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Ruling

Subject: Extension of time to apply tax free threshold

Question 1

Has the Commissioner exercised his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to assess the Trustee for the Estate under subsection 99(2) of the ITAA 1936 in the 2009-10 financial year?

Answer

Yes

Question 2

Can the 2009-10 financial year assessment for the Trustee for the Estate be assessed using the individual tax rates under Clause 1(b) of Part I of Schedule 10 to the Income Tax Rates Act 1986 (ITRA), which includes the tax free threshold?

Answer

No

This ruling applies for the following period:

Financial year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are the Trustee for a Deceased Estate.

The deceased passed away more than three years before 30 June 2010.

You lodged the Estate's 2009-10 income tax return and received the notice of assessment.

The Estate declared no beneficiaries were presently entitled to the Estate's income. As a result, you were required to pay tax on the Estate's income. The rate of tax was the same as progressive individual tax rates, without the tax free threshold.

You applied for an extension of the three year standard time the ATO allows a Trust Estate to be assessed as though the deceased were still alive.

The reason for your request is that it has taken a longer time to finalise the estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99,

Income Tax Assessment Act 1936 Section 99A,

Income Tax Rates Act 1986 Section 12,

Income Tax Rates Act 1986 Section 14,

Income Tax Rates Act 1986 Clause 1 of Part I of Schedule 7 and

Income Tax Rates Act 1986 Clause 1 and 2 of Part I of Schedule 10.

Reasons for decision

Question 1

Summary

Has the Commissioner exercised his discretion under subsection 99A(2) of the ITAA 1936 to assess the Trustee for the Estate under subsection 99(2) of the ITAA 1936 in the 2009-10 financial year?

The Commissioner confirms he has previously exercised his discretion to assess the Estate using the tax rate available under subsection 99(2) of the ITAA 1936 for the 2009-10 financial year.

Detailed reasoning

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. The rate of tax applied to income under section 99A of the ITAA 1936 is higher than the rate of tax applied to income under section 99 of the ITAA 1936.

In considering these sections, section 99A of the ITAA 1936 must be considered first. Subsection 99A(2) of the ITAA 1936 applies in relation to all trusts unless, among other conditions, the trust 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 forms the opinion it would be unreasonable for section 99A of the ITAA 1936 to apply. The discretion will continue to apply, unless there is a change in the circumstances, as outlined in subsection 99A(3) of the ITAA 1936, which the Commissioner has based his decision on.

In your case, the Estate came into existence as a result of a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil.

The Commissioner confirms he has previously exercised the discretion under subsection 99A(2) of the ITAA 1936 to assess the trustee of the Estate under subsection 99(2) of the ITAA 1936 for the financial year ended 30 June 2010.

Question 2

Summary

Can the 2009-10 financial year assessment for the Trustee for the Estate be assessed using the individual tax rates under Clause 1(b) of Part I of Schedule 10 to the ITRA, which includes the tax free threshold?

We acknowledge there were circumstances which resulted in the Estate being finalised at a later time. However, the Commissioner does not have the legislative power to apply the tax free threshold to your Trustee assessment for the Estate in the 2009-10 financial year.

Detailed reasoning

The rates of tax payable by a trustee are determined by the ITRA. Subsection 12(6) and Schedule 10 of the ITRA set down the rates of tax payable by a trustee under section 99 of the ITAA 1936.

Part I of Schedule 10 of the ITRA applies different rates of tax to the net income of resident trust estates. The rate of tax depends on the length of time that has elapsed after the date of death of the deceased person.

Clause 1(b) of Part I of Schedule 10 of the ITRA applies to any trustee assessed under section 99 of the ITAA 1936 in respect of a person who died less than three years before the end of the year of income. Under this clause, the trustee is entitled to the rate of tax payable by a resident taxpayer as set out in Part I of Schedule 7 of the ITRA.

The relevant tax rate includes a tax free rate for the first $6,000 of taxable income.

Under Clause 2 of Part I of Schedule 10 of the ITRA, a trustee assessed under section 99 of ITAA 1936 in respect of a person who died more than three years before the end of the year of income is not entitled to the full tax free threshold.

The rate of tax payable is outlined in Part I of Schedule 7 and subsections 14 (1) and (2) of the ITRA. After the three-year anniversary of the deceased person's death, the $6,000 tax free threshold no longer applies.

In this case, the deceased died more than three years before the last day of the 2009-10 financial year. We acknowledge there were circumstances which resulted in the Estate being finalised at a later time. However, there is no legislative discretion which allows the Commissioner to extend the period when the $6,000 threshold may apply.

The decision of B. J. McCabe in Trustee for the Estate of E. Dukes v. Federal Commissioner of Taxation [2002] AATA 574; (2002) 50 ATR 1060; 2002 ATC 2079 confirmed that there is no provision in the legislation that allows the Commissioner any discretion to extend the application of Clause 1(b) of Schedule 10 of the ITRA to encompass any further years.

In this case, the Commissioner does not have the legislative power to apply the tax free threshold to your trustee assessment for the Estate in the 2009-10 financial year.