Edited version of your private ruling

Authorisation Number: 1012471493351

Ruling

Subject: Present entitlement for the Members of a Trust for the purposes of section 97 of the Income Tax Assessment Act 1936

Issue 1

Question 1

For the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936), will a Member of the Trust (Member) be presently entitled to a share of the income of the Trust where the Trustee determines that the Member is entitled to be paid income of the Trust notwithstanding that:

The Trustee knows it does not have the means to enable the Members to 'receive' payment of its entitlement as it has an invalid address for the Member and therefore cannot post the cheque to the Member or notify the Member; or

the Member does not become aware of its entitlement, because the Trustee has an address listed but the Member no longer lives at that address and never receives the cheque because they have not notified the Trustee of a change of address or otherwise does not receive the cheque?

Answer

Yes, provided the Trustee does not exercise its power of forfeiture under Trust Deed.

Question 2

If the answer to question 1 is yes, is that Member liable to pay tax on that share of the net income of the Trust estate pursuant to the operation of section 97 of the ITAA 1936?

Answer

Yes.

Question 3

If the answer to questions 1 and 2 is yes, should the Trustee be liable to pay tax on that share of the net income of the trust estate pursuant to the operation of section 99A of the ITAA 1936?

Answer

No.

This ruling applies for the following periods

1 July 20SS to 30 June 20ZZ

The scheme commences on

1 July 20SS

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 Trust is constituted by the Trust Deed. Its purpose is to fund redundancy payments to employees in certain industry.

The Trustee is an Australian resident company.

Employers in the industry can meet their obligations for employee redundancy benefits required under various industrial awards and enterprise agreements, by making contributions to the Trust.

All contributions made to the Trust by employers are placed into separate member accounts identifying contributions for each Member.

The Trust also maintains a Reserve Account for payment of the Fund's costs and expenses.

A Member is defined in the Trust Deed as:

an Employee in respect of whom a Participating Employer is obliged or may under an Enterprise Agreement or Industrial Agreement contribute to the Fund who has been admitted to membership of the Fund and whose membership of the Fund has not ceased in accordance with the terms of the Fund.

Upon admission to membership of the Fund, the Trust requires each Employer or Member to provide Member details. In particular, contact details, address for correspondence and the Member's tax file number.

Pursuant to a clause of the Trust Deed, the Trustee determines the income of the Fund which it may:

· credit to the Fund's Reserve Account pursuant to a clause of the Trust Deed; or

· determine to distribute to eligible Members pursuant to a clause of the Trust Deed (Income Distribution).

The Trustee determines the income of the Fund for each income year, pursuant to a clause of the Trust Deed, prior to 30 June of each year.

In determining the amount of each Member entitlement, the Trustee declares a daily interest rate in accordance with the Trust Deed. This daily interest rate is applied to each Member's share of the Income Distribution to be distributed, subject to the resulting amount being in excess of the Minimum Earnings pursuant to the Trust Deed.

In cases where the resulting amount on applying the daily interest rate to a particular Member Account is less than Minimum Earnings determined by the Trustee in accordance with the Trust Deed, the holder of that Member Account in not entitled to receive a share of the Income Distribution pursuant to the Trust Deed. These amounts are transferred to the Reserve Account.

Pursuant to the Trust Deed, the Trustee is required to pay to Members the amount determined under a clause of the Trust Deed, subject to any accumulation and application of income to the Reserve Account under a clause of the Trust Deed.

The amount of Income Distribution determined under the Trust Deed is placed into a bank account separate from the Trust's other funds for approximately 12 months, and the Income Distribution is paid to Eligible Members (i.e., Members whose distributions are in excess of the Minimum Earnings), provided the Trustee has a valid address for those Members, by way of issuing cheques to those Members, allowing them to draw on that bank account. This bank account is closed approximately 12 months after the Trustee issues the cheques. The receipt of cheques together with a cover letter from the Trustee is how the Members are notified of their entitlement to trust income.

A Member's address for correspondence is classed as 'invalid' where two annual Member statements sent to the last known address of a Member have been returned.

An eligible Member may not receive their share of the Income Distribution where:

the Trustee has an invalid address for the Member and therefore cannot post the cheque to the Member or notify the Member;

the Trustee has an address listed but the Member never receives the cheque because they have moved from that address and they have not notified the Trustee of a change of address, or otherwise does not receive their cheque.

If an Eligible Member that has not provided a valid address at the time the Trustee issues cheques, but subsequently provides a valid address, prior to the closure of the bank account, that Member is issued a cheque for the amount of its share of the Trust's Income Distribution.

Any residual amount of income Distributions in the separate bank account, relating to cheques that are never issued or remain undrawn 12 months after the date that they are issued (either because an Eligible Member has not notified the Trustee of their new address after moving, or because they do not otherwise bank their cheque), are transferred to the Fund's Reserve Account.

The Trust Deed provides that a distribution of income may be forfeited where:

· a cheque in payment of the income distribution has not been presented within three months of sending the cheque to the Member; or

· the trustee has no address for the Member at time of sending income distribution to Member; or

· any other circumstance the Trustee is satisfied the Member has not received payment or having receive payment, the Member has not applied the payment to his or her benefit;

· where forfeiture occurs before the Trustee has lodged its tax return for the year of income to which the distribution relates the income amount will be deemed to have been income to which no Member is presently entitled.

The Trustee's current and historic practice indicate that the Trustee does not intend to exercise its power, pursuant to the Trust Deed, to forfeit certain Income Distributions in the circumstances laid out under a clause of the Trust Deed and subsequently deem that amount as income to which no Member is presently entitled.

In practice, when an Eligible Member entitled to a share of the Income Distribution transferred to the Reserve Account claims the payment they were entitled to, the Trustee issues a cheque for this share of income less 46.5% of that share on the basis that the Trustee included that income in its assessable income the following year and paid tax in relation to a proportionate share of net income. In this case, the Member is informed not to pay tax on this amount. If the Tax Office makes the decision that the Members are presently entitled to their share of Income Distribution, the Trustee intends to pay such Members the full income entitlement and advise member to pay tax on the distribution.

The Trustee lodges Annual Investment Income Reports (AIIRS) each year which discloses each beneficiary's share of the Trust's net income.

Relevant legislative provisions

Income Tax Assessment 1936 Division 6

Income Tax Assessment 1936 section 97

Income Tax Assessment 1936 section 99A

Reasons for decision

Issue 1

Question 1

Summary

For the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936), a Member is presently entitled to a share of the income of the Trust where the Trustee determines the Member is entitled to be paid income of the Trust notwithstanding that:

The Trustee knows it does not have the means to enable the Members to 'receive' payment of its entitlement as it has an invalid address for the Member and therefore cannot post the cheque to the Member or notify the Member; or

the Member does not become aware of its entitlement, because the Trustee has an address listed but the Member no longer lives at that address and never receives the cheque because they have not notified the Trustee of a change of address or otherwise does not receive the cheque.

However, this will only be the case when the Trustee does not exercise the power given to it under clause 10 of the Trust Deed.

Detailed reasoning

Section 97 of the ITAA 1936 states as follows:

97(1) Subject to Division 6D, 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:

assessable income of the beneficiary shall include:

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

so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to a source in Australia; and

Division 6D of the ITAA 1936 deals with the present entitlement of trustee beneficiary of closely held trust. The arrangement in the present case does not deal with such a situation.

The taxation legislation does not define or explain what present entitlement is. We therefore need to look at court cases and ATO view documents to see what the concept means and how the Tax Office interprets it.

The Full High Court in Harmer & Ors v FCT 91 ATC 5000 stated (p. 5004):

The parties are agreed that the cases establish that a beneficiary is 'presently entitled to a share of the income of a trust estate if, but only if,

the beneficiary has an interest in the income which is both vested in interest and vested in possession; and

the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

In the Federal Court in Harmer & Ors v FCT 89 ATC 5180; [1989] FCA 432; (1989) 90 ALR 550, French J at 5191 discussed the concepts of 'vested in interest' and 'vested in possession' and referred to the 4^th edition of Megarry and Wade, 1975, The Law of Real Property, p. 173 as follows:

An interest is 'vested in possession' when it gives the right of present enjoyment; but of course it is not then a future interest. If it is vested in interest but not in possession (for which situation the term 'vested' is ordinarily used by itself) it is a 'future interest', since the right of enjoyment is postponed, yet it is also an already subsisting right in property vested in its owner: it is a present right to future enjoyment. By contrast with the vested interest, a contingent interest is one which will give no right at all unless or until some future event happens.

In other words, the beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. The interest must not be contingent, but must be such that the beneficiary may demand immediate payment of that income. If the beneficiary is under legal disability such as infancy or insanity, the interest must be such that the beneficiary would have been able to demand immediate payment of the income had there been no disability or incapacity. In FCT v Harmer (1990) 24 FCR 237; 21 ATR 623; 90 ATC 4672, money was on trust by a solicitor, pending court orders to resolve competing claims to the money. The court held that unless and until the court orders were made, the parties to the dispute were not presently entitled to the interest earned on money.

In the present case, the Trustee is required, under the Trust Deed to determine the income of the Fund for each Accounting Period, which ends on 30 June in each year. Once the income is determined, the Trustee is required, under the Trust Deed to pay to the members as soon as practicable, at the end of the Accounting Period, the daily interest rate determined in accordance with a clause of the Trust Deed, where the amount is in excess of the Minimum Earnings. Since the Members' interest in the trust income is not contingent and they can claim immediate payment following the income determination, the Members' interest in the trust income is both 'vested in interest' and 'vested in possession'.

The second criteria for present entitlement, as stated in Harmer V FCT 91 ATC 5000, a beneficiary can only be presently entitled to income that is legally available for distribution to the beneficiary, even though it may not be in the trustee's hands for distribution at the relevant time.

In the case on hand, the income is legally available to the Members at the end of the Accounting Period and is not subject to any contingencies. As soon as the Trustee determines the amount of the Income Distribution pursuant to the Trust Deed, the income is legally available to be distributed by the Trustee and is placed in a bank account separate to Trustee's other funds. The Trustee issues cheques to the Members together with a covering letter allowing them to draw on that account. After 12 months, the money available in the Member's separate account gets transferred to the Fund's Reserve Account. Although the Trust Deed provides that a distribution of income may be forfeited where a cheque in payment of the income distribution has not been presented within three months of sending the cheque to the Member or where the Trustee has no address to send the cheque or the Member has not received payment, the Trustee has in practice never exercised or intends to exercise this power. The Trustee Deed provides the Trustee absolute discretion, subject to certain clauses of the Trust Deed to exercise or not to exercise any of the powers, authorities or discretions in the execution of the Trust Deed. The Trust Deed requires the Trustee to ensure the management of the Trust Fund is carried out at arm's length. It puts limitation on the Trustee's power imposing restriction not to invest more than 5% of the asset of the Fund in an entity controlled by a Participating Employer or to provide any financial assistance to a Participating Employer. Therefore, if this Trustee does not exercise the powers vested under the Trust Deed, the Income Distribution will be available to the Member whenever such Member demands the payment even when the money is transferred to the Reserve Account.

The fact that the cheque may not be received by a Member because of an invalid address does not deny the Members of their present entitlement to the income. Actual receipt of the income is not a requirement of present entitlement: Richardson v FCT (2001) FCA 1354.

The courts have gone even further than receipt. A beneficiary can have a present entitlement even if the beneficiary is not aware or has no knowledge of it: FCT v Cornell (1946) 73 CLR 394; Vegners v FCT (1991) 21 ATR 1347.

A beneficiary may disclaim his or her entitlement on becoming aware of the entitlement, but must do so within a reasonable time of becoming aware of the entitlement: Vegners v FCT (1991) 21 ATR 1347; FCT v Ramsden (2005) 58 ATR 485; Pearson v FCT (2005) 58 ATR 502. ATO Interpretative Decision ATO ID 2010/85 Income tax - trust income: disclaimer of an entitlement of trust income, deals with a situation in which a trustee of a discretionary trust appointed part of the income of the trust estate to a beneficiary for the 2006-07 income year, but the beneficiary was not aware of the appointment until the Commissioner issued an amended assessment in 2009. Thereupon, the beneficiary immediately advised the trustee of the disclaimer. The Tax Office accepted that the beneficiary had validly disclaimed the entitlement to trust income.

In the present case, the Members, who do not have valid address with the Trust, would not be able to receive the cheque and in turn would not be able to physically receive the income that they are entitled to. Again, they may not have any knowledge that such cheques have been sent to them as they have moved to another address.

However, the Members will still be presently entitled unless they disclaim their entitlement on becoming aware of it and as soon as they become aware of it. In that situation, they will not be presently entitled to the income.

Therefore, since the Members interest in the income of the Trust is vested in interest and vested in possession and legally available for distribution following the determination of the income at the end of the Accounting Period, they are presently entitled to the income, irrespective of the fact that some of them may not receive the cheque because of invalid address and have no knowledge of such distribution.

However, the members will not be presently entitled where the Trustee exercises its power under the Trust Deed whereby the distribution of the income is forfeited in the circumstances described there. In such situation, it is the Trustee who will be liable to pay tax on that income.

Question 2

Summary

Since the answer to Question 1 is yes, a Member is liable to pay tax on that share of the net income of the trust estate pursuant to the operation of section 97 of the ITAA 1936.

Detailed reasoning

When the Trustee of the Trust determines the income of the Fund for an Accounting Period under a clause of the Trust Deed and is transferred to the Member Accounts, the Members are presently entitled under section 97 of the ITAA 1936. In that situation, the Members are liable to pay tax on their proportionate share of the Fund's net income as is included in their assessable income for the income year. This is regardless of the fact that they could not receive the income because of invalid address and therefore had no knowledge of it.

However, this will be the case so long as the Trustee does not exercise its power of forfeiture under the Trust Deed. If so, it will be the Trustee who would be liable for tax on the forfeited amount.

Question 3

Summary

Since the answer to Questions 1 and 2 is yes, the Trustee should not be liable to pay tax on that share of the net income of the trust estate pursuant to the operation of section 99A of the ITAA 1936.

Detailed reasoning

Section 99A of the ITAA 1936 states:

99A(4A) Where there is a part of the net income of a resident trust estate

that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and

that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

In the present case, each Member's respective share of the net income of the Trust estate, as determined by the Trustee of the Trust for each Accounting period, is available for distribution and hence is considered as their assessable income. They are liable to pay tax on their share of the net income of the Trust under section 97 of the ITAA 1997. The fact that some of them may not receive the cheque issued to them by the Trustee because of non-current or invalid address or because they have no knowledge of such distribution, does not make the members not presently entitled. In this circumstances, the Trustee is not liable to pay tax under subsection 99A(A4) of the ITAA 1936.

However, the Trustee shall be liable to pay tax on those parts of the net income of the Trust estate that are forfeited by virtue of the Trustee exercising its power under clause 10 of the Trust Deed. This will also be the case when a Member disclaims such entitlement following within a reasonable time following them becoming aware of the entitlement.