Edited version of your private ruling

Authorisation Number: 1012526462908

Ruling

Subject: Liquidators tax Liability

Question 1

Do the Liquidators (Rulees) meet the definition of Agents and Trustees for the purposes of section 254 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by them (in their capacity as liquidators) in relation to the Entity's clients where they are Australian Residents, during the relevant income years on the basis that sections 99 and/or 99A of ITAA 1936 applies to those amounts?

Answer

Yes

Question 3

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by them (in their capacity as liquidators) in relation to the Entity's clients where they are Australian Residents, during the income year ended 30 June 20XX on the basis that sections 99 and/or 99A of ITAA 1936 applies to those amounts?

Answer

No

Question 4

Are the Entities clients absolutely entitled to the Entity's shares for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 5

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived them (in their capacity as liquidators in relation to the Entity's clients) where they are Australian Residents, on the sale of the Shares during the income year ended 30 June 20YY on the basis that sections 99 or 99A of the ITAA 1936 applies to those amounts?

Answer

Yes

Question 6

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived by them (in their capacity as liquidators), where the clients are Australian Residents, on the sale of the Shares during the income year ended 30 June 20XX on the basis that sections 99 or 99A of the ITAA 1936 applies to these amounts?

Answer

No

Question 7

Can the Rulees treat all the Entity's clients with an overseas address as non-residents for the purposes of section 98 of the ITAA 1936?

Answer

No

Question 8

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax in relation to any net income derived by them (in their capacity as liquidators) during the relevant income years to which the Entity's clients who are found to be non-residents are presently entitled on the basis that section 98(3) of the ITAA 1936 applies to these amounts?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

01 July 2009

Relevant facts and circumstances

The entity has had administrators appointed who subsequently become the Liquidators (Rulees) of the Entity. This ruling was lodged by the Applicant on behalf of the Rulees.

Prior to going into administration the Entity had provided a service to investors. The Entity had a trust like relationship with its investors (clients) trust entitlement arising at the time of their payment to the Entity.

It was found by the Rulees that the Entity had mixed the clients monies in the accounts they created to hold these payments to such an extent that it was impossible to now ascertain entitlements to particular accounts (named by the Rulees as tainted accounts).

The Rulees sought a court order to approve the pooling of the tainted accounts into a Client Fund and other issues including the methodology to be used in determining client entitlements. An order was provided by the court which included directions on the pooling, entitlement and disbursement of the Client Fund.

The Applicant has advised that the Rulees will be able to disburse the Client Fund in line with the Court Order in the year ended 30 June 20XX.

The Entity's clients include both Australian residents and non-resident investors. No clients of the Entity are under a legal disability.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 95AAA

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 254

Income Tax Assessment Act 1997 Subsection 102-5

Income Tax Assessment Act 1997 Subsection 106-50

Corporations Act 2001 Section 511

Corporations Act 2001 Section 544

Trustee Act 1958

Reasons for decision

Issue 1

Question 1

Do the Rulees meet the definition of Agents and Trustees for the purposes of section 254 of ITAA 1936?

Summary

The Rulees as joint and several liquidators of the Entity satisfy the definition of Trustee. Accordingly the provisions of section 254 of ITAA 1936 apply to the Rulees.

Detailed reasoning

Section 254 of ITAA 1936 states that:

With respect to every agent and with respect also to every trustee, the following provisions shall apply:

a) He or she shall be answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of a capital nature, derived by him or her in his or her representative capacity, or derived by the principal by virtue of his or her agency, and for the payment of tax thereon.

b) He or she shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his or her representative capacity only, and each return and assessment shall, except as otherwise provided by this Act, be separate and distinct from any other.

c) If he or she is a trustee of the estate of a deceased person, the returns shall be the same as far as practicable as the deceased person, if living, would have been liable to make.

d) He or she is hereby authorized and required to retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

e) He or she is hereby made personally liable for the tax payable in respect of the income, profits or gains to the extent of any amount that he or she has retained, or should have retained, under paragraph (d); but he or she shall not be otherwise personally liable for the tax.

f) He or she is hereby indemnified for all payments which he or she makes in pursuance of this Act or of any requirement of the Commissioner. Where as one of 2 or more joint agents or trustees he or she pays any amount for which they are jointly liable, each other one is liable to pay him or her an equal share of the amount so paid.

g) For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of any other taxpayer in respect of tax.

Section 6 Interpretation, of ITAA 1936 defines trustee as:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

a) an executor or administrator, guardian, committee, receiver, or liquidator; and

b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

The Rulees as joint and several liquidators of the Entity satisfy the definition of Trustee. Accordingly the provisions of section 254 of ITAA 1936 apply to the Rulees.

Question 2

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by them (in their capacity as liquidators of the Entity) in relation to the Entity's clients where they are Australian Residents, during the relevant income years on the basis that sections 99 and/or 99A of ITAA 1936 applies to those amounts?

Summary

Present entitlement does not occur until the beneficiaries who are entitled to receive income are identified and it is established that there is income which these beneficiaries are presently entitled to receive, that is, until the identified clients of the Entity have a legal right to receive income which is available in the hands of the Rulees.

Therefore the Rulees are liable to tax on dividends, interest and any other income, profits and gains derived while in their capacity as liquidators of the client prior to the events being concluded by which the income available for disbursement to the entitled Entity's clients is established. The final shares will be liquidated and pooled in the year ended 30 June 20XX and the Court Order requirements will be completed establishing the Client Fund ready for disbursement in the year ended 30 June 20XX.

Hence the Rulees will be liable for tax under section 254 of ITAA 1936 on the net income of Entity in the years prior to the year ended 30 June 20XX, being the relevant year.

Detailed reasoning

Section 254 of ITAA 1936 provides that the Rulees as trustees of the Entity are answerable as taxpayer for doing all such things as required to be done in respect of the income, profits or gains of a capital nature, derived by them in their representative capacity and for the payment of tax therein.

Pt III of Division 6 sets out the basic income tax treatment of the net income of the trust estate with section 95AAA providing that generally:

a) it has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and

b) it has the result of assessing the trustee directly on any residual net income; and

c) as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non residents or those under a legal disability.

Net income is defined in TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions, as being:

net income means the net income of a trust estate calculated pursuant to subsection 95(1) as the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer less all allowable deductions (except for certain deductions identified in the provision)

Broadly sections 97, 98, 99 and 99A of ITAA 1936 provide the rules for determining whether the trustee or beneficiary(s) are assessed on the net income of the trust.

Subsection 98(3) of ITAA 1936 provides that the trustee of the trust estate will be assessed and liable to pay tax under subsection 98(1) of ITAA 1936 where a beneficiary is under a legal disability or where the beneficiary is a non-resident, under subsection 98(2A) of ITAA 1936. The Applicant has advised that no clients of the Entity are under a legal disability therefore subsection 98(1) will not apply.

Section 97 of ITAA 1936 broadly provides that where a beneficiary of a trust estate is an Australian resident at the end of the income year and is not under any legal disability and is presently entitled to a share of the income of the trust estate the beneficiary is assessable on that share of the net income of the trust estate.

Where a beneficiary is found not to be presently entitled to a share of the income of the trust estate in a year of income sections 99 and 99A of ITAA 1936 provide that the trustee shall be assessed and is liable to pay tax on the net income of the trust estate. Section 99 provides for the trustee to be taxed on the trust net income as if it were the income of an individual who was a resident and were not subject to any deduction. Section 99A provides for the trustee to be assessed at the rate declared by the Parliament for the purpose of this section. Section 99 applies only if section 99A is inapplicable.

Accordingly the Rulees question rests upon whether the clients of the Entity are presently entitled to a share of the income of the Entity trust estate in the years of income of the ruling.

Taxation Ruling 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income tax Assessment Act 1936 and related provisions, states that:

A product of the trust estate

10. 'Income' and 'trust estate' are distinct concepts, income being the product of the trust estate.

11. It follows that something which formed part of the trust estate at the start of an income year cannot itself, for the purposes of Division 6, be treated by the trustee as income of the trust for that year.

Amount beneficiary can be made presently entitled to

12. In the context of Division 6, the 'income of the trust estate', is not a reference to the gross income of a trust estate, but rather a reference to the net amount of income to which a beneficiary could be made presently entitled or accumulated. That is, it is a reference to the income available for distribution to beneficiaries or accumulation by the trustee, commonly referred to as 'distributable income'.

13. Notwithstanding how a particular trust deed may define income, the 'income of the trust estate' for Division 6 purposes must therefore be represented by a net accretion to the trust estate for the relevant period. In effect, the statutory context places a cap on what the income of the trust estate may be for Division 6 purposes. Specifically, for these purposes, the income of a trust estate for an income year cannot be more than the sum of:

· the accretions to the trust estate (whether accretions of property, including cash, or value) for that year;

· less any accretions to the trust estate for that year which have not been allocated, pursuant to the general law of trusts (as that may be affected by the particular trust instrument), to income [and therefore cannot be distributed as income]; and

· less any depletions to the trust estate (whether depletions of property, including cash, or value) for that year which, pursuant to the general law of trusts (as that may be affected by the particular trust instrument), have been allocated as being chargeable against income.

And further that at paragraph 71 that:

71. For trust law purpose, income of a trust is essentially that which is a product of (that is, "flows" from) the trust property - for example, rent from the letting of trust property or interest on loans of trust property. On that basis, it is likely to correspond in most cases with what would be ordinary income under section 6-5 of the ITAA 1997 (which may include exempt and non-assessable non-exempt amounts).

The Applicant refers to dividends, interest or any other income, profit and gains, including revenue from the sale of shares. It is accepted that these form part of the income of the trust estate.

It therefore needs to be determined whether the Entity's clients are presently entitled to the income of the Entity trust estate. Taxation Ruling IT 2680 Income tax: withholding tax liability of non-resident beneficiaries of Australian trusts provides an ATO view on the meaning of present entitlement to trust income stating:

Present entitlement to trust income

21. The meaning of the expression 'presently entitled' in subsection 128A(3) is not defined in the statute but its meaning is well settled by decisions of the courts.

22. A beneficiary of a trust becomes presently entitled to income from the trust if all of the following requirements are met:

· the relevant income is legally available for distribution; and

· the beneficiary has an absolutely vested beneficial interest in possession in the whole of the relevant income; and

· the beneficiary would succeed in an action to recover the income from the trustees ignoring for this point the existence of any legal disability from giving a valid discharge to the trustees (e.g., by being a minor).

…

23. The conclusion that a beneficiary is presently entitled to a share of the income of a trust estate if, but only if:

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

b) 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 was agreed to by the parties before the Full High Court in Harmer v. FC of T 91 ATC 5000 at 5004; (1991) 22 ATR 726 at 729, 730.

24. The requirement of present entitlement to a share of the income of the trust estate refers to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in the trustee's hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts.

As the appointed administrators then liquidators of Entity the Rulees stand as the trustees of the assets and income of the company.

The Rulees filed an application in the Court of Australia seeking directions on a number of matters. No income or assets of Entity were distributed pending the outcome of the Court judgement and orders.

In considering the question of present entitlement it is necessary to briefly discuss the relationship between Entity and its clients and the Court decisions.

The Judge in the Entity's court case, found that prior to administration, the Entity held a trust relationship with its clients with the client's trust entitlement arising at the time of their payment to Entity.

The Judge issued a Court Order in the Entity's Case that included directions:

· for the Rulees to pool the certain assets into a Client Fund:

· on the entitlement of particular clients of the Entity; and

· on the disbursement of the Client Fund.

In applying the Entity's situation to case law the following is noted. In Harmer & Ors v Federal Commissioner of Taxation 91 ATC 5000 (Harmer) the Judges considered a situation where the monies were paid into court for a determination by the court regarding four contending claimants. It had been ordered by a Judge in Chambers that the said monies be paid out to the claimants' solicitors - the appellants, to be invested in a Building Society pending the determination of the Proceedings. The interest which was earned during the tax years was payable to the appellants as trustees of a trust. The Judges determined that no claimant had an interest in the monies until an order in his or her favour was made by the Supreme Court and that therefore the appellants, as trustees, were assessable pursuant to section 99 of ITAA 1936 in respect of the interest earned during the tax years. The Judges stated:

As had been the case when the moneys were held by the Court, however, any beneficial interest of an individual claimant was contingent upon an order being made in his or its favour. Unless and until such an order was made, no claimant had any vested interest in the moneys lodged with the Building Society, in the interest earned thereon or in the rights of the appellants as legal creditors of the Building Society. If, for example, the whole of the moneys had been exhausted by orders of the Supreme Court in relation to costs, none of the claimants would ever have obtained a vested beneficial interest in any of the moneys otherwise than to the extent of his or its entitlement under those orders as to costs.

Once the moneys were deposited with the Building Society in the names of the appellants holding as trustees, the moneys were held by them in that capacity to be dealt with in accordance with the order of the Court and not otherwise. It is unnecessary to consider whether the contingent interests of the claimants in the moneys paid into court could be aggregated into a totality of beneficial ownership or whether the powers of the Supreme Court to make orders affecting the moneys, including orders as to costs, meant that one of the elements of an ordinary non-purpose trust was lacking. It suffices to say that the trust upon which the moneys were held was a trust for statutory purposes and that the legislative provisions, including Rules of Court, applicable to govern the payment of the moneys into court and their subsequent application effectively overrode any need of that element.

It follows that the Full Court of the Federal Court was correct in concluding that, during the tax years, there was no beneficiary presently entitled to the interest earned on the moneys deposited with the Building Society. As has been said, it is now conceded by the appellants that that money was held by them as trustees. It follows that the appellants were assessable pursuant to s. 99A in respect of the interest earned during the tax years.

However the Judges also stated at 91 ATC 5004 that:

There are many circumstances in which trust money can be paid into court by a trustee either pursuant to an order made on the application of a beneficiary or pursuant to an application made by the trustee himself or herself. In such a case, the funds paid into court remain subject to any pre-existing trust notwithstanding the payment in. If some person or persons were presently entitled to the corpus or income before payment in, the fact of payment in to await the orders of the court will not, of itself, displace that present entitlement. If entitlement is disputed, the function of the Court will be to identify existing interests in the money paid into court rather than to create new ones. If the interest of a beneficiary in the moneys is vested and the beneficiary has a right to demand and receive payment of income, the fact that the interest and the right are disputed and await vindication by the order of the Court will not make the interest contingent or negate the existence of the right. That being so, if a beneficiary is found by the Court to have had a pre-existing interest in the income, the fact that the interest was not admitted or its extent was not ascertained at the time of payment in or until the making of the relevant order does not mean that the beneficiary was not presently entitled to it both at that time and during the period pending the Court's determination.

In considering the application of this to the Entity it is noted that in the Entity's Case the Rulees sought a Court determination in order to establish among other things:

· whether they could create a pooled Client Fund;

· which Entity clients were to be entitled to the Client Fund;

· what/whose funds were to be allocated to the Client Fund;

· how the clients' entitlement were to be calculated; and

· the application of the monies in the Client Fund for various claims prior to disbursement.

The Court in the Entity's case was required to do more than identify existing interests, rather they were required to order on the identities of those persons/accounts whose funds would form the Client Fund, whom would be entitled to a proportion of the Client Fund and what monies were to form part of the Client Fund. It was only after the Court decision that it could be said that the identities of participants along with the funds to be allocated into the Client Fund were established. Accordingly it is considered that the Entity's situation differs from the circumstances referred to in the above paragraph from Harmer (91 ATC 5004). Rather the view represented in the final determination made by the Judges in Harmer is applicable where they state that 'unless and until such an order was made, no claimant had any vested interest in the moneys lodged with the Building Society, in the interest earned thereon or in the rights of the appellants as legal creditors of the Building Society'.

The concept of presently entitled is also discussed in the High Court case of The Federal Commissioner of Taxation v. Whiting 68 CLR 199 (Whiting Case). In this case Latham CJ and Williams J state:

The words "presently entitled to a share of the income" refer to a right to income "presently" existing - i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee, or that, within the meaning of s. 19 of the Act, the trustee may properly reinvest, accumulate, capitalize, carry to any reserve, sinking fund or insurance fund however designated or otherwise deal with it as he directs or on his behalf.

A beneficiary who has a vested right to income (as in this case) but who may never receive any payment by reason of such right, is entitled to income, but cannot be said to be "presently entitled" as distinct from merely "entitled." Indeed, it is difficult to see how he can be entitled at all to income which must be applied in satisfaction of some prior claim: See Allhusen v Whittell, at p. 303.

Thus, in order to ascertain whether such a present right exists, it is necessary to look at the state of the administration of the trust estate.

Numerous authorities, many of which are collected in the recent decision of this Court in Robertson v Deputy Federal Commissioner of Land Tax, have established that until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities, and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries. But his Honour did not consider that the principles enunciated in these authorities were applicable to the provisions of Part III., Div. 6, of the Act. With great respect, it appears to us that these provisions must be construed in the light of the general principles of law applicable to the administration of estates by executors and trustees at law and in equity. The crucial question is at what moment of time, having regard to these general principles and to the provisions of the trust instrument, can it be said that a beneficiary has become presently entitled to a share in the income of a trust estate. A beneficiary under a will may become entitled to a share of such income as an annuitant legatee or a residuary beneficiary. His right to share in such income would be determined by the trusts in the will, these trusts being administered in accordance with such rules of equitable administration (where applicable) as those laid down in such cases as Allhusen v Whittell and Howe v Earl of Dartmouth. The only part of an estate which can be made available to satisfy the claims of the beneficiaries is that part which remains after the funeral and testamentary expenses, death duties and debts have been paid or provided for, if necessary out of the whole estate, including any income earned by the estate during the period of realization. Entries made in the books of the estate to adjust the rights of the beneficiaries in the income and capital of the estate can only operate subject to the satisfaction of the claims of and cannot affect the rights of the creditors….

Latham CJ and Williams J decision was supported by their fellow Starke J who stated;

My brother Rich thought it "reasonably plain that in the case of a beneficiary who is sui juris all that is necessary in order to attract liability to him and to divert it from his executor or trustee, is that he should be presently entitled to income of the estate. By this is meant entitled for an interest in possession as contrasted with an interest in expectancy. It is not necessary that he should have received his share of the income." The last-mentioned proposition is true enough, but a beneficiary is not, I think, presently entitled to income unless it can be established that there is income which he is presently entitled to receive: that he is entitled to obtain payment thereof from the trustee.

The sections do not look to the nature of the beneficiaries' title to shares of the income whether they be vested or contingent, but to the right to receive income which is available in the hands of trustees for payment to the beneficiaries. So far as cases throw any light upon the construction of the Act they are, I think, all in favour of this view, from Lord Sudeley v Attorney-General down to the case in this Court of Robertson v Deputy Federal Commissioner of Land Tax. And if this view is right, it is clear that the beneficiaries are not so entitled in the present case.

The Judges statements in Whiting support a conclusion that the aspects of 'entitled' and 'presently entitled' need to be established to determine the beneficiaries' right to receive income. To achieve this it needs to be determined on what date the Entity's clients who were entitled to the Client Fund were identified and then on what date these beneficiaries moved from being 'entitled' to 'presently entitled' as described by Latham CJ and Williams J above.

It is considered that on the date of the Court decision the Entity's clients entitled to a share in the Client Fund were established i.e. at this point in time the Rulees had established which clients' funds were to be pooled into the Client Fund.

However, as stated above present entitlement does not occur until it is also established that there is income which the beneficiaries are presently entitled to receive, that is, until the Entity's clients have a legal right to receive income which is available in the hands of the Rulees.

In considering whether and/or when there is income which the Entity's clients would be presently entitled to receive it is necessary to establish at what point the Rulees could disburse the Client Fund as the Court Order does not provide for any disbursement of income prior to the disbursement of the Client Fund.

Therefore even with the identify of the Entity's clients entitled to a proportion of the income of the Client Fund established, the amount if any, of that entitlement is dependant on monies remaining in the Client Fund after it has paid out in satisfaction of the Court's Orders.

On this basis is considered that the Rulees would not be able to establish the income available for disbursement from the Client Fund until:

1. Shares and accrued dividends retained in holding accounts are released to the Rulees in the years for liquidating and pooling as part of the Client Fund;

2. the Rulees settle any contentions to Clients' Proposed Account Balances; and

3. the Rulees disburse the Client Fund in accordance with the Court Order.

Consequently it cannot be said that there is net income which any of the Entity's client can be legally presently entitled prior to these events being concluded.

Therefore the Rulees are liable to tax on dividends, interest and any other income, profits and gains derived while in their capacity as liquidators of Entity prior to the above events being concluded by which the income available for disbursement to the entitled Entity clients is established. The Applicant has advised that the final shares will be liquidated and pooled in the year ended 30 June 20XX and that the Client Fund will be ready to be disbursed in line with Court Order in the year ended 30 June 20XX.

Hence the Rulees will be liable for tax under section 254 of ITAA 1936 on the net income of the Entity in the years prior to the year ended 30 June 20XX, being the relevant years.

Question 3

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax on dividends, interest and any other income, profits and gains derived by them (in their capacity as liquidators of the Entity) in relation to the Entity's clients where they are Australian Residents, during the income year ended 30 June 20XX on the basis that sections 99 and/or 99A of ITAA 1936 applies to those amounts?

Summary

The Entity's clients would be presently entitled to the income of Entity in the year ended 30 June 20XX and assessed on their distributions under section 97 of ITAA 1936. Therefore the Rulees would not be liable to tax under section 254 of ITAA 1936 pursuant to sections 99 and/or 99A of ITAA 1936 on the net income of Entity in the year ended 30 June 20XX.

Detailed reasoning

As concluded in question 3 above it cannot be said that there is income which any Client of the Entity can be presently entitled prior to the events being undertaken as required under the Court Order. The Applicant has advised that the Client Fund will be ready to be disbursed in line with these orders in the year ended 30 June 20XX. Accordingly it is considered that in the year ended 30 June 20XX the Entity's Clients would become presently entitled to the net income of the Client Fund.

Therefore the Rulees would not be liable to tax under section 254 of ITAA 1936 pursuant to sections 99 or 99A of ITAA 1936 on the Entity's net income in the year ended 30 June 20XX.

Question 4

Are the Entity's clients absolutely entitled to the shares for the purposes of section 106-50 of the ITAA 1997?

Answer

No

Summary

No client of the Entity had the right to call for the asset to be transferred to them or to be transferred at their direction as required under paragraph 10 of TR 2004/D25.

Therefore no client of the Entity is absolutely entitled to the shares for the purposes of section 106-50 of the ITAA 1997.

Detailed reasoning

Section 106-50 of ITAA 1997 states that:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, states that:

1. This ruling explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

2. Broadly, an absolutely entitled beneficiary (rather than the trustee) is treated as the relevant taxpayer in respect of the asset for the purposes of the capital gains tax (CGT) provisions.

And further:

Core principle

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions

Persons who cannot be absolutely entitled

13. The following persons cannot be absolutely entitled because they do not have an interest in the trust's assets:

· an object of a discretionary trust prior to any exercise of the trustee's discretion in their favour (see Explanation paragraph 71), and

· a beneficiary of a deceased estate prior to the completion of its administration (see Explanation paragraph 72).

14. Also, a beneficiary with an interest in the trust's assets cannot be absolutely entitled if that interest is contingent or defeasible (see Explanation paragraphs 73 to 75).

The Applicant advised that some of the shares were sold in the relevant years. As directed by the Court Orders the proceeds of the sale of the shares were to be pooled into the Client Fund. The Client Fund was then to be disbursed in accord with the Court order.

Accordingly since the assets (shares) were by Order of the Court to be liquidated and the proceeds pooled to a common fund no client of the Entity had the right to call for the shares to be transferred to them or to be transferred at their direction as required under paragraph 10 of TR 2004/D25.

Therefore no Client of the Entity was absolutely entitled to the shares for the purposes of section 106-50 of the ITAA 1997.

Question 5

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived them (in their capacity as liquidators of the Entity in relation to the Entity's Clients) where they are Australian Residents, on the sale of the shares during the income year ended 30 June 20YY on the basis that sections 99 or 99A of the ITAA 1936 applies to those amounts?

Summary

As established in Question 2 it is determined that the Entity's clients are not presently entitled to the income of the trust in the year ended 30 June 20YY. Therefore the Rulees are liable for tax under section 254 of ITAA 1936 pursuant to sections 99 and/or 99A of ITAA 1936 on the Entity's net income, which includes any capital gains generated on the sale of the shares during the income year ended 30 June 20YY.

Detailed reasoning

In order to determine whether the Liquidators will be liable to pay tax on the capital gains generated from the sale of the shares it is first necessary to establish if any client of the Entity was absolutely entitled to the assets in this year.

As determined in question 4 above it is considered that no client of the Entity was absolutely entitled to the assets as against the Rulees as trustees in the year ended 30 June 20YY.

Subsection 102-5 of ITAA 1997 provides that assessable income includes net capital gain. Therefore as no beneficiary is absolutely entitled to the shares any net capital gain/loss from the sale of the shares will form part of the assessable income/net income of the trust in the income year, being the year ended 30 June 20YY.

As established in Question 2 it is determined that the Entity's clients are not presently entitled to the income of the trust in the year ended 30 June 20YY. Therefore the Rulees are liable for tax under sections 99 or 99A of ITAA 1936 on the Entity's net income, which includes any capital gains generated on the sale of the shares during the income year ended 30 June 20YY.

Question 6

Does section 254 of the ITAA apply to make the Rulees liable to tax on any capital gains derived by them (in their capacity as liquidators of the Entity), where they are Australian Residents, on the sale of the shares during the income year ended 30 June 20XX on the basis that sections 99 or 99A of the ITAA 1936 applies to these amounts?

Answer

No

Detailed reasoning

It is not considered that any client of the Entity is absolutely entitled to the shares. However for the reasons detailed in Question 3 it is considered that the Entity's clients not the Rulees, are liable for tax on the net income of the trust which will include any capital gains generated on the sale of the shares, during the income year ended 30 June 20.

Question 7

Can the Rulees treat all the Entity's clients with an overseas address as non-residents for the purposes of section 98 of the ITAA 1936?

Answer

No

Summary

It is not possible to determine the residency of a person based on solely on their address. The Entity's clients with non-Australian addresses will need to have their 'residence' in each of the ruling years determined separately with relevance to the taxpayer's individual circumstances in those years.

Detailed Reasoning

The terms "resident" and "resident of Australia" are defined in subsection 6(1) of the ITAA 1936. So far as an individual is concerned, these terms are defined to mean:

(a) a person, other than a company, who resides in Australia and includes a person-

i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

iii) who is an eligible employee for the purposes of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person;

Effectively, if a person does not reside in Australia, commonly referred to as 'residence according to ordinary concepts' that person may nevertheless be considered a resident of Australia if he or she satisfies any one of three additional statutory tests set out in paragraphs 6(1)(a)(i) to 6(1)(a) (iii) of the ITAA 1936. Simply stated, these tests are: (i) the domicile and permanent place of abode test; (ii) the 183 day test; and (iii) the superannuation fund test.

Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia, provides the Commissioner's interpretation of the ordinary meaning of the word 'resides' within the definition of resident in subsection 6(1) of the ITAA 1936. Paragraph 9 of TR 98/17 states that:

Residency status for income tax purposes

9. Residency status is a question of fact and is one of the main criteria that determines an individual's liability to Australian income tax. Liability to tax is determined on a year by year basis…

Expanding on this, in Commissioners of Inland Revenue v. Lysaght [1928] A.C 234, it was held that a decision on a question of 'residence' was a finding of fact. i.e., it is essentially a question of fact whether a person does or does not comply with the meaning of that expression and that there is no technical or special meaning attached to the expression for the purposes of the Income Tax Act. Following this, the judgment by the High Court of Australia in Commissioner of Taxation v Miller [1946] HCA 23; 73 CLR 93 ('Miller') is considered as decisive in illustrating the way in which the question of "resident" or "not resident" has become a "question of degree and therefore of fact".

Accordingly it is not possible to determine the residency of a person based on solely on their address. Clients of the Entity with non-Australian addresses will need to have their 'residence' in each of the ruling years determined separately with relevance to the taxpayer's individual circumstances in those years.

Question 8

Does section 254 of the ITAA 1936 apply to make the Rulees liable to tax in relation to any net income derived by them (in their capacity as liquidators of Entity) during the relevant income years to which the Entity's clients who are found to be non-residents are presently entitled on the basis that section 98(3) of the ITAA 1936 applies to these amounts?

Answer

Yes

Reasoning

Subsection 98(2A) of the ITAA 1936 provides that if a beneficiary who is a non-resident at the end of the year of income is presently entitled to a share of the income of the trust estate, the trustee is assessed and liable to pay tax under subsection 98(3) of the ITAA 1936.

Subsection 98(2A) further provides that the trustee will be liable to pay tax under subsection 98(3) in respect of:

(c) 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

(d) 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 sources in Australia.

Therefore in respect of the Entity's clients who were presently entitled to a share of the income of the trust estate and who were non-residents at the end of the income year the Rulees will be liable to pay tax under section 254 of ITAA 1936 on the share of their net income that is covered by (c) and (d) above.