Edited version of private advice

Authorisation Number: 1051977919446

Date of advice: 3 June 2022

Ruling

Subject: Testamentary trust

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 testamentary trust for the relevant income years under section 99 of the ITAA 1936?

Answer

Yes.

Question 2

If the income of the testamentary trust is assessed under section 99 of the ITAA 1936, is the rate of tax that which is prescribed directed under section 1 of Part 1 of Schedule 10 of the Income Tax Rates Act 1986 (ITRA 1986)?

Answer

Yes.

This private ruling applies for the following period(s):

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased died in 20XX.

The deceased will directed the establishment of a testamentary trust (the Trust) in favour of a taxpayer.

The taxpayer is the sole trustee and primary beneficiary of the Trust.

Under the terms of the will, the Trust was created over a share of the deceased estate. This share consisted of cash, shares in listed companies and units in managed funds.

The corpus of the trust is comprised solely of these assets being assets of the deceased as at the time of death. No person has directly or indirectly transferred money or property to the Trust or conferred or attached any special rights to the property of the Trust.

The Trust derived investment income such as dividends, interest and capital gains in the income year ended 30 June 20XX being income generated by its share of the assets transferred from the estate.

The Trust will derive only income of the same kind in the year ending 30 June 20XX.

The trust anticipates that it will distribute some of this income to the taxpayer as required for his living expenses, whilst the remainder will be accumulated in the Trust.

No amendments have been made to the terms of the trust, nor will any such amendments be made prior to 30 June 20XX.

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 Rates Act 1986 subsection 12(6)

Income Tax Rates Act 1986 subsection 12(9)

Income Tax Rates Act 1986 Sch10-PtI

Reasons for decision

Discretion as per section 99A

Sections 99 and 99A of the 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 applies in relation to all trusts unless:

•         the trust resulted from a will; subparagraph 99A(2)(a)(i)

•         the trust is bankrupt estate; paragraphs 99A(2)(b) and (c)

•         the trust is a trust that consists of property referred to in paragraph 102AG(2)(c)

and the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances.

The applicable rate of tax under section 99A is set in subsection 12(9) of the Income Tax Rates Act 1986 (ITRA 1986) at 45%, which is imposed from the first dollar of taxable income.

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2) states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for Section 99A to apply.

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will.

In order for a trust to result from a will, it is necessary that the will should be the source of the funds and that the trust should be created in consequence of a provision in the will or court order itself (Case P53 82 ATC 247).

As the Trust Fund was created in consequence of a will, the discretion under subsection 99A(2) of the ITAA 1936 is exercised to assess the income of the trust in accordance with Section 99 of the ITAA 1936.

Rates of tax to be applied

If no part of the net income of the Trust Fund is to be distributed to beneficiaries and section 99A is considered not to apply, then the trustee will be assessed under section 99 of the ITAA 1936 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 of the Act. Part 1 of Schedule 10 of 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 of the ITAA 1936 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 of the ITRA 1986 comprises trustees liable to be assessed under section 99 of the ITAA 1936 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 $6,000, but rather a reduced tax-free threshold of $416 applies.

In this particular case, for the years ended 30 June 20XX onwards, the Trust Fund is a testamentary trust that falls into the second category and therefore will be eligible as per section 99 of the ITAA 1936 for normal individual rates of a resident individual.

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 testamentary trusts.

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.

Code 37, on the other hand, applies to trustees assessed under subsection 99A(2) including the trustee of a trust resulting from a will i.e. a testamentary trust, but not the 'estate of a deceased person'.

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