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Advice

Subject: Commissioner's discretion subsection 99A(2) of the Income Tax Assessment Act 1936

Question

Will the Commissioner exercise his discretion under section 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the testamentary trust under section 99 of the ITAA 1936?

Advice

Yes

Relevant facts and circumstances

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

Your advice is based on the following facts.

Upon the death of the testator a testamentary trust will be created.

A company is to be the trustee of the testamentary trust according to the will.

The will provides that the trustee is to establish a number of separate funds with the primary beneficiary being the children.

The first two funds for the primary beneficiaries are administered according to an Annexure of the Will and another fund for a primary beneficiary will be administered according to another Annexure. Other beneficiaries and the children, spouse of the primary beneficiary and any relative by blood, marriage or adoption.

The vesting dates of the children's trusts are XX years from the date of the testator's death.

The will provides that the trustee is to establish a number of separate funds with the primary beneficiary being each grandchild and administered in accordance with the terms of an Annexure of the will. The vesting dates of the grandchildren's trusts are XX years from the date of the testator's death.

According to the will the trustee is to hold on trust according to the terms in a certain clause the Company Shares. The capital of this testamentary trust will solely comprise assets transferred pursuant to the will.

The testamentary trust is to be created because the shares are subject to strict ownership rules applicable to trading in or on disposal of the shares. The testamentary trust will allow the shares to be dealt with as one parcel in the interest of the beneficiaries.

According the will the trustee is not permitted to sell the unlisted shares except in limited circumstances listed in the will.

The Codicil includes a termination clause for the testamentary trust. In the event that the unlisted shares are disposed of the capital proceeds will be retained by the trustee unless a certain percentage of the beneficiaries agree in writing. In this case the trustee will be subject to capital gains hence the request for advice in relation to whether the discount is applicable on this capital gain.

The testamentary trust will be managed as follows:

· Any property transferred or lent to the trust will be done so on an arm's length basis,

· The income derived by the trust will be from investments transferred to the trust in accordance with the will.

· In the event these investments are sold any income earned on replacement investments will be on arm's length terms,

· And there will be no benefit, special right or privilege conferred on the trust other than that which is available to other trust estates.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 99A(2)

Income Tax Assessment Act 1936 Section 99A(3)

Income Tax Assessment Act 1997 Division 115

Reasons for decision

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

Section 99A 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 in such circumstances.

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for Section 99A not to apply. The relevant part of subsection 99A(2) 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 to apply. 

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will.  

In order for a trust to result from a will, it is necessary that the will should be the source of the funds and that the trust should be created in consequence of a provision in the will or court order itself (Case P53 82 ATC 247; (1982) 25 CTBR (NS) Case 115).  

In forming an opinion that it would be unreasonable to apply section 99A of the ITAA 1936, the Commissioner must have regard to all the circumstances outlined in subsection 99A(3) of the ITAA 1936. These matters include situations where an attempt has been made to increase the assets of the trust by, for example, granting of special rights or privileges to the trust, the transfer of the property to it, or the making of loans to it. In this case there are no factors which would preclude the Commissioner from exercising his discretion pursuant to subsection 99A(3) of the ITAA 1936.

As the testamentary trust was created in consequence of a will, the discretion under subsection 99A(2) of the ITAA 1936 would be exercised to assess the income of the trust in accordance with section 99 of the ITAA 1936.

As the testamentary trust will be assessed under section 99 of the ITAA 1936 any capital gain assessable to the trustee is not prevented from applying the 50% capital gains discount in Division 115 of the ITAA 1997 (as section 99A of the ITAA 1936 is not applicable then section 115-225 of the ITAA 1997 does not apply).