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Edited version of your private ruling
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Ruling
Subject: Commissioner's discretion - Exempt Entity Elections
Question
Will the Commissioner exercise the discretion granted to him under Subsection 100AA(4) of the Income Tax Assessment Act 1936 (ITAA 1936) to treat a distribution declared to an income tax exempt entity on 30 June 2011 as a present entitlement of that entity even though it was not physically notified and paid in the required timeframe in accordance with subsection 100AA(1)(c) of the Income Tax Assessment Act 1936?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Facts of the Arrangement
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
The application for private ruling
Discretionary Trust Deed for theTrust
The Trust distributes to an exempt entity each year.
The trustee did not notify the exempt entity in writing by the X of its present entitlement as required by Subsection 100AA(c) Of the ITAA 1936.
The trustee was overseas at the time of section 100AA of the ITAA 1936 was enacted.
The trustee informed the exempt entity as soon as they became aware of the legislative change.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 100AA
Income Tax Assessment Act 1936 Section 99A
Income Tax Assessment Act 1936 Division 6
Income Tax Assessment Act 1997 Subdivision 115-C
Reasons for decision
Section 100AA of the ITAA 1936 is an anti-avoidance provision that applies to income tax exempt entities that are presently entitled to income of a trust estate.
Section 100AA of the ITAA 1936 treats an exempt entity as not being presently entitled to income of a trust where it has not been notified of its present entitlement within two months of the end of the relevant income year. The trustee is assessed under s 99A of the ITAA 1936 on this income.
Because s 100AA of the ITAA 1936 adjusts a beneficiary's income, it applies before any adjustments made by Div 6E of the ITAA 1936 to amounts assessable under Div 6 of the ITAA 1936.
Where the trustee fails to give the exempt entity notice it is treated as though it is not presently entitled to the income. Instead the trustee is assessable on the amount under s 99A of the ITAA 1936.
The Commissioner has the discretion to disregard the trustee's failure to notify within the required time period. Where the discretion is exercised, the exempt entity is assessed under Div 6 of the ITAA 1936, and Subdivision 115-C of the ITAA 1997
The Commissioner is required to have regard to the following in exercising his discretion:
· the circumstances that led to the failure
· the extent to which the trustee has taken action to try to correct the failure and if so, how quickly that action was taken
· whether the Commissioner has exercised the discretion in the past and the circumstances in which this occurred
· any other matters that the Commissioner considers relevant.
As the trustee took immediate action to notify the exempt entity of its entitlement and pay the amount of distribution declared in full on becoming aware of its requirement under 100AA of the ITAA 1936 and it was not unreasonable for the trust to be unaware of the legislative changes, the Commissioner will exercise the discretion to disregard the failure of the trustee to comply with section 100AA of the ITAA 1936.
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