tax to apply to the trust income, the more concessional rate of tax will apply under section 99 of the ITAA 1936.

As the trust is created in consequence of a Will, the discretion under subsection 99A(2) of the ITAA 1936 is exercised to assess the income of the trust in accordance with section 99 of the ITAA 1936.

The rates of tax for trustees assessed under section 99 are found in section 12(6) of the Income Tax Rates Act 1986 (ITRA 1986), which directs attention to Schedule 10 of the ITRA 1986.

Trustees of testamentary trusts are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold of $6,000, but rather a reduced tax free threshold of $416 applies.

Where the income to which no beneficiary is presently entitled is greater than $416 or the relevant threshold, a trust tax return is to be lodged. The trustee of the trust is responsible for lodging the trust's tax return.

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