Edited version of private advice

Authorisation Number: 1052182576489

Date of advice: 25 October 2023

Ruling

Subject: Commissioner's discretion - trust estate

Issues

Question

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

Answer

Yes.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

Facts

The deceased estate was established under the will of the late Individual A, who passed away on XXXX.

There is a definable relationship ordinarily of blood or marriage between the deceased and the beneficiaries.

The Estate's assets consist of the following.

• Shares in Company A

100% ownership of this company was held by late Individual A. The shares were either acquired by late Individual A on establishment of the company or upon the the death of their spouse. Dividend distributions have been made prior to and following Individual A's death, including for the period from XXXX to XXXX, of $X in each income year. The dividends were paid out of retained profits held by the company prior to Individual A's death.

• Shares in Company B

100% ownership of this company was held by late Individual A. The shares were either acquired by late Individual A on establishment of the company or upon the the death of their spouse. Dividend distributions have been made prior to and following Individual A's death, including for the period from XXXX to XXXX, of $X in each income year. The dividends were paid out of retained profits held by the company prior to Individual A's death.

• Property

The Property was purchased in XXXX (settlement in respect of which occurred XXXX).

• Bank account

The bank account for the Estate was established under Powers of Attorney granted to the Executors in XXXX, being after the grant of probate by the Court to the Executors. The proceeds of late Individual A's individual bank accounts held in their lifetime were transferred to this account as the personal accounts were closed.

Balance Sheet for the Estate:

XXXX

Table 1: Balance sheet for the Estate:

The deceased has not contributed to more than one estate for the beneficiaries.

The trustee has not proceeded with the final distribution to beneficiaries within a three year period due to disputes that were resolved in XXXX year.

The Estate is liable for the Respondent's costs of both the court proceedings. To date the Respondent has not stated to the Estate the amount of costs to be paid by the Estate which they will agree to in order to satisfy the court costs orders in their favour.

Due to the material unknown liabilities, no distributions have been made to any beneficiary of the Estate as at 1 XXXX.

Given the time which has transpired since both the most recent Court costs order and the communication by the Estate's lawyer to the lawyers for the other party of the need for an independent valuation of the other party's costs (and the lack of communication from the other party), the Executors have commenced the process of liquidating the remaining assets of the Estate.

Taxpayer's contentions

The Taxpayer has made the following submissions to support the request for the exercise of the discretion:

The deceased estate is of the 'ordinary and traditional' kind and has been in existence for more than three years. There is no tax avoidance involved and the Commissioner's discretion to assess the trustee under section 99 of the ITAA 1936 for the years ended XXXX and XXXX due to the ongoing court case is appropriate.

The Commissioner has discretion to assess the trustee under section 99 of the ITAA 1936 rather than under section 99A of the ITAA 1936. The decision to exercise discretion to the trustee under section 99 of the ITAA 1936 should be made due to the below reasons:

1.    the Estate anticipates a material liability to the other party to the Court proceedings, currently unquantified, as a result of orders against the Estate in favour of that other party;

2.    at the present time, the Executors are not prepared to be exposed to personal liability if they made any distribution to beneficiaries before at least knowing the potential quantum claimed by the other party to the Court proceedings; and

3.    to date the Executors have not received, and accordingly the Executors await, any information from the other party to the Court proceedings of the amount he claims he is entitled by reason of the Court orders

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 99

Question

Will the Commissioner exercise the discretion under section 99A of the ITAA 1936to tax the income of the trust estate under section 99?

Summary

Having regard to the relevant facts and circumstances, the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the trust estate in relation to the relevant years of income. Accordingly, section 99 of the ITAA 1936 will apply.

Detailed reasoning

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee of a trust estate on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee.

Section 99A of the ITAA 1936 does not apply in relation to a trust estate that:

•         arises from a will or intestacy (i.e. which included both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will) - subparagraphs 99A(2)(a)(i) and (ii); or

•         relates to bankruptcy - paragraphs 99A(2)(b) and (c); or

•         consists of property referred to in paragraph 102AG(2)(c) - paragraph 99A(2)(d).

if the Commissioner forms the opinion that it would be unreasonable to apply section 99A of the ITAA 1936 with respect to the trust estate in relation to that year of income.

In forming an opinion pursuant to section 99A(2) of the ITAA 1936 whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) to have regard to certain matters, including:

Broadly, these are:

•         The circumstances in which and conditions upon which property was transferred to a trust estate, benefits provided for a trust estate or income was derived by the trust estate, or special rights or privileges whether or not they have been exercised were conferred on or attached to property of the trust estate - including whether a person who, after the initial settlement is made, either alone or with others directly or indirectly transfers or lends property to the trust estate, channels income into the estate, confers benefits on the estate, or confers special privileges on the property of the estate.

•         The number of trust estates to which a person has transferred assets, provided benefits or conferred special privileges.

•         Any such other matters, if any, as the Commissioner thinks fit. This includes whether the trustee has lent money to others.

In the case of a deceased estate, subsection 99(3A) of the ITAA 1936, read in conjunction with paragraph 99A(3)(a), provides that the Commissioner is to have regard to the circumstances in which and any conditions upon which property was acquired by, or lent to, the deceased person, income was derived by the deceased person, benefits were conferred on the deceased person, or special rights or privileges were conferred on, or attached to, property of the deceased person.

The Commissioner issued Public Information Bulletin No.4 Income Of A Trust Estate To Which No Beneficiary Is Presently Entitled (Bulletin) in April 1965 to provide guidance on the circumstances and matters he considers to be relevant or irrelevant for the purpose of forming an opinion for the purposes of subsection 99A(2) of the ITAA 1936.

In broad terms, the matters that relate to the circumstances in which any assets were transferred to a trust estate or benefits provided for a trust estate (including any condition imposed in relation to the transfer of assets or the provision of benefits), address the source of the trust capital and trust income (including whether a person who, after the initial settlement is made, either alone or with others directly or indirectly transfers or lends property to the trust estate, channels income into the estate, confers benefits on the estate, or confers special privileges on the property of the estate).

Amongst other things, this takes into account whether the trust estate derives income from aprivate company.

The Bulletin sets out the circumstances or factors that may weigh against the discretion being exercised - this includes:

• Where shares in a private company held by a trustee are of a special class, having special rights or privileges attaching to them. Examples include shares on which the persons in control of a company can cause a dividend to be paid to the exclusion or partial exclusion of other classes of shares, or shares on which, by virtue of provisions in a company's Articles, dividends at the discretion of the controllers of a company are paid at a rate differing from other classes of shares.

• Where dividends paid by a private company in favour of the trustee of a trust estate are satisfied by the issue of shares in respect of which the persons in control of the company may, at their discretion, withhold payment of a dividend.
• Where partly paid shares in a private company forming assets of a trust estate have the same dividend entitlement as equivalent fully paid shares held by other persons.

The Bulletin also sets out matters that circumstances or factors that are not in themselves determinative in the discretion being exercised - this includes:

• Where the trustee of a trust estate own shares in a private company that are redeemable, the effect of the power to redeem or of an actual redemption would be considered. Ordinarily, if a dividend is not paid on those shares in the year of income, the fact that they are part of the property of the trust estate will be disregarded in considering exercise of the discretionary power in relation to income of the trust estate for that year.
• The owning of private company shares by the trustee of a trust estate will not, in itself, be a factor against the exercise of the discretionary power if all the shares in the company (other than the normal type of preference shares) carry equal rights to dividends and capital distributions on a winding up or reduction of capital.

In ITR 1447, issued on 24 January 1979, the Commissioner indicates that, generally, an estate of an "ordinary and traditional kind' where there is no tax avoidance will be taxed at the normal progressive marginal rates under section 99 of the ITAA 1936.

The Commissioner explains that a deceased estate of the ordinary and traditional kind has the following characteristics:

• One whose assets come directly from the assets of the deceased person. Ordinarily, the assets would be those of the deceased person, for example, a house or income producing property, or assets purchased subsequent to the death of the deceased out of funds arising from the sale or conversion of those assets by the executors acting in their course of their duties.
• There is a definable relationship, ordinarily of blood or marriage, between the deceased person and the beneficiaries.

Where the estate comprises shares in a private company, a relevant consideration is the time of acquisition of shares in the private company.

In determining the weight to be given to the matters described in subsection 99A(3) , Windeyer J has stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that:

The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate. But the idea of reasonableness seems to be here amorphous....It does not clearly emerge from the Act in respect of what matter - or whose interest...he is to consider whether it would be reasonable or unreasonable to apply section 99A in the case of any particular trust estate. He is to have regard to certain stated matters; but what weight or influence each is to have is not made clear.....That [the Commissioner] has formulated certain considerations by which he is guided, and made them publicly known, may be important as showing that in the exercise of his statutory discretion he acts honestly, consistently and, as he thinks, in accordance with the legislative purpose. That purpose I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose.

The favourable exercise of the Commissioner's discretion under subsection 99A(2) of the ITAA 1936 means the highest rate of income tax does not apply to a trust estate. If no part of the net income is distributed to beneficiaries, and section 99A of the ITAA 1936 is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936.

Application in these circumstances

In these circumstances, the trust is a deceased estate satisfying the eligibility for the Commissioner's discretion.

Having regard to the following factors, it would be unreasonable to apply the special rate of tax under section 99A of the ITAA 1936 to the trust income to which no beneficiary is presently entitled:

• The trust estate is a deceased estate that resulted from a will and was established as a result of the death of the testator.
• There is a definable relationship ordinarily of blood or marriage between the deceased and the beneficiaries. There are no suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind.
• The assets come directly from the assets of the deceased and the income of the Estate is only derived from assets held or deemed to belong to the Estate as at the date of death of the deceased.
• Whilst the estate comprises private company shares, the deceased held all of the shares in the companies and has done so since the inception of the companies and the inheritance of shares upon the death of their spouse. Dividend distributions were paid out of retained profits held by the company prior to Individual A's death. Dividend income from the shares forms part of the income of the trust estate.
• The executors/trustees have not borrowed money from others.
• The executors/trustees have not lent money to others.
• Administration of the estate is incomplete and therefore there are no presently entitled beneficiaries. The delay is due to resolution of conflict between family members.

Accordingly, the Commissioner would exercise his discretion in these circumstances and assess the trust income under section 99 of the ITAA 1936 for the relevant income year.

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