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Authorisation Number: 1011752829952

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Ruling

Subject: Commissioner's discretion under section 99A of the ITAA 1936

Question

Will the Commissioner exercise the discretion under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the trust estate under section 99 of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period

Financial year ended 30 June 2011

Financial year ended 30 June 2012

Financial year ended 30 June 2013

Financial year ended 30 June 2014

The scheme commenced on

1 July 2010.

Relevant facts

The testamentary trust was created by the will of the deceased.

Under the will a number assets were left in trust for the deceased's grandchildren until they reach the age of 21 years.

Each grandchild was assigned a particular asset and a proportionate share of the accumulated income conditional upon reaching 21 years old.

The trust has no liabilities and each year the trustee will be assessable on the net income of the trust as no beneficiary is presently entitled.

Relevant legislative provisions

Section 99 of the Income Tax Assessment Act 1936;

Section 99A of the Income Tax Assessment Act 1936;

Subsection 99A(2) of the Income Tax Assessment Act 1936;

Section 12 of the Income Tax Rates Act 1986;

Schedule 10 of the Income Tax Rates Act 1986.

Reasons for decision

Summary

It is appropriate for the Commissioner to exercise his discretion to tax the trustee under section 99 of the Income Tax Assessment Act 1936 (ITAA 1396).

Detailed reasoning

Commissioner's discretion

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.

Section 99A applies in relation to all trusts unless: 

· the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii)

· the trust is bankrupt estate; paragraphs 99A(2)(b) and (c)

· the trust is a trust that consists of property referred to in paragraph 102AG(2)(c)

· and the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances. 

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2) states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A to apply. 

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will.

If no part of the net income is distributed to beneficiaries, and section 99A is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual.  

In forming an opinion pursuant to section 99A(2) whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) to have regard to certain matters. It specifies the matters to be considered to include:

· The manner and price at which the trust acquired its assets;

· Whether any special rights or privileges are attached to, or conferred on or in relation to, the trust property; and

· Such other matters as the Commissioner thinks fit.

These matters look at the source of the trust capital, including whether any loans have been made to the trust. The source(s) of the trusts income are also considered, as are any benefits conferred upon the trust, and any rights and privileges conferred on or attached to property held by the trust.

In determining the weight to be given to the matters described in subsection 99A(3) , Windeyer J has stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that:

The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate …. That purpose I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose.

In these circumstances, the trust has been created through a will satisfying the eligibility for the Commissioner's discretion. The trust was created out of the will of the deceased. It was a trust whose assets come directly from the assets of the deceased and there is a definable relationship ordinarily of blood or marriage between the deceased person and the beneficiaries. There are no other suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind.

Therefore it would be reasonable for the Commissioner to apply his discretion to allow section 99 of the ITAA 1936 to apply and the trustee to be taxed at ordinary marginal rates.

Rates of Taxation

The rates of tax for trustees assessed under section 99 of the ITAA 1936 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. Part 1 of Schedule 10 of the ITRA 1986 identifies two classes of trustees for the purpose of determining the rates of tax that are to apply.

In the first class are trustees who are liable to be assessed under section 99 of the ITAA 1936 in respect of resident trust estates of a deceased person where the income is derived in the year of death of the deceased or in any one of the following two years. These trustees are liable to pay tax at the rates applicable to resident individuals.

The second class of trustees identified in Part 1 of Schedule 10 of the ITRA 1986 comprises trustees liable to be assessed under section 99 of the ITAA 1936 in respect of income of a resident trust estate, other than the estate of a person who died fewer than three years before the end of the income year.

These trustees (including the 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.

In the current circumstances the trustee of the trust is 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. On income between $416 and $594 the rate of tax applied is 50%, and for amounts between $594 and $37,000, the rate of 15% is applied (section 14 of the ITRA 1986).

The trustee is responsible for lodging the testamentary trust's tax return and paying the resulting tax liabilities.

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