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Ruling

Subject: Trust- beneficiary

What this ruling is about:

1. Are payments received by the trustee of the trust to be included in the assessable income of the trust to the extent not distributed to the beneficiaries?

2. Will the income distributed by the trustee of the trust to beneficiaries be included in the assessable income of those beneficiaries?

Ruling:

1. Are payments received by the trustee of the trust to be included in the assessable income of the trust to the extent not distributed to the beneficiaries?

No.

2. Will the income distributed by the trustee of the trust to beneficiaries be included in the assessable income of those beneficiaries?

No.

Year(s) of income or period(s) to which this ruling applies:

Year ended 30 June 2012

Year ended 30 June 2013

Commencement date of scheme:

1 July 2004

The scheme that is the subject of the ruling:

Payments described as compensation payments are to be paid to the trust under an agreement. The agreement sets out, amongst other things, the payment of compensation to the trust, for and on behalf of the beneficiaries in connection with the effect of the activities on native title rights and interests of the claim group.

The trust

The trust was established by a deed of settlement.

Clause X of the deed states:

Subject to the terms of this Deed, the Trust Fund shall be applied exclusively for the promotion of the Charitable Objects in accordance with the terms of this Deed.

The trust is not carried on for the purpose of private gain, and the objects of the trust are predominantly for benevolent relief.

The trust is for the sole benefit of the claim group.

Relevant provisions:

Income Tax Assessment Act 1936 subsection 95(1).

Income Tax Assessment Act 1936 paragraph 99(2)(a).

Income Tax Assessment Act 1936 paragraph 99(2)(c).

Income Tax Assessment Act 1997 section 6-15.

Income Tax Assessment Act 1997 paragraph 104-10(5)(a).

Income Tax Assessment Act 1997 subsection 108-5(1).

Explanation: (This does not form part of the notice of private ruling)

Are the payments subject to income or capital gains tax?

Subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines net income of a trust to be:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income…

If the trust's income is assessable income; it is assessable in the hands of the trustee to the extent not distributed. It is noted that the trust is a discretionary trust, consequently, beneficiaries are not presently entitled unless the trustee has exercised its discretion in their favour (paragraphs 99(2)(a) and 99(2)(c) of the ITAA 1936).

The question is whether the payments made under the Agreement form part of the assessable income of the trustee.

Section 6-15 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

Compensation payments under the Agreement are for the effect on the Native Title rights and interests of the Claim Group. It is noted that the payments are periodical.

In Nullaga Pastoral Company Pty Ltd v. FC of T 78 ATC 4329; (1978) 8 ATR 757, Wickham J (Nullaga Pastoral Company) considered that periodic payments for compensation were of a capital nature and not assessable income. The company conducted a pastoral business and entered into the agreement with the consortium of mining companies whereby it granted to them the right to explore for bauxite on approximately 1/3 of its farmlands. The exploration rights were to subsist for five years in consideration of an annual payment of $10,000. Payments were received as compensation for damage to and interference with the company's use of the land.

In Barrett v. Federal Commissioner of Taxation (1968) 118 CLR 666; (1968) 15 ATD 149; (1968) 10 AITR 685 (Barrett), a licence to win minerals was granted to a third party and the taxpayer received amounts on account of damage, loss and diminution of value of the property. During the years ended 30 June 1954 to 1960, mining operations were carried out by Universal Milling Co. on the land each year and in each year it paid to the taxpayer by monthly installments an amount calculated at the rate of 5s per ton for every ton of soap stone removed from the land during the year.

In each year, the Commissioner had included the payments as assessable income but the High Court ruled the payments were made and received for the purpose of making good the estimated diminution in value of the land and the amount of damage to it which might result from the carrying on of mining operations and were not payment of royalties or payments received by the company as income in return for the grant of a licence to use the land for the purpose of mining.

It is considered that the payments received by the trust are capital receipts and are not considered 'ordinary income'.

Whether the payments may be included in assessable income will then depend upon whether they are to be included as statutory income.

Accepting the payments as a capital receipt for compensation, Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts suggests a right to seek compensation is an asset for the purposes of the former Part IIIA of the ITAA 1936 and the right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

Paragraph 32 of TR 95/35 notes that asset is defined in the former section 160A of the ITAA 1936 as any form of property and includes, among other things, a chose in action, and any other right, whether or not proprietary in nature and whether legal or equitable (current reference is subsection 108-5(1) of the ITAA 1997).

At paragraph 33 of TR 95/35, there is an extract from the explanatory memorandum accompanying Taxation Laws Amendment Act (No 4) 1992 which states: 'To be an asset, a right must be recognised and protected by law - a court of law or equity will assist in enforcing it'.

Paragraph 34 of TR 95/35 states, 'we consider that the right to seek compensation is an asset for the purposes of CGT provisions'.

It has been suggested that the payments made under the agreement are compensation payments made for the effect that the project has and will have on the native title rights and interests of the claim group.

Paragraph 104-10(5)(a) of the ITAA 1997 provides that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

As regards a pre CGT asset, it is stated in TR 95/35 at paragraph 5:

It follows that if the underlying asset disposed of was acquired by the taxpayer before

20 September 1985, the receipt of compensation has no CGT consequences for the taxpayer.

Native title is a traditional entitlement said to have been held since time immemorial. The capital receipt would not be subject to capital gains tax as the native title rights and interests have been owned by the relevant people since prior to the introduction of capital gains tax and the native title rights and interests would therefore be pre CGT assets.

Will income that is distributed to beneficiaries be assessable to them?

For income tax purposes, where a beneficiary in a trust estate is presently entitled to the net income of the trust estate, that income, as a general principle, has the same character in the hands of the beneficiary as it had in the hands of the trustee.

The payments in the hands of the trustee are not assessable as ordinary income (Nullaga Pastoral Company Pty Ltd and Barrett). Neither are the payments included as statutory income. They are payments in compensation for disposal of a right and the underlying asset was acquired prior to the introduction of capital gains tax. The payments have the same non-assessable character in the hands of the beneficiaries.

The payments appear to be compensation payments relating to damage to native title rights (the underlying asset). The underlying asset was acquired before 20 September1985.

There are no CGT or income tax consequences regarding any distributions made to the beneficiaries.