Edited version of private ruling

Authorisation Number: 1011728754195

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Ruling

Subject: Trustee assessment and Medicare Levy

Issue 1

Section 99 of the Income Tax Assessment Act 1936 (ITAA 1936)

Question

Has the trust been incorrectly assessed by applying section 99 of the ITAA 1936?

Advice/Answers

No

Issue 2

Medicare Levy

Question

Is the Trustee liable for the Medicare Levy?

Advice/Answers

Yes.

Relevant facts

1. The taxpayer is a Testamentary trust set up by a will of a deceased person for the benefit of a child. (A minor for the financial years 2007-08, 2008-09 and 2009-10).

2. The trust assessment code initially used was 26 on both the 2007-08 and 2008-09 financial years' tax return.

3. An amendment lodged and approved with the trust assessment code changed from 26 to 37. The following changes to the trust tax position resulted:-

o The trustee was taxed as per the rates indicated on Part 1 Schedule 10 of the Income Tax Rates Act 1986 (ITRA 1986).

o The trustee was levied with the Medicare Levy.

4. Based on over the phone guidance given by the Australian Taxation Office (ATO) and circumstances to be detailed below, it was determined that trust assessment code 37 should be used:-

o The minor is under the care of the surviving parent.

o The minor, under the terms of the Testamentary Trust would not receive any distributions from the Trust until the age of 18. This effectively creates a situation where the financial of the trust should be considered as income to which no beneficiary is presently entitled.

o Trust assessment code 26 was previously used, the reason being it was the most tax effect from 2004-05 to 2006-07 financial years as the trustee was taxed as an individual on behalf of the beneficiary who was under a legal disability.

o Trust assessment code 37 was used from financial year 2007-08 onwards.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Paragraph 251S(1)(c)

Income Tax Rates Act 1986 Subsection 12(6)

Income Tax Rates Act 1986 Sch10-PtI

Reasons for decision

Issue 1

Section 99 of the ITAA 1936

Question

Has the trust been incorrectly assessed by applying section 99 of the ITAA 1936?

Income to Which No Beneficiary is Presently Entitled

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

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. Section 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for Section 99A not to apply. If the discretion under Section 99A(2) of the ITAA 1936 is exercised, the trust's income is taxed at a concessional rate of tax.

Section 99A(2) of the ITAA 1936 states that:

This section does not apply in relation to a trust estate in relation to a year of income, being a trust estate:

(a) that resulted from:

(i) a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil; or

(ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate;

If part of the net income is not distributed to beneficiaries - and section 99A is considered not to apply - then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual.

The facts of the case indicates that subsection 99A(2) of the ITAA 1936 should apply and section 99 of the ITAA 1936 applies as the trust was formed under the terms of the will of the deceased. A further stipulation is that the minor, in the capacity as a beneficiary, will not receive any distributions from the trust until he reaches the age of 18. This has the effect of making no beneficiary presently entitled to the trust income for the financial years in question.

The rates of tax for trustees assessed under section 99 are found in section 12(6) of the ITRA 1986, which directs attention to Schedule 10 of the ITRA 1986. Part 1 of Schedule 10 of the ITRA 1986 identifies two classes of trustees for the purpose of determining the rates of tax that are to apply.

In the first class are trustees who are liable to be assessed under section 99 of the ITAA 1936 in respect of resident trust estates of a deceased person where the income is derived in the year of death of the deceased or in any one of the following two years. These trustees are liable to pay tax at the rates applicable to resident individuals.

 The second class of trustees identified in Part 1 of Schedule 10 of the ITRA 1986 comprises trustees liable to be assessed under section 99 of the ITAA 1936 in respect of income of a resident trust estate, other than the estate of a person who died fewer than three years before the end of the financial year.

 These trustees are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold of $6,000, but rather a reduced tax free threshold of $416 applies. On income between $416 and $594 the rate of tax applied is 50%, and for amounts above $594 and between $30,000 (2007-08 financial year), $37,000 (2008-09 financial year) and $34,000 (2009-10 financial year), a tax rate of 15% will apply.

In this case, the trust will fall under the second category. As per the legislative references outlined above, the trust income will be assessed under section 99 of the ITAA 1936.

Issue 2

Is the Trustee liable for the Medicare Levy under the trust assessment code 37?

Question

Is the Trustee liable for the Medicare Levy?

Medicare Levy is imposed by the Medicare Levy Act 1986 (MLA 1986), to the extent that the Levy is payable pursuant to Part VIIB of the ITAA 1936 and section 5 MLA 1986.  Paragraph 251S(1)(c) of the ITAA 1936 provides that Medicare Levy will be imposed:

(c) if the trustee of a trust estate (other than a trust estate of a deceased person) is required to be assessed, and is liable to pay tax, in pursuance of section 99 or 99A in respect of the whole or a part of the net income of the trust estate of the year of income;

The effect is that the Medicare Levy is not payable on the estate of a deceased person however Medicare Levy is still payable on trust estates arising from the terms of a will, such as a testamentary trust.

In this case, the trust will be liable to pay the Medicare Levy as it is a testamentary trust and has been assessed to pay tax under section 99 of the ITAA 1936.