Edited version of private advice

Authorisation Number: 1052209693165

Date of advice: 11 January 2024

Ruling

Subject: Commissioner's discretion - section 99A

Question 1

Pursuant to subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936), is the Commissioner of the opinion that it would be unreasonable that section 99A should apply in relation to the Testamentary Trust?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A (the Deceased) passed away on XX XX 20XX and probate was granted on XX XX 20XX.

The Last Will and Testament of the Deceased (the Will) was dated XX XX 20XX.

The Deceased was an Australian resident for tax purposes.

Under the terms of the Will, two testamentary trusts were established for the beneficiaries to settle the remaining assets of the estate, with one half of the assets split between each trust.

The Testamentary Trust was established under the Will on XX XX 20XX.

The Testamentary Trust is an Australian resident for tax purposes.

The assets held in the Testamentary Trust are solely from the deceased estate (the Estate), and the income accumulated on those assets.

The assets were publicly listed shares only, acquired before the death of the Deceased.

Only 50% of the assets were transferred from the Estate to the Testamentary Trust.

The Testamentary Trust derived income from dividends, interest and capital gains in the 20XX income year.

The Testamentary Trust derived income from dividends in the 20XX income year.

The beneficiaries of the Testamentary Trust are Australian residents for tax purposes.

No beneficiary was presently entitled to the income of the Testamentary Trust in either the 20XX or 20XX income years.

No other entity has directly or indirectly transferred or lent any property (including money) to, or conferred any benefits on, the Testamentary Trust, nor have any special rights or privileges been conferred or attached to the assets of the Testamentary Trust.

The Testamentary Trust has not invested in any private companies or other non-arms length assets or provided any loans to related parties.

Assumptions

No other property will be transferred into the Testamentary Trust that are not sourced from the income or profits transferred under the Will during the period of this ruling.

The transfer of assets to the Testamentary Trust was made in accordance with the Will.

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 Assessment Act 1936 paragraph 99A(2)(a)

Income Tax Assessment Act 1936 subparagraph 99A(2)(a)(i)

Income Tax Assessment Act 1936 subparagraph 99A(2)(a)(ii)

Income Tax Assessment Act 1936 paragraph 99A(2)(b)

Income Tax Assessment Act 1936 paragraph 99A(2)(c)

Income Tax Assessment Act 1936 paragraph 99A(2)(d)

Income Tax Assessment Act 1936 subsection 99A(3)

Income Tax Assessment Act 1936 paragraph 99A(3)(a)

Income Tax Assessment Act 1936 subsection 99A(3A)

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Rates Act 1986 subsection 12(6)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Capital gains and franked distributions included in the net income of a trust are brought to tax in accordance with Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 respectively.

Broadly, these subdivisions operate to assess trustees under section 99 or 99A of the ITAA 1936 on a proportionate share of an amount of a capital gain and franked distribution to which no beneficiary is specifically entitled, but only to the extent that there is an (adjusted) share of the income of the trust estate to which no beneficiary is presently entitled.

All other trust income to which no beneficiary is presently entitled is assessed to the trustee under section 99A of the ITAA 1936, which is retained or accumulated by the trustee, unless the Commissioner is of the opinion that it would be unreasonable that section 99A should apply.

Section 99A of the ITAA 1936 applies in relation to all trusts unless:

•                     the trust estate is a kind listed in paragraphs 99A(2)(a) to (d), and

•                     the Commissioner is of the opinion that it would be unreasonable that section 99A (and thereby, the highest rate of tax) should apply in relation to that trust estate in relation to that year of income (subsection 99A(2)).

If the Commissioner forms the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply, the trustee will be assessed under section 99. Section 99 applies to that net income such that the net income of the trust will be taxed at the progressive rates applicable to certain individuals rather than at the highest marginal tax rate. The tax-free threshold is only available for deceased estates where the deceased person died less than 3 years before the end of the relevant year of income (see subsection 12(6) of the Income Tax Rates Act 1986). This excludes testamentary trusts (and accordingly the tax-free threshold would not be available here). A trust estate that resulted from a will, or an order of a court that varied or modified the provisions of a will, is a trust estate listed in subparagraph 99A(2)(a)(i).

In forming an opinion, for the purposes of subsection 99A(2) of the ITAA 1936, the Commissioner must consider the factors in subsection 99A(3) as follows:

a)            the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;

b)            if a person who has, at any time, directly or indirectly:

                             i.                transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

                            ii.                conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised; has not, at any time, directly or indirectly:

                           iii.                transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

                           iv.                conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised; the Commissioner shall have regard to that fact; and

c)            the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.

In the case of a deceased estate, the Commissioner is required to consider the application of paragraph 99A(3)(a) of the ITAA 1936 as it relates to the deceased person (subsection 99A(3A)).

In determining the weight to be given to the matters described in subsection 99A(3) of the ITAA 1936, Windeyer J 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 sec. 99A should apply to any particular trust estate. ... 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.

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).

Application to your circumstances

The Testamentary Trust was established under the Will and is therefore the type of trust estate in relation to which the Commissioner's discretion under section 99A of the ITAA 1936 may be exercised.

The assets of the Testamentary Trust are publicly listed shares acquired before the date the Deceased passed away.

No other entity has directly or indirectly transferred or lent any property (including money) to, or conferred any benefits on, the Testamentary Trust, nor have any special rights or privileges been conferred or attached to the assets of the Testamentary Trust.

No other property will be transferred into the Testamentary Trust that is not sourced from the income or profits transferred under the Will.

The decision to accumulate the income of the testamentary trust (and request the Commissioner to apply section 99 of the ITAA 1936) will mean that the assessable income of the testamentary trust will be subject to income tax without access to the tax-free thresholds.

If the trustee had instead resolved to distribute the income of the trust to individual beneficiaries, the tax-free threshold would have been available (under section 97 or section 98 of the ITAA 1936). Depending upon the level of assessable income derived by the beneficiaries outside of the testamentary trust, the decision to accumulate the income of the testamentary trust does not appear to avoid income tax (and may possibly produce the same, or a less favourable, income tax result).

Conclusion

After consideration of the conditions in section 99A of the ITAA 1936, the Commissioner is of the opinion that it would be unreasonable that section 99A should apply in relation to the Testamentary Trust.

Accordingly, the Commissioner would exercise his discretion and assess the trustee of the Testamentary Trust under section 99 of the ITAA 1936 for any trustee assessments.

The assessable income of the Testamentary Trust will be subject to resident marginal tax rates (without the tax-free threshold).

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