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Ruling

Subject: Commissioner's discretion - section 99A of the Income Tax Assessment Act 1936

Question

Will the Commissioner exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to assess the trustee on income to which no beneficiary is presently entitled, under section 99 of the ITAA 1936 for the years ended 30 June 2010 and 2011?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

The trusts are inter vivos trusts. They are discretionary family trusts where the assets have been built up over a number of years.

For the two financial years, the directors of the trustee company were unable to resolve to distribute the income of the trusts therefore creating the situation whereby no beneficiaries were presently entitled to the income of the trust.

The reason for this is that there was a protracted legal battle between various family members regarding the assets held within various family trusts. Resolutions were completed in the financial years before and after the court case and if it had been possible to correctly resolve to distribute the income for the two financial years, the same beneficiaries would have received the taxable distributions.

The beneficiaries who would have been made presently entitled to the taxable income of the trusts for the two years in question all had taxable incomes well below the top marginal rates in each of the two years. If the trustee had been able to make effective distributions, none of the income in question would have been taxed at the highest marginal rate of tax of 46.5% (including Medicare Levy).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Subsection 99A(2)

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Subsection 102AG(2)

Reasons for decision

Section 99A of the ITAA 1936 taxes certain trust income at a special rate (highest marginal tax rate). This rate will apply where the trustee is assessable on the income because no beneficiary is presently entitled. There are specified exceptions to this rule outlined in subsection 99A(2) of the ITAA 1936.

There are two steps to this subsection, firstly the trust has to be a trust estate that was formed for one of the reasons set out in paragraphs (a) to (d) and secondly, the Commissioner has to be of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the trust estate in that year of income. There are factors set out in subsection 99A(3) of the ITAA 1936 that the Commissioner should take into consideration in forming that opinion.

The application of the section was changed to this two step process by an amendment in 1979. The explanatory memorandum to this Bill explains that the original general rule was that unless the Commissioner is satisfied that it would be unreasonable for the section to apply the special tax rate would apply. Under the changes to the provision the application became very limited. The general rule will be that, subject to specified exceptions, all income of a trust estate to which there is no present entitlement will be assessed under section 99A of the ITAA 1936 at the maximum personal tax rate.

The Commissioner has discretion not to apply this provision to a trust that:

· resulted from the will or intestacy of a deceased person

· consists of property either of a bankrupt vested in the official receiver in bankruptcy or being administered under Part XI of the Bankruptcy Act 1966(as amended)

· consists of property that was transferred to the trustee for the benefit of the beneficiary
- by way of, or in satisfaction of a claim for, damages for loss of parental support, personal injury, disease, or physical or mental impairment
- by way of workers or criminal injury compensation
-directly as a result of the death of a person and from the proceeds of a life insurance policy, a superannuation fund or an employer of the deceased person
-out of a public fund established and maintained exclusively for the relief of persons in necessitous circumstances
-as a result of a family breakdown.

Note: These later situations are set out in sub-section 102AG(2) of the ITAA 1936.

Your trusts are inter vivos trusts that have been set up as entities to hold assets for the family. They are normal discretionary family trusts. They are not trusts resulting from any of the above situations. Therefore the Commissioner does not have the power to apply a discretion under subsection 99A(2) of the ITAA 1936 to have the assessments raised to the trustee under section 99 of the ITAA 1936, for income to which no beneficiary is entitled.

You have indicated that the only reason that the trustees could not make a resolution and make the beneficiaries presently entitled was because the family members were involved in legal battles. This does not put the trust into a category of the trusts set out above. The trust is not formed as a result of a family breakdown.

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