Edited version of private ruling

Authorisation Number: 1011633589302

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Ruling

Subject: Trust - income - assessment

1. Is the trustee assessed on income for beneficiaries who over 18 years of age and presently entitled to a share of the income of the trust, but not entitled to receive the income until they attain a qualifying age?

No.

2. Is the trustee assessed on income for beneficiaries who are over 18 years of age and not presently entitled to the income of the trust?

Yes.

This ruling applies for the following periods:

30 June 2010

30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The three beneficiaries of the trust were born in the 1990's.

The beneficiaries are unable to receive a benefit until they turn the qualifying age (as per the Last Will and Testament of the deceased), or meet the requirements of the other two forms of discharge.

All beneficiaries and trustees are Australian residents for taxation purposes. The trust was created and has been maintained within Australia.

The trust earns income from a share and investment portfolio. The bulk of the income comes from dividends from a share portfolio and increase in unit value of cash management accounts.

The trust deed states that each of the beneficiaries who survived the deceased by 30 days and attained the qualifying age would be the primary beneficiary of a beneficiary testamentary trust for a sum of money. If any of the beneficiaries had not attained the qualifying age, their shares would be held on a separate trust (maintenance trust).

According to the trust deed, the funds in the maintenance trust were to be invested within three months of the deceased's date of death.

The trustees were not to allow any of the funds to be used to pay any costs on behalf of the applicable beneficiary except in the following circumstances:

· The trustees may lend any part of the capital of each applicable beneficiary's trust to the relevant applicable beneficiary for the purposes of enabling the applicable beneficiary to acquire an interest in a principal place of residence, and

· The trustees may make contributions on behalf of the applicable beneficiary to any superannuation funds in respect of which the applicable beneficiary is a member.

The executors shall each financial year apply such of the net income, allocated net income or capital of each beneficiary's trust as follows:

· The executors may decide to acquire a legal, equitable, leasehold or other interest for the beneficiary's benefit in any suitable housing arrangement

· The executors may provide financial support or items that the executors consider would maintain or improve the beneficiary's quality of life, including personal furnishings and fittings, recreation, entertainment, holiday travel and accommodation, as well as personal belongings, and

· The executors may allocate any surplus of net income either to the maintenance of the applicable beneficiary, or accumulate all or any part of the surplus.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95A

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Rates Act 1986 Subsection 12(9).

Reasons for decision

Summary

The trustee is assessable on the net income of a trust when no beneficiary is presently entitled to that income.

Detailed reasoning

Assessment of net income

Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, where a beneficiary not under a legal disability is presently entitled to a share of the income of a trust, they must include that share of the net income in their assessable income.

Section 98 of the ITAA 1936 provides that, where a beneficiary who is under a legal disability is presently entitled to a share of trust income, the trustee is liable to pay tax on that share. A person is considered to be under a legal disability if they cannot give a legal discharge for payment. The main categories of people who are considered to be under a legal disability are minors (people under 18 years of age in Australia), undischarged bankrupts and insane people.

If no beneficiary is entitled to the income of a trust, the income is assessed to the trustee under section 99 or 99A of the ITAA 1936.

Presently entitled beneficiaries

A beneficiary will be presently entitled to trust income if the following conditions are satisfied:

· The beneficiary has an indefeasible, absolutely vested, beneficial interest in possession in the trust income. If the beneficiary is not under a legal disability, they must be able to demand immediate payment of the income. If the beneficiary is under a legal disability, they would be able to demand immediate payment of the income if they were not under a legal disability.

· The trust income is legally available for distribution to the beneficiary.

Section 95A(1) of the ITAA 1936 states that if the trust income has already been paid or applied for the beneficiary's benefit, the beneficiary will continue to be presently entitled.

Section 101 of the ITAA 1936 provides that where a trustee is given discretion to pay or apply the trust income for the benefit of specified beneficiaries, the beneficiaries are deemed to be presently entitled to the amount when the trustee exercises the discretion in their favour.

No beneficiary presently entitled

Where no beneficiary is presently entitled, section 99A of the ITAA 1936 applies in relation to all trusts unless:

· the trust resulted from a will; subparagraph 99A(2)(a)(i)

· the trust is bankrupt estate; paragraphs 99A(2)(b) and (c)

· the trust is a trust that consists of property referred to in paragraph 102AG(2)(c).

and the Commissioner forms the opinion that it would be unreasonable to apply section 99A of the ITAA 1936 in such circumstances. 

The applicable rate of tax under section 99A of the ITAA 1936 is set in subsection 12(9) of the Income Tax Rates Act 1986 (ITRA 1986) at 47%, which is imposed from the first dollar of taxable income. 

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A of the ITAA 1936 not to apply. The relevant part of subsection 99A(2) of the ITAA 1936 states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply. 

Consequently, 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 trust estates resulting from a will, codiciland so on. These include both the estate of a deceased person and testamentary trusts established pursuant to the terms of a Will.

Your case

The testamentary trust is a discretionary trust created as the result of a Will. The deceased's Will specified that if his grandchildren were under the qualifying age at the date of his death, a sum of money for each would be held on trust until they attained the qualifying age. The trustees may choose to apply the net income of the trust for the benefit of the beneficiaries, or accumulate it.

If a beneficiary is over the age of 18 years of age and not otherwise under a legal disability, the trustee will not be assessed on their behalf under section 98 of the ITAA 1936.

If the trustees exercise their discretion to apply any part of the net income of the trust for the benefit of a beneficiary, the beneficiary will be presently entitled to that amount. The beneficiary will be assessable under section 97 of the ITAA 1936, and must report the income on their individual tax return.

If the trustees do not exercise their discretion to apply any part of the net income of the trust for the benefit of a beneficiary, and choose to accumulate the net income of the trust, then no beneficiary will be presently entitled. The trustee would then be assessable on the net income of the trust. If the Commissioner exercises his discretion under subsection 99A(2) of the ITAA 1936, the trustee would be assessed under section 99 of the ITAA 1936.