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Ruling

Subject: Assessability to trustee of distributions from estate following court order concerning substitution of beneficiary

Question 1

In the situation presented, has the trustee correctly dealt with the distributions made by the estate to a substituted beneficiary in the 2009 and 2010 income years as being not assessable to the executor under section 99 of the Income Tax Assessment Act 1936?

Answer

Yes. The estate income in question is considered to be validly distributable to the substituted beneficiary as being the presently entitled beneficiary and therefore the executor is not assessable under section 99 of the ITAA 1936 in respect of that income in either income year.

This ruling applies for the following periods:

Income year ended 30 June 2009

Income year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The ruling application incorporated a large amount of supporting material relating to the estate and the application to the Supreme Court for a scheme under section 15 of the Charitable Trusts Act 1962 (WA). This material includes financial statements and annual reports of the substitute beneficiary, plus affidavits and other correspondence relating to the court action. The facts below are derived from, and supported by, this material.

The original beneficiary was established as a division of the substitute beneficiary. The original beneficiary provided specialist inpatient care for terminally ill patients.

The substitute beneficiary closed the original beneficiary after the testator's death.

The material provided shows that the substitute beneficiary redirected funding into other aspects of its operations.

In addition, the information provided shows that:

· At all times the original beneficiary has not been a separate legal entity, and

· At all times the original beneficiary was a division of the substitute beneficiary, with the result a disposition to the original beneficiary was a distribution to the substitute beneficiary.

The deceased made a valid will and subsequently made a codicil to that will.

The original will bequeathed the residue of the estate to named charitable entities, including the original beneficiary.

The codicil altered the will's residuary clause by adding further named charities. The original beneficiary remained in the will.

The testator died prior to closure of the original beneficiary.

As a result of the closure of the original beneficiary, to the extent the residual entitlements of the original beneficiary were undistributed and unpaid; it was not possible to give effect to the intention of the deceased.

Accordingly the trustees were required to seek a court ruling establishing a scheme under the relevant legislation for the purpose of substituting a beneficiary in place of the original beneficiary.

Distributions of income were made to the beneficiaries and were paid at the time of distribution, save that the distributions relating to the original beneficiary were set aside into a separate account pending the establishment of the scheme.

A court order was made, the effect of which was to substitute the substitute beneficiary in place of the original beneficiary.

The trustees construe the order to apply retrospectively to the date of closure of the original beneficiary, that is, pursuant to the order the substitute beneficiary was substituted as a residual beneficiary and therefore entitled to the distributions to the original beneficiary following closure of the original beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1936, section 99.

Section 357-55 of Schedule 1 to the Taxation Administration Act 1953

Section 359-5 of Schedule 1 to the Taxation Administration Act 1953

Charitable Trusts Act 1962 (WA), section 15.

Reasons for decision

Summary

Accepting that the order has substituted the substitute beneficiary in place of the original beneficiary in the will, the distribution resolutions naming the substitute beneficiary as the presently entitled beneficiary in the 2009 and 2010 income years are considered valid and therefore no trust income falls for assessment to the trustee under section 99 of the ITAA 1936.

Detailed Reasoning

The original question posed in the ruling application was whether the court order applied retrospectively; either to the date of grant of probate or to the date if closure of the original beenficiary. Since this involved a question of trust law it was therefore not a question to which the ATO could provide a ruling. The combination of sections 357-55 and 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) means that the Commissioner can only rule on the way a provision of tax law applies to a specified scheme.

The tax issue is whether the amounts originally recorded in the estate's 2009 and 2010 income tax returns as being distributable to the original beneficiary should instead be assessed to the trustee under section 99 of the ITAA 1936, in view of the closure of the original beneficiary.

The ATO accepts the submission that the Supreme Court order has made the substitute beneficiary the beneficiary in place of original beneficiary. While the ATO is not able to rule on when the order takes effect from (i.e. date of probate or date of closure of the original beneficiary), it is agreed that the general effect is to alter the will and that this alteration will apply to the income years in question.

This outcome reflects:

· the practical situation (regarding operation and control of the original beneficiary);

· the financial accountability of the original beneficiary to the substitute beneficiary (as reflected in the substitute beneficiary's annual reports);

· the legal status of the original beneficiary;

· the agreement reached with the executors and the family of the deceased over the most appropriate recipient of the funds, and the use of those funds; and

· the agreement of the parties regarding the most appropriate way of realising the deceased's charitable intent.

Therefore, the substitute beneficiary is considered to be the presently entitled entity in place of the original beneficiary and no estate income falls for assessment to the trustee under section 99 of the ITAA 1936.