Edited version of private ruling

Authorisation Number: 1011657364578

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Ruling

Subject: Income - Interest

1. Does a trust relationship exist between you and your relative?

Yes.

2. Is your relative the beneficial owner of the principal and income in the transaction account?

Yes.

3. Are you, as trustee, assessable on the interest income received in the transaction account?

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Relevant Facts:

Your relative is on a disability pension.

They resided with relatives until their death in 2005. These relatives managed the financial affairs of this person until their death.

You have enduring power of attorney and enduring power of guardianship.

You manage the financial affairs of this person.

Your relative has requested that you continue to manage their finances.

Separate bank accounts are held in your name to manage this person's finances.

Relevant provisions:

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision:

The existence of a trust relationship

The essential elements of a trust (as set out in the 4th ed of Jacobs' Law of Trusts in Australia) are: 

· the trustee holds a legal or equitable interest in the trust property

· the trust property must be property capable of being held on trust (this includes a chose in action)

· that one or more beneficiaries other than the trustee exist, and

· that a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property exists.

It is accepted that it is difficult to satisfactorily define a trust in a comprehensive manner. Perhaps the most widely referred to definition is that of Underhill (Law of Trusts and Trustees, 12th ed, p 3):

A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust) of whom he may himself be one, and any of whom may enforce the obligation.

Trustee

The term "trustee" is given very wide meaning for the purposes of Income Tax Assessment Act 1997 (ITAA 1997). In addition to every person appointed or constituted trustee by act of parties, by order or declaration of a court, or by operation of law, it includes:

· an executor or administrator, guardian, committee, receiver or liquidator, and

· every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

Implied Trust

An implied trust, that is a trust which is founded on an unexpressed, but presumed intention of the party creating it, and arises in favour of the person who was the original owner of the property dealt with or purported to be dealt with by the trust instrument.

The most common circumstance where a trust can be implied from an objective consideration of the fact is where someone places assets in the name of another.

We have determined that an implied trust exists in your situation, and that you will hold the funds in trust for your relative. We, therefore have to examine whether your relative is absolutely entitled to the asset as against the trustee (you).

Absolutely entitled

It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee if the beneficiary is:

· absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset, and

· able to direct the trustee how to deal with the asset.

Clearly, your relative has a vested, indefeasible and absolute interest in the funds. This is evidenced by the following facts:

· you did not pay any money into the account

· your relative is the beneficial owner of the funds in the account

· your relative derives financial stability by having the funds in the account, and

· you did not receive any financial consideration from the arrangement.

Beneficial Ownership

Although Taxation Determination TD 92/106 relates to joint bank accounts, the same principal applies to interest earned on a bank account which is in the name of only one person.

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, that is, ordinary income. For an Australian resident, assessable income includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia.

Interest from investments is considered ordinary income, and is therefore assessable in the income year which it is derived.

TD 92/106 discusses the issue of who should be assessed to interest earned on a joint bank account and states that:

Interest income on a joint bank account should be assessed to income tax to the persons who are beneficially entitled to the income (see Macfarlane v. Federal Commissioner of Taxation (1986) 13 FCR 356; 86 ATC 4477; (1986) 17 ATR 808). That entitlement depends on the beneficial ownership of the moneys in the account. The general presumption is that holders of accounts in joint names have joint beneficial ownership of the moneys in equal shares. This presumption is rebuttable by evidence to the contrary (see Case Z7 92 ATC 131; AAT Case 7675 (1991) 22 ATR 3591).

Evidence relevant in determining an individual's beneficial entitlement includes information as to who contributed to the account, in what proportions the contributions were made, the nature of the contributions, who drew on the account and who used the money and the accrued interest as their own property. Although TD 92/106 relates to joint bank accounts, the same principles apply to interest earned on a bank account which is in the name of only one person.

In your case, the money invested in your account was from sources related to your relative. The evidence suggests that you have no beneficial entitlement to the interest income derived from the account.

Therefore, although you had control over the assets in the bank account, the interest income credited to the account would be applied to your relative.

Accordingly, this interest is assessable to your relative and should not be included in your income tax returns.

Conclusion

Based on the information provided by you, it is evident that a trust relationship exists between you and your relative. That is, you are not the beneficial owner of the principal or income of the transaction account. The assets, from which the said income was derived, were acquired by you in your capacity as power of attorney, and not for your personal benefit. At all times, the assets have been held for the benefit of your relative and all expenditure of funds from the relevant bank account in your name has been for the purposes of your relative.