Edited version of your written advice

Authorisation Number: 1051212203849

Date of Advice: 7 March 2017

Ruling

Subject: Trust income - taxed at special rates - section 99A. Will the Commissioner exercise his discretion under section 99A(2).

Issue 1

Income to beneficiaries - will the Commissioner use his discretion under section 99

Question 1

Will the Commissioner exercise his discretion under section 99A (2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the deceased estate and testamentary trust under section 99 of the ITAA 1936?

Answer

Yes

Question 2

Is the remaining property of the deceased estate to be set up as a testamentary trust?

Answer

Invalid - general guidance provided

Question 3

What rates of tax will apply to the deceased estate/testamentary trust?

Answer

Invalid - general guidance provided

This ruling applies for the following periods:

30 June 2015

30 June 2016

30 June 2017

30 June 2018

30 June 2019

30 June 2020

30 June 2021

30 June 2022

30 June 2023

The scheme commences on

1 July 2014

Relevant facts and circumstances

The deceased passed away.

Under the will after payment of deceased's debts, funeral and testamentary expenses, the residue of the deceased's estate both real and personal is to be payable to her three children upon attaining the age of 25 as tenants in common in equal shares.

The deceased's children are all aged less than 25 years.

The trust estate has not borrowed from others or lent money to others.

There have been no assets transferred into the trust estate since the date of death.

There are no special rights or privileges attached to the property of the trust estate.

Assumption(s)

Nil

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).

Anti-avoidance rules

Nil

Reasons for decision

All legislative references refer to the Income Tax Assessment Act 1936 unless advised otherwise.

Sections 99 and 99A apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. Section 99 will only apply if section 99A does not apply.

Subsection 99A(2) outlines the situations when the Commissioner may apply his discretion for section 99A not to apply, which includes trust estates resulting from a will, codicil, etcetera. This includes both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will.

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax will not apply.

Section 99A(3) sets out factors which the Commissioner can consider in deciding that it would be unreasonable for section 99A to apply.

In your case, the Commissioner has had regard to the circumstances of the trust estate for the purposes of subsection 99A(2) and is of the opinion that it would be unreasonable that section 99A should apply in relation to the trust estate and the relevant years of income. Accordingly section 99 will apply.

The beneficiary's interest in the trust income is currently contingent on them reaching the age of 25. Once any of the children reach the age of 25, they will be presently entitled to their share of the trust income and should be assessed on that income.

Further issues for you to consider

Testamentary trusts

A testamentary trust is generally set up because of the deceased's instructions and goes beyond just determining and distributing net assets. It is not the same as a deceased estate that is wound up as soon as practicable, a testamentary trust may continue for such periods of time as specified.

Once a testamentary trust comes into existence, trustees are assessed on undistributed income under different sections of the Income Tax Rates Act 1986 (ITRA 1986), namely Schedule 10 to the ITRA 1986. Testamentary trusts are assessed under section 99 at rates applicable to resident individuals but do not benefit from the tax free threshold during the initial three year period.

Rates of tax

If part of the net income is not distributed to beneficiaries, and section 99A is considered not to apply, then the trustee is assessed under section 99 as if the income were that of an individual.

The rates of tax for trustees assessed under section 99 are found in subsection 12(6) of the ITRA 1986, which directs attention to Schedule 10 to the ITRA 1986. Part 1 of Schedule 10 to 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 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 to the ITRA 1986 comprises trustees liable to be assessed under section 99 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 are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold of $18,200.

Assessment Codes

To impose the correct rates of tax and calculate the appropriate Medicare Levy, the trust tax return applies 'assessment codes' to particular parts of net income and distributions. A distinction in the coding is made between deceased estates and inter vivos trusts (including discretionary trusts).

Deceased

Code 15 applies to the estate of a deceased person that has been in existence for less than three years. Code 16 applies if the deceased estate has existed for more than three years.

Testamentary Trust

Code 37 applies to trustees assessed under subsection 99A(2), including the trustee of a trust resulting from a will, that is, a testamentary trust, but not the estate of a deceased person.

ATO view documents

Taxation ruling IT 2622

Taxation ruling IT 319

Taylor v. Federal Commissioner of Taxation (1970) 119 CLR 444; 1 ATR 582; 44 ALJR 148; 70 ATC 4026 (Taylor's Case)

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).