Edited version of private ruling

Authorisation Number: 1011689931685

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Ruling

Subject: Trust income

Question

Will the Commissioner exercise the discretion under 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?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The deceased passed away in the 2006-2007 income year.

The deceased, prior to their semi retirement, operated a residence and market garden on a small number of acres.

The executors of the estate undertook a subdivision of the property into house blocks.

The work is almost complete and marketing of the land is now in progress. It is anticipated that most blocks will be sold prior to 30 June 2011.

The estate earned in interest in the 2009-10 income year on cash held by the executors for payment towards subdivision costs and generated from the sale of assets of the estate.

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 subsection 99A(3A)

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

Reasons for decision

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A of the ITAA 1936.

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion not to assess a trust using section 99A of the ITAA 1936. Section 99A of the ITAA 1936 assesses the income of a trust where no beneficiary is presently entitled at the top marginal rate of tax. If the Commissioner's discretion under subsection 99A(2) of the ITAA 1936 is exercised, the trust's income is taxed at a concessional rate of tax.

Subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) gives the Commissioner a discretion to assess the trustee pursuant to section 99 of the ITAA 1936, rather than section 99A, where the following kinds of trust estates are involved:

(1) a trust estate that resulted from a will, a codicil, an intestacy or a court order varying the provisions of a will, a codicil or the operation of the intestacy provisions

(2) bankrupt estates, or

(3) trust estates that consist of property of a kind referred to in subsection 102AG(2)(c).

The effect of subsection 99A(3A) of the ITAA 1936 when read with subsection 99A(3)(a), is that in forming an opinion for the purposes of subsection 99A(2) in the case of a deceased estate, the Commissioner is required to have regard, inter alia, 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 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, whether or not the rights or privileges were exercised. The Treasurer explained that subsection 99A(3A) was designed to counter possible tax avoidance practices under which a person's assets might be "padded out" prior to his death so as to take advantage of the fact that the Commissioner has a discretion in the case of deceased estates to assess the trustee pursuant to section 99 rather than section 99A.

The general practice is to assess the income of a deceased estate trust under section 99 of the ITAA 1936 unless there is tax avoidance involved. Deceased estates of the 'ordinary and traditional' kind (whose assets come directly from the assets of the deceased) are assessed under that section.

The trust is a deceased estate and the assets were held at the date of death. The deceased estate is of the 'ordinary and traditional kind'. The funds on which the interest was earned, stem from the sale of assets from the deceased estate. In these circumstances, the Commissioner will exercise his discretion not to assess the trust under section 99A of the ITAA 1936, choosing instead to assess the trust under section 99 of the ITAA 1936.

Subsection 12(6) and Schedule 10 of the Income Tax Rates Act 1986 set down the rates of tax payable by a trustee under section 99 of the ITAA 1936. You should note that after the three-year anniversary of the person's death the $6,000 tax-free threshold is reduced to $416. That is, the tax free threshold will be reduced when lodging the fourth tax return after the date of death.

Therefore, as the 2009-10 return will be the fourth tax return required to be lodged after the date of death, the following rates will apply: