Edited version of private advice

Authorisation Number: 1051853751099

Date of advice: 2 July 2021

Ruling

Subject: Income - trusts

Question 1

Will the Trust be characterised as a non-complying superannuation fund within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will income of the Trust, to which a beneficiary has been made presently entitled for a particular income year, be included in the assessable income of the beneficiary pursuant to section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) where they are a resident of Australia for income tax purposes and are not under a legal disability?

Answer

Yes

Question 3

Will the proposed amendment to the trust deed of the Trust cause CGT event E1 or E2 insections 104-55 and 104-60 of the ITAA 1997 to happen?

Answer

No

Question 4

Will CGT event E4 in section 104-70 of the ITAA 1997 happen where the Trust makes a non-assessable payment to a beneficiary?

Answer

No

Question 5

Will the Company be entitled to claim a deduction under section 8-1 of the ITAA 1997 for losses or outgoings it incurs in making grants to applicants?

Answer

No

Question 6

Will grants made by the Company to applicants constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

The Trust was established to benefit employees, former employees and certain family members of employees and former employees of a particular business (the beneficiaries).

The Trust owns holiday apartments which are offered to the beneficiaries as holiday rentals at a discounted rent.

The Trust makes grants to beneficiaries (including hardship grants, education grants, funeral grants and medical grants).

The Trustees are empowered by the trust deed to apply income and capital for the benefit of beneficiaries.

The trust deed does not stipulate how the Trust's funds are to be used to benefit the beneficiaries, nor does it include specific guidance on how funds can be used.

The trust deed contains a power of amendment.

The Trust has been previously treated as a non-complying superannuation fund.

The Trustees are proposing the following:

•         The trust deed will be amended to include the Company as a beneficiary eligible to receive distributions from the Trust;

•         The Trustees will make annual resolutions to distribute some or all of the income of the trust estate to the Company; and

•         Using amounts received from the Trust, the Company will make grants to the beneficiaries of the Trust as well as other applicants that are eligible to receive grants (the applicants) pursuant to its constituent documents, rules and policies.

The purpose of the Company is to advance the health, education and welfare of people who work in, or have previously worked in, a particular industry in Australia and their families.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 subsection 97(1)

Income Tax Assessment Act 1936 section 101

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 subsection 104-70(1)

Income Tax Assessment Act 1997 paragraph 104-70(1)(a)

Income Tax Assessment Act 1997 subsection 995-1(1)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Superannuation Industry (Supervision) Act 1993 section 10

Reasons for decision

Question 1

Summary

The Trust is not characterised as a non-complying superannuation fund within the meaning of subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

In order to be characterised as a non-complying superannuation fund under subsection 995-1(1) of the ITAA 1997, a fund must firstly be a 'superannuation fund' within the meaning of subsection 995-1(1) of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 provides that the term 'superannuation fund' has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). The definition of 'superannuation fund' in section 10 of the SISA provides that 'superannuation fund' means a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident benefit, superannuation or retirement fund

The concept of a 'provident, benefit, superannuation or retirement fund' is not defined in either the SISA or the ITAA 1997.

The question of what, by way of ordinary meaning, is meant by the expression 'superannuation fund' has been considered in a number of High Court and Federal Court decisions. Most notably, and on which a number of other decisions rely are the decisions in Scott v Commissioner of Taxation (No 2) 1966 40 ALJR 265 (Scott) and Mahony v Commissioner of Taxation (1965) 13 ATD 519 (which went on appeal as Mahony v Commissioner of Taxation (1967) 41 ALJR 232) (Mahony).

In Cameron Brae v. FCT 2007 ATC 4936, Jessup J summarised the position from the foregoing decisions in the following terms (and in a consistent manner to Stone and Allsop JJ in the same case):

Thus, as a matter of common understanding, it would seem that a superannuation fund is a fund which has as its sole purpose the provision of benefits to participating employees upon their reaching a prescribed age (per Windeyer J [in Scott]) or upon their retirement, death or other cessation of employment (per Kitto J [in Mahony on appeal]).

Similarly, in Austin v. Commonwealth [2003] HCA 3, Gaudron, Gummow and Hayne JJ summarised the general description of a superannuation fund given by Windeyer J in Scott as being:

the setting aside of money or other property for investment with the yield therefrom to be capitalised, and the fund thus created being subjected to appropriate trusts for the provision to participants of monetary benefits upon their reaching a prescribed age.

In Walstern Pty Ltd v FCT (2003) 54 ATR 423, Hill J made reference to Raymor Contractors Pty Ltd v FC of T 91 ATC 4259 in which he concluded that regard was to be had to the terms of the trust deed in determining whether a fund was a superannuation fund.

The High Court has made observations about the terms of a deed and their characterisation of a fund as a superannuation fund and has observed that:

•         If, on a proper examination of the terms of the deed establishing the fund, the terms permitted the trustees to apply the fund or any portion of it to purposes foreign to the true purpose of such a fund, then it would not be a superannuation fund (Mahony); and

•         If the deed required the provision of non-retirement benefits or permitted the provision of non-retirement benefits in conjunction with tax avoidance, then the fund would not have been a superannuation fund (Driclad Pty Ltd v. FCT (1968) 121 CLR 45 (Driclad)).

In the AAT matter of Paul Baker and Commissioner of Taxation [2015] AATA 469 Senior Member O'Loughlin stated:

Accordingly a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund.

In Driclad it was suggested that when a deed was such that there were sections to which contributions were to be allocated, each section of the fund was to be considered as a separate fund and to be considered separately to determine whether it was formed for the requisite purpose.

Based on the cases mentioned a determination of whether the Trust is a superannuation fund requires an examination of language used in the trust deed and the circumstances surrounding the creation and the operation of the Trust.

The Trust applies funds to purposes other than those prescribed under the SISA (and its accompanying Regulations), including the provision of holiday rentals, hardship grants, education grants, funeral grants and medical grants.

It therefore cannot be said that the benefits the Trust provides are ancillary or incidental to payment of benefits on retirement, death or disability. It follows that the Trust is not a superannuation fund within the definition of section 10 of the SISA.

The Trust is therefore neither a superannuation fund nor a non-complying superannuation fund within the meaning of subsection 995-1(1) of the ITAA 1997.

Question 2

Summary

Income of the Trust, to which a beneficiary has been made presently entitled for a particular income year, will be included in the assessable income of the beneficiary pursuant to section 97 of the ITAA 1936 where they are a resident of Australia for income tax purposes and are not under a legal disability.

Detailed reasoning

In broad terms, Division 6 of Part III of the ITAA 1936 determines who will be assessed for income tax purposes on parts of the net income of a trust and in what shares.

Subsection 97(1) of Division 6 of Part III of the ITAA 1936 sets out when amounts are included in the assessable income of a beneficiary that is an Australian resident not under a legal disability. It provides:

97 Beneficiary not under any legal disability

(1) [Assessable and exempt income of beneficiary] Subject to Division 6D, where a beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and

...

Accordingly, subsection 97(1) of the ITAA 1936 provides that in circumstances where a beneficiary that is a resident not under a legal disability has been made presently entitled to a share of the income of the trust estate, the beneficiary includes their share of the net income of the trust estate in assessable income.

Section 101 of the ITAA 1936 sets out when a beneficiary of a discretionary trust is presently entitled to income of the trust estate:

Where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises the trustee's discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary's benefit by the trustee in the exercise of that discretion.

The meaning of 'presently entitled' was considered by the High Court in Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 190 where Latham CJ and Williams J stated at 215-6:

The words 'presently entitled to a share of the income' refer to a right to income 'presently' existing-i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee, or that, within the meaning of s.19 of the Act, the trustee may properly reinvest, accumulate, capitalize, carry to any reserve, sinking fund or insurance fund however designated or otherwise deal with it as he directs or on his behalf.

Pursuant to its terms, the Trust operates as a discretionary trust. The Trustees of the Trust will exercise their discretion in each year to make a beneficiary, such as the Company, presently entitled to the Trust's income of the trust estate in that year. Section 101 of the ITAA 1936 will therefore apply to make such a beneficiary presently entitled to the amount paid or applied on their behalf pursuant to the exercise of the Trustees' discretion.

Accordingly, subsection 97(1) of the ITAA 1936 will apply to include the beneficiary's share of the Trust's net income of the trust estate in the beneficiary's assessable income where they are a resident of Australia for income tax purposes and are not under a legal disability.

Question 3

Summary

The proposed amendment to the trust deed of the Trust will not cause CGT event E1 or E2 in sections 104-55 and 104-60 of the ITAA 1997 to happen.

Detailed reasoning

Alterations to a trust deed need to be considered in the context of whether the alterations cause a capital gain or capital loss to arise. This may occur where changes to a trust are such that for income tax purposes one trust comes to an end and is effectively replaced by another. In particular, CGT event E1 in section 104-55 of the ITAA 1997 occurs where a trust is created over a CGT asset, and CGT event E2 in section 104-60 of the ITAA 1997 occurs where an asset is transferred to an existing trust.

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? (TD 2012/21) considers whether CGT event E1 or E2 in sections 104-55 and 104-60 of the ITAA 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document or varied with the approval of a relevant court.

It is considered that neither CGT event E1 nor CGT event E2 happen unless:

•         the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

•         the effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

On 21 January 2011, the Full Federal Court (Edmonds and Gordon JJ, Dowsett J dissenting) handed down its judgment in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark). That case raised for consideration the circumstances in which the nature of a trust has so changed that it might be concluded that the trust that originally incurred capital losses is not the same trust for income tax purposes as that which has derived gains against which the losses are sought to be recouped.

Paragraphs 20 and 21 of TD 2012/21 state:

20. It is clear following Clark that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purposes. As such, in the absence of termination, tax losses being carried forward by a trustee will as a general rule remain available to be recouped against relevant trust income derived in future years of income.

21. Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees [Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd [1999] FCA 1455], as explained by Edmonds and Gordon JJ in Clark, is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power...

This final point is expanded at paragraph 24 of TD 2012/21:

24. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

In the case of the Trust, the trust deed contains a power to amend the deed. Consequently, the proposed amendment may be facilitated by a valid exercise of power.

Since the amendments are, in effect, contemplated in the trust deed, and will not cause the existing trust to terminate and for a new trust to arise, or lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset has been settled on terms of a different trust, the continuity of the Trust will be maintained for trust law purposes. Therefore, the proposed amendments do not result in the creation of a new trust and neither CGT event E1 nor CGT event E2 will be triggered.

Question 4

Summary

Non-assessable payments by the Trust to the beneficiaries will not result in CGT event E4 happening under section 104-70 of the ITAA 1997.

Detailed reasoning

Subsection 104-70(1) of the ITAA 1997 states that CGT event E4 happens if:

(a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for * CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and

(b) some or all of the payment (the non-assessable part) is not included in your assessable income.

The Commissioner's view of how this provision applies to payments made to a beneficiary of a discretionary trust is set out in Taxation Determination TD 2003/28 Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to: (a) a mere object; or (b) a default beneficiary? (TD 2003/28). In this regard, TD 2003/28 explains that CGT event E4 does not occur in these circumstances because the interests of a mere object or a default beneficiary in the trust are not of a 'nature' or 'character' as required by paragraph 104-70(1)(a) of the ITAA 1997 (paragraph 3 of TD 2003/28).

In the current circumstances, the beneficiaries, including the Company, of the Trust are 'mere objects' of the Trust, which therefore do not have an interest in the Trust of the nature required to attract CGT event E4. It follows therefore that non-assessable payments made by the Trust to the beneficiaries, including the Company, will not result in CGT event E4 happening.

Question 5

Summary

The Company will not be entitled to claim a deduction under section 8-1 of the ITAA 1997 for losses or outgoings it incurs in making grants to applicants.

Detailed reasoning

Section 8-1 of the ITAA 1997 sets out when a loss or outgoing may be deducted from assessable income as a general deduction:

8-1 General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

...

In the circumstances, the Company will make grants to the applicants. The grants will be provided to the applicants pursuant to the Company's constituent documents, rules and policies. The decision by the Company to make a grant to a particular applicant is based solely on the particular financial or other hardship being suffered by the applicant (i.e. there being no nexus between the grants and the employment or other services provided by the applicant). This is determined by the Company on an objective assessment of the merits of the applicant's claim.

These grants will therefore not be incurred in gaining or producing assessable income nor are will they be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Accordingly, the Company will not be entitled to claim a deduction under section 8-1 of the ITAA 1997 for losses or outgoings it incurs in making grants to applicants.

Question 6

Summary

Grants made by the Company to applicants will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Detailed reasoning

The term 'fringe benefit' is defined in subsection 136(1) of the FBTAA, which provides:

136 Interpretation

(1) [Definitions] In this Act, unless the contrary intention appears:

...

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to an employee or an associate of the employee by:

(c) the employer;

(d) an associate of the employer;

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer;

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

...

...

Accordingly, in order for a benefit to be a fringe benefit, it must be provided in respect of the employment of an employee.

The term 'in respect of' in the context of employment of an employee is also defined in subsection 136(1) of the FBTAA:

136 Interpretation

(1) [Definitions] In this Act, unless the contrary intention appears:

...

in respect of, in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

...

The term 'in respect of' was also examined in J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 (Knowles). In Knowles, the full Federal Court held that the phrase 'in respect of' required a 'nexus, some discernible and rational link, between the benefit and employment', though the Court noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment'.

As discussed in the case of Smith v Federal Commissioner of Taxation (1987) 164 CLR 513, the benefit needs to be more than causally related to the employment, it must be a 'product or incident' of the employment (Wilson J at 519).

In the circumstances, the Company will provide benefits on a case-by-case basis to applicants after reviewing applications for assistance submitted by applicants.

Whilst eligibility to apply for a grant may arise because the applicant is a current or former employee (or a certain relative of a current or former employee), the decision by the Company to actually make the grant to the applicant is determined on the basis of financial or other hardship. This is determined by the Company on an objective assessment of the merits of the applicant's claim using criteria unrelated to their employment.

Thus, the grants made by the Company to applicants will not be provided in respect of the employment of an employee as required by subsection 136(1) of the FBTAA under the definition of 'fringe benefit'.

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