Edited version of private advice

Authorisation Number: 1052143449965

Date of advice: 18 July 2023

Ruling

Subject: CGT - withholding obligations

Question 1

If the trustee of the Trust does not resolve by 30 June 2023 to distribute the capital gain from the sale of the Property to any beneficiary will the Trustee be assessed under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No, provided a determination is not made to accumulate income, no resolution is made by 30 June 2023 and no default beneficiary is under a legal disability or a non-resident.

Question 2

If the trustee of the Trust does not resolve by 30 June 2023 to distribute the capital gain from the sale of the Property to any beneficiary, does the Receiver have an obligation under section 254 of the ITAA36 to lodge an income tax return in respect of the capital gain on sale of the Property?

Answer

As receiver you are responsible under section 254(1)(b) for lodging (in a representative capacity) an income tax return in respect of any capital gain made as the result of the sale of the property.

Question 3

If the trustee of the Trust does not resolve by 30 June 2023 to distribute the capital gain from the sale of the Property to any beneficiary, does the Receiver have an obligation under section 254 of the ITAA36 to retain money out of the proceeds of sale of the Property?

Answer

Until a relevant assessment has been made, you do not have an obligation to retain funds.

Question 4

If the trustee of the Trust does not resolve by 30 June 2023 to distribute the capital gain from the sale of the Property to any beneficiary, is the Receiver entitled but not obliged to retain an amount on account of tax on the capital gain from sale of the Property until liability for the CGT has been established by an assessment?

Answer

Until a relevant assessment has been made, you do not have an obligation to retain funds.

Question 5

If the trustee of the Trust does not resolve by 30 June 2023 to distribute the capital gain from the sale of the Property to any beneficiary, and the Receiver does not retain an amount on account of the CGT on sale of the Property, will the Receiver be held personally liable for the CGT on sale of the Property under section 254(1)(e) of the ITAA36 for the income year ended 30 June 2023?

Answer

Until a relevant assessment has been made, you do not have an obligation to retain funds nor is the personal liability in section 254(1)(e) enlivened.

Question 6

If the trustee of the Trust resolves by 30 June 2023 to distribute the capital gain from the sale of the Property to the individual as a beneficiary of the Trust does the Receiver have an obligation under section 254 of the ITAA36 to lodge an income tax return in respect of the capital gain on sale of the Property?

Answer

Yes.

Question 7

If the trustee of the Trust resolves by 30 June 2023 to distribute the capital gain from the sale of the Property to the individual as a beneficiary of the Trust does the Receiver have an obligation under section 254(1)(d) of the ITAA36 to retain money out of the proceeds of sale of the Property?

Answer

Once a relevant assessment has been made.

Question 8

If the trustee of the Trust resolves by 30 June 2023 to distribute the capital gain from the sale of the Property to the individual as a beneficiary of the Trust is the Receiver entitled but not obliged to retain an amount on account of tax on the capital gain from sale of the Property until liability for the CGT has been established by an assessment?

Answer

Before a relevant assessment is made you are not obliged to retain an amount for tax.

Question 9

If the trustee of the Trust resolves by 30 June 2023 to distribute the capital gain from the sale of the Property to the individual as a beneficiary of the Trust if the Receiver does not retain an amount on account of the CGT on sale of the Property, will the Receiver be held personally liable for the CGT on sale of the Property, under section 254(1)(e) of the ITAA36 for the income year ended 30 June 2023?

Answer

To the extent of the retention obligation in section 254(1)(d).

This private ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust was established by a Deed of Settlement. The Trust is a discretionary trust. The trustee of this Trust was the Company which is now in liquidation.

In the income year ending 30 June 20XX the Company as trustee for the Trust purchased the Property and became the sole registered owner of the Property.

The Property did not generate any rental or other income.

The legal ownership of the Property was transferred from the Company (as former trustee) to a new trustee, an individual.

On 30 June 20XX you were appointed liquidator of the Company. In June 20XX you were appointed by court order as Receiver over the assets of the Trust, including the Property. You sought this appointment to exercise the Company's right to claim indemnity from the assets of the Trust with respect to the debts it incurred when it was acting as its trustee.

In November 20XX the Federal Court of Australia made orders to the effect, and this ruling is made based on:

•         the Trust was validly established;

•         the Property was characterised as Property held by the Company as trustee of the Trust;

•         the Company was replaced as trustee of the Trust by an individual in November 20XX.

You arranged for the sale of the Property. The Property was sold pursuant to a contract of sale in the 2023 financial year.

The vendor of the Property on the contract of sale is individual as Trustee. You signed and executed the contract of sale of the Property.

The disposal of the Property was a CGT event and triggered a gain of a capital nature to be derived in the income year ended 30 June 2023. That gain is assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 254

Reasons for decision

Question 1

There is no definition of the term presently entitled in Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997). It is therefore necessary to establish the meaning which has been given to the term by the courts.

The principal cases on the concept of present entitlement are the High Court decisions in Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199; (1943) 7 ATD 179; (1943) 2 AITR 421 (Whiting's Case) and Taylor v. Federal Commissioner of Taxation (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582 (Taylor's Case). The principles in Taylor's Case are also dealt with in Income Tax Ruling IT 319.

The main principles emerging from Whiting's and Taylor's Case are:

•         The income must be legally available for distribution to the beneficiary. It does not matter whether the amount of income has not been exactly ascertained. Therefore, the fact that you are not in a position to know exactly what is available to distribute to a beneficiary does not alter the fact that in a legal sense, a beneficiary can still demand payment and be presently entitled;

•         The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent which 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). An interest is said to be defeasible where it can be brought to an end and indefeasible where it cannot.

When does present entitlement arise?

Although the tax legislation is silent on when present entitlement must be created, case law indicates that to create a present entitlement to income it is necessary to create that entitlement prior to the end of an income year. In Trustees of the Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525, Hill J stated at 4539:

"Present entitlement to the income must arise, if at all, at the latest by the end of the year of income."

Therefore, the ATO takes the view that a beneficiary's entitlement must be vested by 30 June. An entitlement that will only arise on the happening of an event in the future is not vested. For example, a resolution would not be effective if it stated that an entitlement of a beneficiary would arise in the event of a future adjustment to the trust's net (taxable) income by the ATO - see Pearson v FCT [2006] FCAFC 111 where Edmonds J stated:

"First, "present entitlement" in terms of Division 6 of Part III of the ITAA has to be determined by the end of the year of income to which the income relates, in the sense of its year of derivation."

Accordingly, if a trustee resolution is not made before the end of the financial year no beneficiary will be presently entitled to the income of the trust. In these instances, it is necessary to examine the trust deed to establish if there are provisions for default beneficiaries and how those provisions operate.

Default beneficiaries

In no resolution is made by the Trustee it is necessary to look to the 'default clause(s)' in the Trust Deed to determine how the income of the Trust is to be applied in the absence of a trustee resolution.

A trust deed may contain a provision that specifies that if the trustee has not, by the end of the income year, determined to distribute or accumulate some or all of the income of the trust, then that income is to be distributed to a default beneficiary. In this situation the default beneficiary automatically becomes presently entitled to the relevant amount or proportion of the trust income.

Clause 6 of the Trust Deed addresses the situation where Trustee fails to make a resolution as to how the income of the Trust should be applied:

'Income which has not been either accumulated or distributed in a year must be divided between the members at that time of the specified class in equal shares."

Application to your circumstances

We consider that if no determination is made to accumulate income and no resolution is made by 30 June 2023, the income of the trust, including the capital gain, is to be divided equally among the beneficiaries. The default beneficiaries will be taken to be presently entitled in the absence of a resolution being made by the trustee. Therefore, provided no beneficiary is under a legal disability or a non-resident, the Trustee will not be assessed under section 99A of the ITAA 1936.

Question 2

You are a court appointed receiver over assets of the trust. As a court-appointed receiver you are an officer of the Court appointed to discharge the Court's instructions by effecting the sale of assets before applying the proceeds as set out in the orders of the Court. The specific court orders determine in whose interests the receivers are acting.

As a receiver you are within the tax law definition of 'trustee'.[1] We also conclude and determine[2] that having regard to the specific wording of the Court order there is an agency relationship between you and the individual Trustee, on the basis:

•         You are empowered to sell the Property, execute documents relating to the Trust, distribute the proceeds of sale to the creditors of the Company, and distribute any surplus to the original trustee. Your role ceases upon completion of these actions.

•         You signed the contract of sale on behalf of the original trustee.

•         You applied for an ABN for the original trustee.

You sold a CGT asset of the trust and derived a gain of a capital nature, not for yourself but as agent. You have triggered the obligations imposed by section 254, which include to 'be answerable as taxpayer for the doing of all such things as are required to be done' by virtue of the tax law in respect of the capital gain derived. You are also responsible for the payment of tax on the gain.

Upon deriving a gain of a capital nature as an agent, you triggered the subsection 254(1)(b) obligation to make returns and be assessed thereon.

As trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying relevant tax liabilities. Section 254 imposes ancillary obligations on you to be answerable as taxpayer in relation to the gain you derived from the sale of the property. The obligations imposed by section 254 are ancillary[3], meaning they are secondary to the primary obligation.

Question 3

A 'relevant assessment' is one that includes the gain, and includes an assessment made under paragraph 254(1)(b).

If you, or anyone else, are assessed to tax in respect of the capital gain, you will have an obligation to retain funds to pay the assessed tax liability out of any funds that you hold at when the relevant assessment is made and any amount that comes to you in your representative capacity.

Question 4

Before the paragraph 254(1)(d) retention obligation is enlivened, you are not obliged to retain an amount.

Question 5

As was explained in Australian Building Systems,[4] the retention obligation in paragraph 254(1)(d) is enlivened upon a relevant assessment. Until a relevant assessment in respect of the gain has been made, you are not obliged to retain funds to pay tax on the capital gain. Personal liability is imposed by paragraph 254(1)(e) only to the extent that the trustee or agent is required to retain funds held when the relevant assessment is made or from funds that subsequently come to them in their representative capacity. Until a relevant assessment is made, you are not personally liable for tax on the disposal of the Property.

Question 6,7, 8 and 9

If the trustee of the Trust does resolve by 30 June 2023 to distribute the capital gain from the sale of Property to a beneficiary, and that beneficiary is not under a legal disability and is not a non-resident at the end of the income year, that beneficiary has the primary obligation to lodge, be assessed and pay the assessed tax liability on the capital gain derived. This does not remove the ancillary obligations that are imposed on you by section 254. Until the primary obligation is met, your section 254 obligations as an agent remain alive. The obligation to retain under section 254(1)(d) only arises once there is a relevant assessment.

Section 254 is both an assessing and collecting provision. Upon the making of a relevant assessment the retention obligation is enlivened. A personal liability is imposed under section 254(1)(e) to the extent that an amount was not retained under section 254(1)(d) from amounts that you had when the assessment was made and any subsequent funds you receive.

[1] Subsection 6(1) of the ITAA 1936.

[2] Subsection 960-105(2) of the ITAA 1997.

[3] Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation) [2015] HCA 48.

[4] Commissioner of Taxation v Australian Building Systems Pty Ltd (in Liquidation) [2015] HCA 48. ATO Decision Impact Statement.

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