Edited version of your private ruling

Authorisation Number: 1012567724092

Ruling

Subject: Income tax: Commissioner's Discretion Under section 99A(2) of the ITAA 1936 Act

Question 1

Will the Commissioner exercise his discretion under section 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to assess income to which no beneficiary is presently entitled under section 99 of the ITAA 1936 for the income years requested?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2008

Relevant facts and circumstances

By Will, the Deceased appointed the executors.

At the time of their death, the Deceased's assets were significant, and included the following:

· Personal effects;

· Life policies;

· Real property and bank accounts owned jointly with the deceased's spouse;

· Shares in a company that carried on a business established by the deceased (Operating Company);

· Shares in an investment company that owned real property interests; and

· Units in a unit trust that owned real property interests.

The Deceased acquired all of their assets through their personal efforts and business endeavours.

The Supreme Court granted probate.

The terms of the Deceased's Will are complex. It provides for the following:

· Certain specific bequests to friends and family of the deceased;

· An annual income payment to the Deceased's spouse of a CPI-adjusted amount for their lifetime. The amount to set aside to provide for this income payment has been the subject of debate and dispute between the Executors and the remaining beneficiaries;

· An annual income payment to the Deceased's child of a CPI-adjusted amount for a set number of years from the Deceased's death;

· On a set anniversary of the Deceased's death, the residuary of the Estate (after allowing a sufficient amount to be set aside to provide for the income payments to the Deceased's spouse) was to be distributed to certain of the deceased's family. It is uncertain whether certain of the beneficiaries are to participate in the residuary of the estate on a per capital or per stirps basis.

The assets of the Estate consist only of assets acquired by the deceased through their personal endeavours and business pursuits, or funds received on disposal, by the Executors, of such assets;

No special rights or privileges have been granted to the Estate; and no property or loans have been granted or made to the Estate.

Given the complexities relating to the terms of the Will, the Executors are seeking judicial guidance in the Supreme Court on various matters. This has caused delays in the administration of the Estate.

The powers of the Executors under the Will are broad, and include the ability to postpone for any period any sale or calling in or conversion of the Estate; and an ability to allow any part of the Estate to remain in the same state as at the death of the Deceased.

The Executors considered that the most appropriate method for dealing with the residuary of the Estate was to liquidate the assets that formed the residuary, and distribute by way of cash transfers.

This position has caused further delays in the administration of the Estate for the following reasons:

· In order to achieve a good price for the sale of shares in the Operating Company, professional advisers were appointed by the Executors to assist with the sale;

· Agents were appointed to facilitate the sale of sale property held by the land-owning company and unit trust. Due to market conditions, it was difficult to sell some of the properties. Further, some of the residuary beneficiaries proposed that the real property be distributed in specie to them, causing further delays in agreeing an appropriate course of action and eventual sale of the properties;

· Once the assets of the land-owning company and unit trust were sold, it was necessary to vest the unit trust (which has now happened) and liquidate the company.

The Executors are about to appoint liquidators to liquidate the land-owning company. Subject to the liquidation, and the resolution of the matters before the Supreme Court, the administration of the Estate may be finalised.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 subsection 99A(3)

Reasons for decision

Section 99 and 99A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to assess a trustee on income to which no beneficiary is presently entitled or income which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.

Section 99A does not apply to a trust estate in relation to a year of income where the trust estate:

(a) that resulted from:

(i) a will, codicil or an order of a court that varied or modified the provisions of a will or a codicil; or

(ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estate of persons who die intestate;

(b) that consists of the property of a person who has become bankrupt, being property that has vested in The Official Receiver in Bankruptcy, or in a registered trustee, under the Bankruptcy Act 1966;

(c) that is administered under Part XI of the Bankruptcy Act 1966; or

(d) that consists of property of a kind referred to in paragraph 102AG(2)(c);

if the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.

In this case the trust resulted from the will of the deceased and therefore is within the categories of trusts where discretion may be considered.

Subsection 99A(3) of the ITAA 1936 lists what matters should be considered by the Commissioner when deciding whether section 99A of the ITAA 1936 should apply to a trust estate. It states:

In forming an opinion for the purposes of subsection (2):

(a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the right or privilege has been exercised;

(b) if a person who has, at any time, directly or indirectly:

(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii) conferred or attached any special right or privilege, or done any act or thing, either along or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege had been exercised;

has not, at any time, directly or indirectly:

(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c) the Commissioner shall have regard to such other matters, if any, as he thinks fit.

In this case, the assets of the Estate consist only of assets acquired by the deceased or funds received on disposal of the assets by the executors and trustees.

In addition, there have been no properties transferred, nor loans granted to the estate.

Therefore, it is of the opinion of the Commissioner that section 99A of the ITAA 1936 will not apply to the estate. The estate will therefore be assessed on income to which no beneficiary is presently entitled under section 99 of the ITAA 1936 for the income years ended 30 June 2009 until 30 June 2014

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).