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Edited version of your private ruling
Authorisation Number: 1012514830423
Ruling
Subject: Capital gains tax
Question 1
Will the Commissioner exercise the discretion under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the trust estate under section 99 of the ITAA 1936?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The deceased passed away in 1990.
The deceased owned a property (the property) that was acquired prior to September 1985. The property was their main residence.
The estate has not been fully administered and the property is still in the name of the estate.
Under the terms of the will, the estate is held in trust for the deceased's two children.
One of the children is a member of a religious order. Whilst they remain a member, they have no entitlement to capital or income from the estate other than at the discretion of the trustee.
The trustee is considering selling the property. This would result in a capital gain for both beneficiaries. However, as one of the children has no entitlement to capital or income from the estate, the trustee will be taxed on the gain.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 99.
Income Tax Assessment Act 1936 Section 99A.
Reasons for decision
Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.
Section 99A of the ITAA 1936 applies in relation to all trusts unless:
· the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii) of the ITAA 1936
· the trust is bankrupt estate; paragraphs 99A(2)(b) and (c) of the ITAA 1936
· the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) of the ITAA 1936
· and the Commissioner forms the opinion that it would be unreasonable to apply section 99A of the ITAA 1936 in such circumstances.
Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A of the ITAA 1936 not to apply. The relevant part of subsection 99A(2) of the ITAA 1936 states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply.
Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) of the ITAA 1936 means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will.
If no part of the net income is distributed to beneficiaries, and section 99A of the ITAA 1936 is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual.
In forming his opinion about the exercise of the discretion, the Commissioner must have regard to the matters outlined in subsection 99A(3) of the ITAA 1936. With respect to matters relating to a deceased estate, the Commissioner must examine situations where an attempt is made to increase the assets of the trust by, for example, granting of special rights or privileges to the trust, the transfer of the property to it, or the making of loans to it.
The Commissioner would generally exercise the discretion under subsection 99A(2) of the ITAA 1936 and assess the income of a deceased estate trust under section 99 of the ITAA 1936 where the estate is of the 'ordinary and traditional' kind (whose assets come directly from the assets of the deceased).
In your case, the trust resulted from a deceased estate and the asset was held at the date of death. There are no other suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind.
Therefore it is reasonable for the Commissioner to apply his discretion to allow section 99 of the ITAA 1936 to apply and the trustee to be taxed at ordinary marginal rates.