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Ruling

Subject: Trust Distributions and Company Dividends

Issue 1

Certain amounts were purported to have been distributed in accordance with the deed for Trust 1 from Trust 1 to Trust 2 via distributions to Individual 1 in their capacity as the trustee of the Trust 2 for the 200X and 200Y years.

Question 1

Are the distributions for the years ended 30 June 200X and 200Y from Trust 1 to Trust 2 made pursuant to the Trust Deed effective or should they be construed as being effective?

Answer

We are unable to answer this question as a private ruling because it is not a tax law question. However the issue has been considered in answering other questions below.

Question 2

On the basis that the Commissioner forms a view that the years ended 30 June 200X and 200Y Trust 1 to Trust 2 distributions were invalid because they were made to Individual 1 in their capacity as trustee as distinct from their personal capacity (with which view the applicant does not agree) or for another reason or reasons, should the provisions of the Trust Deed be interpreted as if they were drafted with the intention of permitting distributions to person acting in their capacity as trustee?

Answer

We are unable to answer this question as a private ruling because it is not a tax law question. However the issue has been considered in answering other questions below.

Question 3

Subject to the answer for question 1 and/or 2, what is the amount of the sub-paragraph 97(1)(a)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) income of Trust 2 referable to the Trust 1 - Trust 2 distribution for the years ended 30 June 200X and 200Y?

Answer

Nil. The purported distributions to Trust 2 from Trust 1 for both years were not provided for in the Deed for the Trust 1.

Question 4

Subject to the determination of questions 1, 2 and 3 what is the amount of the paragraph 99(2)(a) of the ITAA 1936 income of Trust 1 in respect of the years ended 30 June 200X and 200Y arising from the accumulation of income in Trust 1?

Answer

Nil.

This ruling applies for the following period:

1 July 2006 to 30 June 2008

The scheme commences on:

1 July 2006

Issue 2

The validity of the dividend that was claimed to have been paid by Company A to Trust 3 for the year ended 30 June 200Y.

Question 5

Was the increase in the dividend for the year ended 30 June 200Y from Company A to Trust 3 effective?

Answer

We are unable to answer this question as a private ruling because it is not a tax law question. However the issue has been considered in answering other questions below.

Question 6

Subject to the answer to Question 5, what is the amount of the sub-paragraph 97(1)(a)(i) of the ITAA 1936 income of Trust 2 referable to the Trust 3 - Trust 2 distribution for the year ended 30 June 200Y?

Answer

Nil.

This ruling applies for the following period:

1 July 2007 to 30 June 2008

The scheme commences on:

1 July 2007

Issue 3

The effect of Issues 1 and 2 upon the taxable income for Individual 2 for the year ended 30 June 200Y.

Question 7

Subject to the answers to the above questions, what is the amount of the sub-paragraph 97(1)(a)(i) of the ITAA 1936 income of Individual 2 referable to the Trust 2 - Individual 2 distribution for the year ended 30 June 200Y?

Answer

Nil.

This ruling applies for the following period:

1 July 2007 to 30 June 2008

The scheme commences on:

1 July 2007

Related Rulings

The following are related rulings for the purposes of section 359-45 of Schedule 1 to the Taxation Administration Act 1953.

Question 8

For the purposes of paragraph 97(1)(a) of the ITAA 1936 is Company A presently entitled to that part of the income that was purported to be distributed from Trust 1 to Trust 2 for the years ended 30 June 200X and 200Y?

Answer

Yes.

This ruling applies for the following period:

1 July 2006 to 30 June 2008

The scheme commences on:

1 July 2006

Question 9

What is the amount of taxable income under subsection 4-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for Individual 2 for the year ended 30 June 200Y?

Answer

Nil.

This ruling applies for the following period:

1 July 2007 to 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

Trust 1 was settled in the mid-1980s and has a corporate trustee.

Recital A of the Trust Deed for Trust 1 provides that the 'Settlor desires to make provision for the Primary Beneficiary Primary Beneficiaries and the General Beneficiaries hereinafter described as and in the manner set out.'

Among the primary beneficiaries of Trust 1 is Individual 1, who is also one of the joint appointors of this trust. There is no default beneficiary or beneficiaries referred to in the Deed.

Trust 2 was settled in 200W. Individual 1 is the trustee of Trust 2. The primary beneficiaries of the Trust 2 are Individual 1 and their children and remoter issue of them. Individual 2 qualifies as a general beneficiary of Trust 2 under the Deed for Trust 2 as the spouse of Individual 1.

Relevant year ended 30 June 2007 transactions

The Application for Private Ruling states the directors of the corporate trustee of Trust 1 made the following resolution in June 200X:

Resolved in accordance with clause X of the trust deed that the net income of the trust for the year ended 30 June 200X be paid, applied or allocated to or for the benefit of the following:

1 A specified amount to Individual 1as trustee for Trust 2.

2 The balance to Company A.

Company A is a corporate member of the group of entities belonging to Individual 1's family.

The copy of the actual minute of resolution supplied with the application made reference to a clause Y of the trust deed. There appears to be no clause Y in the deed for Trust 1. The applicants provided an explanation for this discrepancy.

The applicants state that they understand that "whilst the intention of the accountant preparing the return was, on instruction from Individual 1, to apply the quantum approach in interpreting section 97(1)(a)(i) (sic.), it appears the proportionate approach was applied".

Trust 2 distributed 100% of its entitlement to the 200X year distribution from Trust 1 to Individual 1.

Relevant year ended 30 June 2008 transactions

In relation to the year ended 30 June 200Y, at a meeting of directors of the trustee of Trust in mid-200Y, the trustee made the following resolution:

Resolved in accordance with clause X of the trust deed that the net income of the trust for the year ending 30 June 200Y be paid, applied or allocated to or for the benefit of the following:

1 A specific amount to Individual 1as trustee for Trust 2;

2 The balance to Company A.

Trust 2 distributed 100% of its entitlement to the 200Y year distribution from Trust 1 to Individual 2 who is the spouse of Individual 1.

First amendment of financial statements

Following lodgement of the original returns for the year ended 30 June 200Y amended financial reports and tax statements for a trust that distributed income to Trust 1 (Trust X) were received, correcting the original financial reports and tax statements. The effect of the amendment resulted in a reduction in the distribution to Trust 1.

The amendment to that distribution resulted in a reduction in the distribution for the 200Y year from Trust 1 to Trust 2. Trust 1's return was amended to reduce its taxable income.

In July 200Z letters from the group's tax agents, were forwarded to the Commissioner seeking amendments to the returns for some of the entities of the family group. Among them was:

§ A letter requesting amendment of the return for Company A for the 200Y year so that it showed dividend amounts and imputation credits as being paid to Trust 3 for this year.

§ A letter requesting amendment of the return for Trust 3 for the 200Y year to include the dividend amounts from Company A as outlined above.

However, according to the Tax Office's records, a return for Trust 3 was not required to be lodged for the year ended 30 June 200Y and no return was lodged by Trust 3 for that year.

An amendment request has not been lodged for Individual 2 relating to the effects of these amendments.

Second amendment to financial statements

The financial statements and tax statements for Trust X have been amended a second time. The effect of the amendment resulted in the year ended 30 June 200Y distribution to Trust 1 being further reduced.

An amended return has not been lodged in relation to Individual 2 relating to the effects of these amendments.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 97(1)(a)

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 subsection 170(1)

Income Tax Assessment Act 1936 subsection 170(6)

Income Tax Assessment Act 1997 subsection 4-15(1)

Income Tax Assessment Act 1997 subsection 960-100(3)

Taxation Administration Act 1953 section 359-45 of Schedule 1

Reasons for decision

Issue 1

Question 1, 2, 3, 4 and 8

Notwithstanding the discrepancies noted in the facts concerning the resolutions of the trustee of Trust 1 for the ended 30 June 200X we accept that the trustee purported to distribute in both the 200X and 200Y year amounts:

§ To Individual 1 in the capacity of trustee of the Trust 2

§ To Company A (the balance beneficiary)

The substantive issue though is whether it is possible for the Commissioner to accept on face value the resolutions for 200X and 200Y that appoint income from Trust 1 to Trust 2.

The applicants have argued that Clause 1.2 of the Deed for Trust 1 does not specify or limit the capacity or capacities in which a person is a beneficiary of Trust 1. The applicant's submissions are:

§ In the absence of words limiting the capacity in which a person can be a beneficiary of Trust 1, Individual 1 in the capacity of trustee of Trust 2 is permitted under the deed for Trust 1 to be a beneficiary of Trust 1.

§ As there are no words of limitation carving out beneficiaries who receive income from Trust 1 in their capacity as a trustee the trustee of Trust 1 was permitted to distribute to beneficiaries regardless of what capacity those beneficiaries are to receive that income.

§ As a result, the distributions made to Individual 1 in 200X and 200Y in their capacity as a trustee of Trust 2 was in compliance with clause 1.2 of the Deed.

§ A person acting in a capacity as a trustee for another is not, in that capacity, a legal person that is distinguishable or different from that person in their own right.

§ Trust 1 could have made a distribution to Individual 1 in his own right or in his capacity as a trustee of Trust 2 because Individual 1 is not a separate person at law.

In relation to the applicant's primary argument, there is no question that Individual 1 is trustee and primary beneficiary of Trust 2. However, there is no mention of any trust being capable of being a beneficiary of Trust 1 in the Deed for that trust. Corporations are mentioned with qualifying connections via shareholdings to primary or general beneficiaries but there is no such mention of trusts as beneficiaries.

The applicants submit that a person who may be a trustee does not have a separate identity in their own capacity. The applicants submit that it is irrelevant whether the distribution was made to Individual 1 in his capacity as trustee of the Trust 2 or whether it was made to him in his personal capacity - it still went to Individual 1. The implication appears to be that the distribution was made to Individual 1 and it is not relevant whether he held that distribution on trust for another trust that he was trustee for or whether he enjoyed the distribution personally. However for taxation purposes, under subsection 960-100(3) of the ITAA 1997, a legal person can have a number of different capacities in which the person does things and in each of those capacities; the person is taken to be a different entity.

After examining the Deed it is the Commissioner's view that the aspect of the resolutions that purported to appoint income to Individual 1 as trustee of Trust 2 were not valid given the way in which beneficiary is defined in the Deed for Trust 1. A trustee cannot appoint trust income to a person who is not a beneficiary and the Commissioner's construction of the Deed for Trust 1 is that it does not make any provision for a person or persons acting in the capacity of a trustee of a trust to benefit under the trust. When an individual is named in a trust deed as a beneficiary without further elaboration, they are a beneficiary in their own capacity and not in the capacity of a trustee.

As to whether the income that was purported to be distributed to Individual 1 in his capacity as trustee of Trust 2 should be regarded as having been distributed to any beneficiary or not distributed at all, the Commissioner's position is that these amounts should be regarded as having been distributed to Company A, the balance beneficiary nominated in the resolutions, in the absence of any specific clause in the Deed that deals with ineffective appointments of income.

It is considered that the resolutions had dealt with the whole of the income in each of the relevant years in that the trustee had expressed a desire to distribute an amount (being the balance) to Company A so that if the part of the resolutions that purported to distribute to Individual 1 as trustee of Trust 2 was not valid, then these amounts would form part of the balance that Company A was entitled to.

The submissions for the alternative question, should the Commissioner not accept the above are:

§ On the authority of Automix II Pty Ltd (as trustee for the McDonald Trust No 1) v McDonald (re McDonald Trust No 1 (2010) VSC 324) the deed of Trust 1 could be varied from its date of creation to include persons or entities acting in their capacity as trustees in the class of General Beneficiaries. In McDonald distributions had been made to a domestic partner of an identified beneficiary but the couple were not legally married. This meant that appointments of income to that person were not permitted on the face of the provisions of the deed for the trust. The trustee applied to the court to vary the deed so that its terms reflect modern community attitudes and that the proposed amendments were consistent with the intention of the settler to enable a domestic partner to become a beneficiary. The court allowed variation to the trust deed because the trustees were unaware of the limitations placed on them by the clauses of the deed - the trustees considered that a domestic partner, married or otherwise, were within the range of beneficiaries.

§ Based on the reasoning of Judd J in McDonald it is submitted that the trustee of Trust 1 assumed that a trust controlled by a primary beneficiary was automatically or naturally intended to be within the class of general beneficiaries which would have also been intended by the settlor.

§ That this assumption is in line with a modern discretionary trust deed that ordinarily specifies that persons acting in capacity as a trustee for a trust controlled by a primary beneficiary of the first trust is within the class of general beneficiary of the first-mentioned trust.

§ It was the intention of the settlor when establishing Trust 1 that the trustee be permitted to make distributions of income to Individual 1 in his own capacity or as trustee of a trust in which he is a primary beneficiary. It is claimed that based on this understanding of the intentions of the settlor, the trustee of Trust 1 made the distributions to Individual 1 for 2007 and 2008 specifying the trustee capacity.

§ Reference is made to where the parties can demonstrate a disconformity between 'the intention which is to be given effect by the Trust Deed and the actual effect of the deed' the parties can seek rectification to permit distributions to Individual 1in his capacity as a trustee of a trust in which he is a primary beneficiary from the date of commencement of Trust 1, citing as authority Kirkham as trustee of the Kirkham Family Trust, unreported, Supreme Court of Western Australia , Martin CJ, 19 May 2010.

In relation to these points, the applicants suggest that they could seek, and would likely be able to obtain, rectification of the Deed to add a clause that allowed a trustee of another trust to be a beneficiary.

That is a matter for the Trustee of Trust 1 to pursue with the relevant State court to seek to rectify the trust Deed. While the courts do have this power, and rectification is not without precedent, the courts are usually reluctant to provide rectification unless it is clear that a mistake has been made. It is an evidentiary matter to determine the original intention of the settlor.

However it is not open to the Commissioner to proceed on the basis that the Deed be read as though it had been rectified if in fact it had not been. If the applicants actually sought and was granted rectification, the Commissioner would interpret the Deed accordingly.

Issue 2

Question 5 and 6

The Commissioner has noted the following regarding Company A and Trust 3 in respect of the year ended 30 June 200Y:

§ Our records indicate that a return for Trust 3 for this year was 'not necessary'

§ The Commissioner has no record of an original return being lodged for this year for this entity.

§ We have not been provided with original financial statements for Trust 3 for this year. Instead we have been provided with financial statements for the 200Z year showing figures for 200Y as comparative figures.

§ These financial statements indicate that the only income purported to have been received by Trust 3 for the 200Y year is the dividend that was purported to have been paid contemporaneously by Company A.

§ A letter was forwarded by the tax agents in 200Z asking for an amendment to be made of a return that had not been lodged.

In the circumstances the Commissioner finds that Company A did not pay a dividend to Trust 3 within the year ended 30 June 200Y. The tax effect is that Trust 2 is not a presently entitled beneficiary for the purposes of paragraph 97(1)(a) of the ITAA 1936 in respect of the dividend that was purported to be paid to Trust 3 for this year.

The overall effect therefore is that no income and no franking credits pass from Trust 3 to Trust 2.

Issue 3

Question 7 and 9

The effect of the Commissioner's conclusions outlined for Questions 5 and 6 above result in the Trust 2 being in a net tax loss position for the year ended 30 June 200Y. Therefore, no taxable income is referable from Trust 2 to Individual 2 for this year and no franking credits can be passed to them from Trust 2.

As a result Individual 2's taxable income will be reduced to nil and an amended assessment will issue to recover amounts previously refunded to them in the original assessment.