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Edited version of your written advice
Authorisation Number: 1051181691260
Date of advice: 20 January 2017
Ruling
Subject: Family trust election
Question 1:
Will the Commissioner accept that the Trustees' distribution of capital at vesting date is a distribution from the deceased's Estate and not from the Y Trust?
Answer:
No
Question 2:
Is Family Trust Distribution Tax (FTDT) payable if a capital distribution is made by the Trustees for the Y Trust to a remainder beneficiary who is not a member of the test individual's family group where a family trust election (FTE) has been made?
Answer:
Yes
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
X died a number of years ago.
The Will of X (the deceased) was granted probate.
The Trustees of the Estate of deceased has provided a copy of the deceased's Will.
The terms of the Will created the Y Trust.
The remainder beneficiaries are defined in Clause X of the Will to mean such of the following who shall be alive on the vesting date namely the:
● Grandchildren of the deceased's children
● Grandchildren of a distant relative of the deceased's children.
The vesting date is defined in the Will to mean the earliest to occur of:
● the attainment of the age of 21 years by the youngest of the remainder beneficiaries; and
● 80 years from the date of the Will
Under the Will, there are two generation of income beneficiaries (life tenants) for the Y Trust. These are:
● beneficiaries A and B (first generation)
● the children of beneficiaries A and B (second generation).
Beneficiaries A and B are siblings.
The Y Trust
The Will provided the following:
● The Trustees of the Y Trust shall hold the assets upon trust and accumulate XX% of the trust income each year and the other XX% is to be paid to beneficiaries A and B during their respective lives as tenants in common in equal shares.
● After the death of beneficiary A, their share of the trust income will be paid to A's children in equal shares or the survivor of them until the death of the survivor of them.
● After the death of beneficiary B. their share of the trust income will be paid to B's children in equal shares or the survivor of them until the death of the survivor of them.
● On the death of the survivor in respect of each half share, the capital of the Y Trust will be distributed to the children of Beneficiaries A and B respectively when they attain the age of 21 years as tenants in common in equal shares.
● Provided however that if there shall be no person living to take the corpus of either or both half shares then such corpus shall be held upon the trusts in Clause Z contained.
Under Clause Z of the Will the Trustees shall on the vesting date hold the corpus of the deceased's assets upon trust absolutely for the remainder beneficiaries as tenants in common in equal shares.
The investments of the Y Trust include shares in publicly listed companies which pay franked dividends.
The Trustees are considering lodging a FTE for the Y Trust and nominating either beneficiaries A or B as the test individual so the full value of the franking credits could be passed on to the beneficiaries of the Y Trust.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 128B
Income Tax Assessment Act 1936 Paragraph 128B(3)(ga)
Income Tax Assessment Act 1936 Section 271-15 of Schedule 2F
Income Tax Assessment Act 1936 Section 272-75 of Schedule 2F
Income Tax Assessment Act 1936 Section 272-75 of Schedule 2F
Income Tax Assessment Act 1936 Section 272-80 of Schedule 2F
Income Tax Assessment Act 1936 Section 272-95 of Schedule 2F
Income Tax Assessment Act 1936 Former Division 1A Part IIIAA
Reasons for decision
Family trust election
A FTE is an optional declaration made to the Australian Tax Office.
Section 272-75 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) provides that a trust is a family trust at any time when a family trust election in respect of the trust is in force. To qualify as a family trust, the trustee is required to make a family trust election under section 272-80 of Schedule 2F to the ITAA 1936.
An election will satisfy section 272-80 of Schedule 2F to the ITAA 1936 where:
a) there is a nominated test individual in relation to whom the family group is to be taken into account for the basis of the tests applicable to the trust;
b) the trust is able to pass the family control test; and
c) it is made in writing in the approved form.
The term 'family group' is defined in section 272-95 of Schedule 2F to the ITAA 1936 and it does not include aunts, uncles, cousins and friends.
Family trust distribution tax (FTDT) applies if at any time while an FTE is in force, the trust confers a present entitlement to or distributes income or capital of the trust to a person that is not a member of the 'family group' of the specified individual in the FTE: section 271-15 of Schedule 2F to the ITAA 1936.
Pursuant to section 272-45 of Schedule 2F to the ITAA 1936 a trustee distributes income or capital to a person if it pays or credits money to the person, transfers property to the person, or deals with the income or capital on behalf of the person or applies it for the benefit of the person in their capacity as a beneficiary.
Application to the Y Trust
The Trustees have argued that Clause Z of the Will gives rise to the possibility that at vesting date all or part of the corpus of the Y Trust is part of the deceased's Estate as a matter of law without the Trustees having to do anything such as making a distribution. Accordingly any distribution to the remainder beneficiaries under the Will who are not members of a family group of a specified test individual of the Y Trust is a distribution from the deceased's Estate and not from the Y Trust.
The Y Trust was created over certain assets from the Estate of the deceased. These assets were subjected to the specific terms of the deceased's Will.
It is true that the destination of the capital of the trust is pre-determined under Clause Z of the Will, rather than being a decision of the Trustees. However, the Trustees are bound by the rules of equity and by statutory rules to give effect to the directions contained in the trust instrument. The governing trust instrument in this case is the Will of the deceased. This means that, on the vesting date, the Trustees are obliged to hold for each remainder beneficiary their equal share on trust absolutely for them.
When the trusts vest the Trustees will then need to do something such as transfer property or write a cheque drawn from the trust's account to meet the beneficiaries' entitlement. Any such action will be a 'distribution' as defined in section 272-45 of Schedule 2F of the ITAA 1936.
Based on the foregoing, it is our view that any distribution made by the Trustees from the capital of the Y Trust is a distribution from that said named trust created by the Will of the deceased and not from the Estate of the deceased.
Family trust election
The Trustees for the Y Trust are considering lodging a FTE and nominating either beneficiary A or B as the test individual of the family group.
As noted above the lodging of a FTE is an optional declaration made to the Australian Taxation Office. The decision to lodge a FTE is to be made by the Trustees of the Y Trust as it is a matter for their judgement as to whether any potential FTDT liability will outweigh the likely franking credit benefits.
If a FTE is made in respect of the Y Trust which satisfies the requirements of section 272-80 of Schedule 2F to the ITAA 1936, the normal consequences will apply when a distribution is made outside the family group of the specified individual in the FTE. That is, any distribution paid to a beneficiary who is not a member of the family group of the Y Trust will trigger an FTDT liability under section 271-15 of Schedule 2F to the ITAA 1936.
Note: The Commissioner has no discretion under the current law not to impose FTDT where a FTE is in force and a distribution is made outside the family group of the specified individual.
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