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Ruling

Subject: Net income of a charitable trust

Question 1:

In preparing the income tax returns of a trust for the years 2001 to 2010 (inclusive) is the net income of the trust determined under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes.

Question 2:

Pursuant to the provisions of section 95 of the ITAA 1936, is the proper method for the determination of what is 'net income' of the trust for the purposes of Division 6 of Part III of the ITAA 1936 to treat all payments and appropriations to charitable objects as outgoings from the assessable income of the trust (in each respective year of income), being part of the deductible expenses and outgoings deductible pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year of payment or appropriation?

Answer:

No.

Question 3:

If the trustees of the trust determine to have net income within the meaning of section 95 of the ITAA 1936, is such income then assessable under section 99A of the ITAA 1936?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2001

Year ended 30 June 2002

Year ended 30 June 2003

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

14 October 1997.

Relevant facts and circumstances

The trust is a charitable trust.

The trust is not an endorsed tax exempt entity for the relevant years.

In each of the years of income, the trustees of the trust received income consisting of service fees, dividends and interest from investments.

In each of the years of income, the trustees of the trust made payments to inter alia charitable objects pursuant to the provisions of the trust deed.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1),

Income Tax Assessment Act 1936 Division 6 of Part III,

Income Tax Assessment Act 1936 Section 95,

Income Tax Assessment Act 1936 Subsection 95(1),

Income Tax Assessment Act 1936 Section 97,

Income Tax Assessment Act 1936 Subsection 97(1),

Income Tax Assessment Act 1936 Section 98,

Income Tax Assessment Act 1936 Section 99,

Income Tax Assessment Act 1936 Section 99A,

Income Tax Assessment Act 1936 Subsection 99A(4),

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Paragraph 8-1(1)(a),

Income Tax Assessment Act 1997 Paragraph 8-1(1)(b) and

Income Tax Assessment Act 1997 Subsection 8-1(2).

Reasons for decision

Question 1:

Summary

The net income of the trust is to be determined under section 95 of the ITAA 1936.

Detailed reasoning

The provisions of the ITAA 1936 which relate to general trust income are found in Division 6 of Part III (Division 6). The purpose of Division 6 is to assess the taxable income derived by the trustee at the level of either trustee or beneficiary.

Broadly the scheme of Division 6 is to determine the share (if any) of the 'income of the trust estate' to which a beneficiary is presently entitled and that share of the 'net income' of the trust estate is assessed to the beneficiary (section 97) or the trustee on their behalf (section 98). Any part of the 'net income' remaining is assessed to the trustee (sections 99 and 99A).

The definition of what constitutes the 'net income' of a trust is stated in Division 6 as follows (in so far as relevant):

95(1) In this Division:

· 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 and were a resident, less all allowable deductions…

In essence, the net income of a trust means the taxable income of the trust calculated under the ITAA 1936 and the ITAA 1997 as if the trustee were a resident taxpayer in respect of that income less all allowable deductions (except for certain deductions identified in the provision).

The 'net income' is the amount that is taxable as opposed to the 'income of the trust' which is the accounting income or distributable income determined in accordance with the trust deed and general trust law to which the beneficiaries are presently entitled (FC of T v. Bamford (2010) 240 CLR 481; 75 ATR 1; 2010 ATC 20-170; Decision Impact Statement DIS S310 and S311/2009).

Question 2:

Summary

Payments and appropriations made by the trust to charitable objects are not deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Section 95 of the ITAA 1936 defines the net income of a trust estate to mean the total assessable income of the trust estate calculated under the ITAA 1936 and ITAA 1997 as if the trustee were a taxpayer in respect of the income and were a resident, less all allowable deductions (subject to certain exceptions).

The term 'allowable deduction' is defined as a deduction allowable under the ITAA 1936 or ITAA 1997 (subsection 6(1) of the ITAA 1936).

Under section 8-1 of the ITAA 1997 a deduction is allowed for a loss or outgoing to the extent that it is incurred in gaining or producing assessable income (paragraph 8-1(1)(a)) or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (paragraph 8-1(1)(b)).

However, under the negative limbs of subsection 8-1(2) of the ITAA 1997 the outgoings are disallowed to the extent they are of a capital, private or domestic nature, or relate to the earning of exempt income.

For an outgoing to be deductible under the first positive limb of section 8-1, the relationship between the outgoing and the trust's assessable income must be such as to impart to the outgoing the character of an outgoing incurred in gaining or producing assessable income. A loss or outgoing is not characterised as having been incurred in gaining or producing assessable income unless it is 'incidental and relevant to that end' (Ronpibon Tin NL & Tongkah Compound NL v. FC of T (1949) 78 CLR 47 at 56; 8 ATD 431 at 435 (Ronpibon Tin)); Taxation Ruling TR 93/17 at paragraph 17).

For a loss to be incurred in gaining or producing the assessable income 'it is both sufficient and necessary that the occasion of the loss ... be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income' (Ronpibon Tin (1949) 78 CLR 47 at 57; 8 ATD 431 at 436; Fletcher & Ors v. FC of T 91 ATC 4950 at 4957; (1991) 22 ATR 613 at 622; Taxation Ruling TR 92/4 at paragraph 7).

The second positive limb covers almost all of the ground occupied by the first limb (Ronpibon Tin (1949) 78 CLR 47 at 56; 8 ATD 431 at 436; Taxation Ruling TR 92/4 at paragraph 9).

The trustee of the trust derives its assessable income from service fees, dividends and interest from investments. The payments and appropriations made by the trust to charitable objects are not incidental and relevant to the production of the trustee's assessable income and therefore do not have the essential character of an outgoing incurred in gaining or producing assessable income.

Question 3:

Summary

For the relevant periods, the net income of the trust is assessable to the trustees under section 99A of the ITAA 1936.

Detailed reasoning

Sections 99A and 97 of the ITAA 1936 state as far as relevant:

…

99A(4) Where there is no part of the net income of a resident trust estate:

· that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

· …

· the trustee shall be assessed and is liable to pay tax on the net income of the trust estate…

97(1) … where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

…

The Reasons in the Application for Private Ruling (paragraph 18) provide that sections 97 and 98 of the ITAA 1936 have no operation in such circumstances as a special purpose trust has no individual beneficiaries (Latimer v. Commissioner of Inland Revenue [2004] 4 All ER 558 at 567).

We agree with the conclusion that the trust as a trust solely for charitable purposes has no beneficiary. It is well settled common law that such a trust lacks the individual beneficiaries who commonly hold the beneficial interest in the trust assets (FC of T v Bargwanna (2012) ATC 20-312 at [7]; [2012] HCA 11 at [7]; (2012) 286 ALR 206 at [7]).

On the plain reading of the provisions we also agree that section 97 of the ITAA 1936 (and section 98 of the ITAA 1936) has no operation due to the fact that the trust has no beneficiary. Consequently section 99A of the ITAA 1936 applies to the whole of the 'net income' of the trust.