Edited version of your private ruling

Authorisation Number: 1012450031835

Ruling

Subject: trust

Question

Did the trust exist and make valid distributions?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· Trust deed, and

· Draft deed of confirmation.

Entity A prepared and supplied four copies of the trust deed to the settlor of the trust and employee of entity B. The settlor paid the settled sum to the trustee and it was banked in the trust bank account. Entity B were the accountants for the trust.

The sole director of the trustee company is entity C.

Entity C and entity D are beneficiaries of the trust.

Entity B provided the four unsigned copies of the trust deed to the trustee for signing. The trustee executed all four copies of the deed and returned all four copies to the settlor for signing.

Entity B held the trust deed in safe keeping for a few years and then returned three copies of the trust deed to the trustee. On the deeds returned to the trustee, it was discovered that the settlor had not signed any of these three copies of the trust deed. The sole signed copy was retained by entity B and not returned to the trustee. The settlor only signed one copy of the trust deed in the witness space. The settlor's signature on this sole copy was not witnessed and has not been validly executed.

The trust deed is invalid under the Property Law Act 1974 (Qld).

A Deed of Confirmation was drafted to show that a trust was created and the parties intended to create the trust. The trustee and beneficiaries are willing to sign this deed of confirmation; however the settlor is not willing to sign.

The tax returns for the trust and the beneficiaries were lodged. The trust operated a business.

The trust 20XX tax return shows net income. The trust return shows distributions were made to the beneficiaries. The tax returns of entity C and entity D show a trust distribution.

The distribution amount was not actually given to them after 30 June 2010; however the beneficiaries had made drawings throughout the year. These drawings were shown in the trust books.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 6.

Reasons for decision

Division 6 of the Income Tax Assessment Act 1936 outlines the basic tax treatment of the net income of the trust estate. A trust is not regarded as a separate legal entity for taxation purposes.

The term trust is not defined in the income tax legislation.

The Macquarie Dictionary defines a trust as a fiduciary relationship in which one person (the trustee) holds the title to property (the trust estate or trust property) for the benefit of another (the beneficiary).

The following definition is often referred to by courts:

A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries), of whom he may himself be one, and any one of whom may enforce the obligation: see Re Marshall's Wills Trusts (1945) 1 Ch. 217 at 219; Green v Russell (1959) 2 Q.B. 226 at 241.

Another definition of a trust is found in Harmer v FCT (1989) 20 ATR 1461; 89 ATC 5180:

A trust is the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiary or other object of the trust.

Both of these definitions identify four elements which must be present for a valid trust to exist at law:

· trust property (the subject of the trust),

· a trustee (who holds the legal interest in the trust property),

· a beneficiary or beneficiaries, or a specified purpose (the objects of the trust), and

· the obligation that the trustee must hold and deal with the trust property for the benefit of the beneficiaries in accordance with the terms of the trust.

That is, a trust is created to enable the trustee (the person setting up the trust) to control what happens to certain funds or property in the future. A trust deed is generally used to outline the terms of a trust agreement. However, for taxation purposes, a formal trust deed is not a specific requirement under tax legislation, however there must be a clear intention.

The Macquarie Dictionary defines a trust deed as the legal document which appoints trustees and defines their power.

In this case, it is acknowledged that the trust deed has not been signed and witnessed by the settlor and the trust deed is not valid under the Property Law Act 1974 (Qld). However, for taxation purposes, it is considered that this is not detrimental and that a valid trust exists. This is based on the following evidence:

· a trust deed was established and documented,

· the trustee signed the trust deed,

· the trustees and beneficiaries intended to create a trust on the terms of the trust deed,

· the trust operated a business during the relevant 2009-10 income year, and

· the beneficiaries received benefits (income) from the business.

Therefore, for taxation purposes the trust distributions are valid and assessable to the beneficiaries.