Edited version of private advice

Authorisation Number: 1052121897970

Date of advice: 23 May 2023

Ruling

Subject: Fixed interest and present entitlement

Issues

Question

Are Individual A and Individual B required to include in their assessable income their share of the income and capital of the trust having regard to section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) and section 115-215 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes - To the extent the distributions reflect the operation of Clauses X and Y of the Will, the beneficiaries Individual A and Individual B have a vested and indefeasible interest in the income and capital of the testamentary trust and are presently entitled to the income and capital gains made by the trust in proportion to their interest for the purposes of section 97 of the ITAA 1936 and section 115-215 of the ITAA 1997

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Deceased died on XXXX leaving an estate in XXXX

The Deceased made a will dated XXXX (Will).

The deceased was survived by their spouse, and following children:

• Individual 1;
• Individual 2;
• Individual 3;
• Individual 4; and
• Individual 5.

Individual A and Individual B are Individual 4's children.

Probate of the Will was granted on XXXX.

Relevantly Clauses X and X of the Will provide:

X. I GIVE AND BEQUEATH all the rest of my property whatever to my Trustee upon trust to sell call in and convert the same into money as and when my Trustees think fit (but with full power to suspend such calling in and conversion and to retain my estate or any part or parts thereof in its present state of investment so long as my Trustees think fit) and out of the proceeds thereof to pay my just debts funeral and testamentary expenses and all duties including Federal Estate duty and to invest the residue thereof at their absolute discretion in or upon any Public Stock Debentures Public Funds or Government Securities of the Commonwealth of Australia or any of the States thereof or upon purchase of freehold land or upon Mortgage of any freehold land or conditionally purchased additionally conditionally purchased or conditionally leased land or lands of any other tenure authorised or created by any Act now or from time to time to be in force relating to Crown Lands in any of the States aforesaid or upon deposit receipt for interest either for a fixed period or at call or on current account in any Joint Stock Company carrying on business in any of the States aforesaid or in or upon the shares stocks funds debentures debenture stock mortgages or other securities of any Corporation or Company (except Mining Companies) carrying on business in any of the States aforesaid with full power from time to time to again sell or take mortgages of any land as aforesaid and to vary transpose or transfer such stocks funds shares and investments into or for...

Y. SUBJECT to the foregoing provisions l direct that my Trustees shall stand possessed of the trust property trust funds and the stocks funds securities and investments for the time being representing the same UPON TRUST -

(a) TO pay out of the income thereof the sum of XXXXXX pounds per annum to my said wife during her life so long as she remains my widow to be paid by quarterly instalments

(b) SUBJECT to the said payment to my said wife UPON TRUST to divide the same trust moneys among all my children in equal shares but subject to the following trusts (namely) as to the yearly income of the share of each such child accruing due in the lifetime of such child to pay him or her such yearly income by quarterly instalments and as to the capital of the share of each such child of mine and the yearly income thereof to accrue after his or her death UPON TRUST for my grandchild if only one, or my grandchildren equally if more than one issue of each. such child but on the death of each grandchild who being a son dies under the age of twenty one years or being a daughter dies under that age without having been married, the share originally given as well as the shares accruing under this cross executor trust shall accrue to the other grandchildren equally or to the other grandchild And if no grandchild being a son attains the age of twenty one years or being a daughter attains that age or is married then in trust for my other children in equal shares.

(c) IF any child of mine dies in my lifetime leaving issue surviv­ing me then the shares original or accruing to which the child so dying would if living at my death have been entitled under the foregoing trusts shall be held by my Trustees upon such trusts and subject to such provisions as the same would have been held if such child had died immediately after my death.

Relevantly, the beneficiaries of the trust include Individual A and Individual B

Assumptions

The trust instrument is valid and the trustees have acted in accordance with the terms of the Will.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1997 section 115-215

Reasons for decision

Summary

The beneficiaries have a vested and indefeasible interest in the income and capital of the trust and are presently entitled to the income and capital gains made by the trust in proportion to their interest for the purposes of section 97 of the ITAA 1936 and section 115-215 of the ITAA 1997.

Detailed reasoning

Pursuant to Division 6 of the ITAA 1936, the net income of the trust is assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.

Pursuant to subsection 95(1) of the ITAA 1936, net income, in relation to a trust estate, is defined as the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions. The net income of the trust includes any capital gain on the disposal of CGT assets.

Subsection 97(1) of the ITAA 1936 relevantly provides that where any beneficiary who is not under a legal disability is presently entitled to a share of the income of the trust estate, that share of the net income of the trust estate (as determined in accordance with subsection 95(1) of the ITAA 1936) shall be included in the assessable income of the presently entitled beneficiary.

Pursuant to section 115-215 of the ITAA 1997, parts of the net income attributable to the trust's net capital gain are treated as capital gains made by the beneficiary entitled to those parts. This allows the beneficiary to reduce those parts by any capital losses and unapplied net capital losses it has.

The leading cases, e.g. FC of T v. Whiting (1943) 68 CLR 199; 7 ATD 179 and Taylor Trust, Trustees of v. FC of T (1970) 119 CLR 444; 70 ATC 4026, have established that in order for a beneficiary to be presently entitled to trust income, the following two conditions must be satisfied:

a)    The beneficiary must have an indefeasible, absolute vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent. This means that the beneficiary must have the right to demand immediate payment (or would have had the right to demand payment had they not been under a legal disability).

b)    The income must be legally available for distribution to the beneficiary.

The net income of the trust estate and whether any beneficiary is presently entitled to a share of income of the estate are determined on the last day of the financial year Union Fidelity Trustee Co. of Australia v. F.C. of T. (1969) 119 CLR 177; 69 ATC 4084; 1 ATR 200; and F.C. of T. v. Galland 86 ATC 4885; (1986) 18 ATR 33).

In Taxation Ruling IT 2622, the Commissioner confirms that this means that, on the last day of the income year, provided a beneficiary has become presently entitled to a share of the income of the trust estate on or before that day, the beneficiary is assessable on that share of the net income of the trust estate.

The trust instrument consists of the Will of the deceased.

The Commissioner considers that pursuant to the operation of Clauses X and Y, the beneficiaries have fixed entitlements to the income and capital of the testamentary trust and there are no clauses in the will that authorises the trustee to do anything that would cause their entitlement to be defeased.

To the extent the distributions reflect the operation of Clauses X and Y, the beneficiaries have a vested and indefeasible interest in the income and capital of the trust and are presently entitled to the income and capital of the trust in proportion to their interest, and as such taxed at their personal rates on their share of the income and capital gains of the trust, having regard to section 97 of the ITAA 1936 and section 115-215 of the ITAA 1997.

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