Edited version of private advice

Authorisation Number: 1052367847610

Date of advice: 28 February 2025

Ruling

Subject: Commissioner's discretion - testamentary trust

Question

Will the Commissioner exercise the discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the net income of the trust estate to which no beneficiary is presently entitled under section 99, for the income year ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

Income Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are:

•                     Your Private Binding Ruling Application dated XX October 20XX (PBR Application) (including the supporting documentation);

•                     Your response to our Further Information Request (FIR) email dated XX February 20XX (FIR Response) (including the supporting documentation); and

•                     Your email clarification dated XX February 20XX (including Attachment X).

The Deceased died on XX July 20XX.

The Will of the Deceased (the Will) was dated X September 20XX. A copy of the Will was provided.

Probate was granted in respect of the Will on X February 20XX.

The Trust was established under Clause X.X of the Will in the income year ended 30 June 20XX. Clause X of the Will states the following.

The assets of the Estate have been vested in Individual A and Individual B as trustees for the Trust (the Trustees). Per paragraph X.X of your PBR Application, the following assets vested in the Trustees under clause X.X of the Will.

The Trustees sold the Residential Property in the income year ended 30 June 20XX.

Your FIR Response (in Attachment X) provided that the Trust held the following assets as at X July 20XX:

Further, your PBR Application stated that the Trustees held assets valued of $X,XXX,XXX as at XX June 20XX.

Throughout the income year ended 30 June 20XX, the Property held by the Trustees:

(a)          comprise of:

            i.         Property vested in the Trustees (that was vested in the Executor) under the terms of the Will of the Deceased;

            ii.         Property that represents accumulations of income or capital from property that satisfies the requirement in i;

            iii.         Property from the sale of these assets of the Trust; and

            iv.         Property from the re-investment of property that satisfies the requirement in iii.

(b)          do not comprise of:

            i.         investment in private companies or trusts;

            ii.         Property that were not acquired at arm's length; or

            iii.         loans to related parties.

Your PBR Application also confirmed that there has at no time been:

(a)          benefits conferred on the Trust; or

(b)          special rights or privileges conferred on or attached to the Trust's Property.

Clause X.X of the Schedule to the Will states the following. Individual X is currently the sole beneficiary of the Trust because he does not have a spouse as term in clause X.X of the Schedule to the Will or have any children. Individual X was born on XX May 20XX.

Clause X of the Schedule to the Will refers to the vesting at perpetuity date and Clause X.X defines perpetuity date to mean:

(a)          The date XX years from the date of death of the Testator;

(b)          An earlier date determined by the Trustee,

whichever first occurs.

A copy of the Trust's financials for the year ended 30 June 20XX was provided.

In the income year ended 30 June 20XX:

(a)          The income of the Trust was $XXX,XXX;

(b)          The net income of the Trust was $XXX,XXX;

(c)          The source of the Trust's income was:

            i.         Dividend income of $X,XXX that was received as a result of holding listed shares that were transferred to the Trust under Clause X.X of the Will; and

            ii.         Interest income of $XXX,XXX that was earned on:

A.           amounts derived from the sale of the Residential Property, which was transferred to the Trust under clause X.X of the Will, and

B.           amounts transferred to the Trust under clause X.X of the Will; and

(d)          No beneficiary was made presently entitled to the net income of the Trust.

Your FIR Response also confirmed the following:

•                     No person, at any time, directly or indirectly, transferred or lent any property (including money) to the Trust.

•                     The Trust did not, at any time, directly or indirectly, transfer or loan any property (including money) to another trust.

•                     The Trust does not hold shares, units or other similar interests that carry rights to receive discretionary distributions of income or capital. Similarly, the Trustees have not received any discretionary distributions of income and capital relating to those assets.

•                     So far as the Trustees are aware, the Trust is not a beneficiary of any other trust. Similarly, the Trustees have not received income or capital in connection with its status as a discretionary object from another trust.

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 Subsection 99A(3)

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

Income Tax Assessment Act 1936 Paragraph 99A(3)(b)

Income Tax Assessment Act 1936 Paragraph 99A(3)(c)

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

Income Tax Assessment Act 1936 Paragraph 102AG(2)(c)

Reasons for decision

Issue 1

Question 1

Summary

After consideration of the relevant factors, 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 for the income year ended 30 June 20XX.

Therefore, the Commissioner will exercise the discretion, under subsection 99A(2) of the ITAA 1936 to allow section 99 to apply where the Trustees of the Trust are liable to pay tax on income to which no beneficiary is presently entitled for income year ended 30 June 20XX.

Detailed reasoning

The relevant legislation

Under subsection 99A(2) of the ITAA 1936, section 99A will not apply to the net income of a resident trust estate retained by certain trust estates where the '... Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income...'.

Instead, section 99 of the ITAA 1936 will apply 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 flat top marginal tax rate (although, the availability of the tax-free threshold is only available to trustees of trusts where the relevant person died less than 3 years before the end of the relevant year of income).

In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936.

The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a)).

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matters in subsections 99A(3) and (3A). These provide:

99A(3) In forming an opinion for the purposes of subsection (2):

(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.

99A(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Application of the legislation to the facts

The Trust was created under the terms of the Will of the Deceased (dated X September 20XX) and is considered to be a 'trust estate ... that resulted from a will' for the purposes of subparagraph 99A(2)(a)(i) of the ITAA 1936 (clause X.X of the Will).

The Trustees have retained net income in respect of the income year ended 30 June 20XX.

The net income will fall to be assessed to the Trustees under section 99A of the ITAA 1936 unless, '... the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.' (subsection 99A(2))

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matters in subsection 99A(3) and 99A(3A).

Consideration of paragraphs 99A(3)(a) and (b) of the ITAA 1936

You have advised that:

•                     Throughout the income year ended 30 June 20XX, the Property held by the Trustees consist of:

-                    Property vested in them (that was vested in the Executor) under the terms of the Will of the Deceased;

-                    cash from the sale of the Property of the Trust; and

-                    cash earned from holding those assets.

•                     The assets held by the Trustees do not consist of:

-                    investments in any private companies or private trusts;

-                    other assets acquired at non-arm's length value; or

-                    loans to related parties.

Consideration of paragraph 99A(3)(c) of the ITAA 1936

In the current circumstances the 'other matters' that are considered to be relevant for the purposes of forming an opinion for the purposes of subsection 99A(2) are encapsulated by the matters enunciated by Member Thompson in Case A50 (69 ATC 288).

Broadly, these matters involve the Commissioner having regard to the objects of the section in protecting, on the one hand, the revenue against tax avoiding devices and the interests of taxpayers generally in the equal distribution of the tax burden and, on the other hand, the right of the subject to make legitimate and reasonable family and business arrangements.

Each of these matters will be considered in turn:

1.           The Revenue should be protected against tax avoiding devices:

In this case, the trustees have not use their powers under the Trust to avoid tax.

2.           The interests of taxpayers generally should be protected:

In considering the exercise of the discretion in subsection 99A(2) the Commissioner will consider whether the type of arrangement under consideration may cause the tax burden to fall unevenly on taxpayers. The discretion is to be exercised in way that will discourage arrangements that would otherwise result in tax avoidance.

In this case, the Trustees have exercised their powers under the Trust in a conventional manner (and not as a tax-avoidance device).

3.           The right of the subject to make legitimate and reasonable arrangements relating to family and business matters should be protected:

The Trust's assets consist of assets owned by the Deceased when he died that vested in the Trustees under the terms of the Will (that was vested in the Executor), and the Trust is being administered by the Trustees in a conventional manner.

4.           Arrangements which are for the good of the public generally should not be discouraged:

The Trust is not a trust of the type that is relevant to this matter.

5.           Trusts which arise out of the exercise of a public duty should not be penalised:

The Trust is not a trust of the type that is relevant to this matter.

Surrounding circumstances to also be considered

In Case A50 Thompson suggested that [at 302 and 303], in the process of forming an opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner should undertake, '[a] wide survey and close scrutiny of all the surrounding circumstances, including, but not by any means limited to' [emphasis added]:

•                     an examination of the terms of any relevant instrument;

•                     the manner in which those terms have been or are capable of being implemented;

•                     the circumstances under which the trust is called into being;

•                     the overall effect achieved or sought to be achieved upon the tax affairs of all parties directly or indirectly affected by the trust; and

•                     and the manner in which the arrangement is administered.

In relation to these 'surrounding circumstances' it is noted that:

•                     the Trust is a testamentary trust that resulted from the Will of the Deceased, dated X September 20XX.

•                     the Trust has been established in accordance with clause X.X of the Will and will be administered by the Trustees in the manner set out in that clause and under the terms contained in the Schedule to the Will. Vesting day shall be the first to occur of the following events: XX years from the date of death of the Testator; or an earlier date determined by the Trustee.

Conclusion as to whether it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of the income year ended 30 June 20XX

The matters that are considered to be particularly relevant to forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 are:

•                     The Trust resulted from a will and satisfies the requirement of paragraph 99A(2)(a).

•                     In the income year ending 30 June 20XX:

-                    The Trustees have retained an amount of trust income.

-                    Tax has not been avoided by the exercise of the powers available to the Trustees under the Will. It is noted that there is no tax difference or any advantage between the Trustees being assessed under section 99 of the ITAA 1936 and Individual X being assessed as a minor receiving excepted trust income in this instance.

-                    The Trust has been administered in a conventional manner by the Trustees and not as a tax avoidance device.

-                    The Trustees have not entered into arrangements beyond the purpose for which section 99 was retained in the ITAA 1936 of a type that the Commissioner will seek to discourage.

•                     The assets held by the Trustees consist of:

-                    assets vested in them (as Trustees) under the terms of the Last Will and Testament of the Deceased;

-                    cash earned from holding these assets; and

•                     The assets held by the Trustees do not consist of:

-                    other assets acquired at non-arm's length value; or

-                    loans provided to related parties.

•                     The Trustees have not avoided tax by exercising the powers available to them under the terms of the Trust Deed.

Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A to apply to the Trust in respect of the income year ended 30 June 20XX.

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