Edited version of your private ruling

Authorisation Number: 1012571177732

Ruling

Subject: Unpaid Present Entitlements

Issue 1

Debt Forgiveness

Question 1

Does a release, waiver or assignment by a beneficiary, of a trustee's obligation to make a payment in respect of an unpaid present entitlement, constitute a forgiven debt for the purposes of Division 245 of the Income Tax Assessment Act 1997? If so, what is the Division 245 net forgiven amount?

Answer

No.

Issue 2

Section 100A ITAA 1936

Question 1

Does section 100A of the Income Tax Assessment Act 1936 apply in respect of any of the unpaid present entitlement's being released, waived or assigned by a beneficiary?

Answer

No

Issue 3

Capital Gains Tax

Question 1

Do Capital Gains Tax events D1 and C2 occur upon creation and satisfaction/discharge of a UPE?

Answer

Yes, but it is appropriate to look through Capital Gains Tax events D1 and C2 (and any capital gain they may result in) as the rights incidentally created and discharged/satisfied merely facilitate the distribution of income from a trustee to a beneficiary.

Question 2

Does Capital Gains Tax event C2 occur upon cancellation/release/waiver of an unpaid present entitlement?

Answer

Yes

Question 3

Does a Capital Gains Tax event occur upon assignment of an unpaid present entitlement?

Answer

Yes

Question 4

If a Capital Gains Tax event occurs upon cancellation/release/waiver or assignment of an unpaid present entitlement resulting in a capital gain in the hands of a beneficiary, does section 118-20 of the ITAA 1997 apply to reduce the amount of the assessable capital gain by the amount that was previously included in the assessable income of the beneficiary when the distributions had been made?

Answer

Yes, section 118-20 of the ITAA 1997 applies to the extent that, in respect of the unpaid present entitlement an amount or amounts have been included as assessable income by the respective beneficiary pursuant to either the ITAA 1997 the ITAA 1936.

Question 5

Do the unpaid present entitlement's have a cost base for Capital Gains Tax purposes and if so, was the cost base at least the face value of the unpaid present entitlement?

Answer

Yes, but the cost base will need to be determined on a case by case basis

Issue 4

Ordinary Income

Question 1

Does the release, waiver and/or assignment by a beneficiary of a trustee's obligation to make a payment in respect of the unpaid present entitlement's in this arrangement cause an amount of ordinary income to arise under section 6-5 of the ITAA 1997 for any of the rulees?

Answer

No

This ruling applies for the following period

1 July 2013 to 30 June 2015

The scheme commences on:

During the 2009-2010 income year.

Relevant facts and circumstances

Relevant facts

T manages a portfolio of commercial properties held, as long- term rental investment properties, in a group of discretionary trusts established by T.

T controls the Group as the sole Appointor and Guardian of the various Group trusts. T is also a director of the Group corporate trustees, either alone or with another party.

Distributions were also declared (but not paid) from one Property Trust to another Property Trust or Trusts, and then usually distributed to a related company. This resulted in UPEs being created between the Property Trusts as well.

The actual cash profits net of corporate tax represented by the UPE's have been retained and used by the respective Property Trusts as investment capital for the purpose of maintaining existing or acquiring new investment properties

All of the UPEs in the Group the subject of this application:

arose from distributions declared before the Commissioner released his concluded views concerning the interplay of UPEs and Division 7A on 16 December 2010 (in Taxation Ruling TR 2010/3):

are not, and have never been subject of an express or implied agreement between the trust and the beneficiary for the UPE to be converted into an ordinary loan.

T wishes to divide and separate the assets in the Group into three (3) smaller independent groups so that the control of each sub-group can be transferred to one person with no financial ties (including joint and several bank debt) or commercial interaction between them. To achieve this objective, T recently asked the Group's bank to refinance its loan into three (3) equal split facilities for each sub-group,

Numerous UPEs exist between entities which belong in different intended sub-groups (Intergroup UPEs").

As noted above, the UPEs in the Group are represented by the assets (principally real property) owned by the Property Trusts. The Intergroup UPEs therefore cannot be simply paid out (in cash) without the Property Trusts selling the properties they hold.

The Group has recently paid down, as much of the Intergroup UPEs as possible (including pre 16 December 2009 UPEs). In this regard, the Group has relied on the ATO's confirmation that there would be no Division 7A consequences for paying down part of a pre-16 December 2010 UPE in this manner (see Part B, Section 1, response to Item 1 in TR 2010/3EC). Thus, Intergroup UPEs have been reduced as much as possible in a conventional fashion.

There are still remaining Intergroup UPEs which need to be dealt with

It is proposed that some of the UPE's be released and some be assigned

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Subsection 104-10(2) Income Tax Assessment Act 1997

Subsection 108-5(1) of the Income Tax Assessment Act 1997

Subsection 110-25(2) of the Income Tax Assessment Act 1997

Section 112-20 of the Income Tax Assessment Act 1997

Section 116-20 of the Income Tax Assessment Act 1997

Section 116-30 of the Income Tax Assessment Act 1997

Section 118-20 of the Income Tax Assessment Act 1997

Division 245 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Debt Forgiveness

Question 1

Does a release, waiver or assignment by a beneficiary, of a trustee's obligation to make a payment in respect of an unpaid present entitlement, constitute a forgiven debt for the purposes of Division 245 of the Income Tax Assessment Act 1997? If so, what is the Division 245 net forgiven amount?

Answer

No.

Detailed reasoning

Section 245-1 ITAA 1997 states that when a creditor forgives a commercial debt you owe, you make a gain. This is usually not included in your assessable income. Instead, this Division offsets the forgiven amount against amounts that could otherwise reduce your taxable income in the same or a later income year. Those amounts are:

(a) your tax losses and net capital losses; and

(b) capital allowances and some similar deductions; and

(c) the cost bases of your CGT assets.

Division 245 of the ITAA 1997 is a rewrite of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936).The Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Act 2010 clearly indicates that the purpose of the rewrite of Division 245 of the ITAA 1997 is to reproduce the effect of Schedule 2C of the ITAA 1936.

Division 245 of the ITAA 1997 applies where a commercial debt is forgiven. A commercial debt exists, for section 245-10 of the ITAA 1997 purposes, where a debt for which the whole or any part of interest, or an amount in the nature of interest, paid or payable in respect of a debt is allowable as a deduction to the debtor. An understanding of the meaning of the term commercial debt for the purposes of Division 245 is therefore based on the meaning of the term debt and ultimately whether the debt would have been deductible to the debtor.

One consequence of the rewrite is that the term "debt" is neither defined for the purposes of Division 245 of the ITAA 1997 nor for the Income Tax Assessment Acts generally. Accordingly, it is necessary to apply the rules of statutory interpretation to determine the meaning intended by the legislature in drafting the provision.

Australia's leading text on statutory interpretation is Pearce and Geddes' Statutory Interpretation in Australia. With respect to the interpretation of words with a legal technical meaning, the approach to be followed is, according to those authors, "best stated' by O'Connor J in Attorney-General (NSW) v. Brewery Employees' Union of New South Wales (1908) 6 CLR 469 at 531:

Where words have been used which have acquired a legal meaning it will be taken, prima facie, that the legislature has intended to use them with that meaning unless a contrary intention clearly appears from the context. To use the words of Denman J in R v. Slator ((1881) 8 QBD 267 at 272): but it always requires the strong compulsion of other words in an Act to induce the Court to alter the ordinary meaning of a well known legal term'.

The legal technical meaning of the word "debt" is defined in Butterworth's Australian Legal Dictionary 1997, Butterworth's, NSW:

A sum of money owed: Director of Public Prosecutions v. Turner [1073] 3 All ER 124 at 126. A debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation: debtum in praesenti, solvendum in futuro. It is a right which a creditor has to enforce by taking action in a court of law against the person who owes the money (the debtor).

Taking into consideration the words of the Act and the policy intent conveyed in the explanatory memorandum, there does not appear to be any "strong compulsion" for concluding that the word "debt", as used in Division 245 of the ITAA 1936, should take any meaning other than its ordinary legal technical meaning. In the context of the provision, there does not appear to be any clear contrary intention such that the ordinary legal technical meaning requires that a debt involve an enforceable obligation imposed by law on a person to pay an amount to another person.

The key difference between an unpaid present entitlement and a debt is that an unpaid present entitlement does not result in an enforceable obligation imposed by law, as distinct from the rights that attach to a creditor. Rather the rights of an unpaid beneficiary arise in equity only - and not in law. In the case of an unpaid beneficiary their interest is an equitable interest in the corpus and in the income of the assets of a separate trust that is formed when a beneficiary of a trust is made presently entitled to an amount that is not paid - see paragraph 35 of Taxation Ruling TR 2010/3;

paragraph 67 of Self Managed Superannuation Funds Ruling SMSFR 2009/3;

Case U111 87 ATC 667; Case 83 (1987) 18 ATR 3602; Case U157 87 ATC 912;

Case 108 (1987) 18 ATR 3772; Case V4 88 ATC 123); Case 5/94 94 ATC 130;(1994) 27 ATR 1117). An unpaid beneficiary has rights in equity and not, without more, as a result of any debtor-creditor relationship (paragraph 34 of Taxation Ruling TR 2010/3; paragraph 64 of Self Managed Superannuation Funds Ruling SMSFR 2009/3; Re Euroasian Holdings Pty Ltd v. Ron Diamond (1996) 64 FCR 147 at 150;

Commissioner of Inland Revenue v. Ward 69 ATC 6050 at 6071; (1969) 1 ATR

287 at 313).It is for this reason that an unpaid beneficiary cannot sue for their entitlement.

The Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Act 2010 (at 3.12) states that there may be "some unenforceable obligations that could be described as debts" within the ordinary meaning of that word. It states that "debts of honour' may fall within this category. That example aside, there is no indication that the drafters considered that the ordinary meaning of the word "debt" encompassed all equitable rights and interests. It was further considered at clause 3.12 that it was unlikely anyway that such unenforceable obligations could satisfy the requirement that interest on the debt be deductible for the purposes of qualifying as a commercial debt in section 245-10 of the ITAA 1997.

The fundamental distinction between debtor and trustee is clear (Ong, DSK 2003, Trust Law in Australia (2nd edn), The Federation Press, Sydney, 7). That the drafters failed to insert any extended definition, or any definition at all, of the word debt into Division 245 of the ITAA 1936 is an indication that they intended the term to take its ordinary legal technical meaning in accordance with the ordinary rules of statutory interpretation.

In situations where an unpaid present entitlement has not been converted into a loan, such as those discussed in Taxation Ruling TR 2010/3, an unpaid present entitlement is not a debt within the legal technical meaning. Accordingly, as the trustee is not a debtor, the release by a beneficiary of their equitable right to the unpaid present entitlement in the present circumstances will not be forgiveness of a debt by the beneficiary.

As the unpaid present entitlements in this case do not satisfy the criteria for a 'debt' according to the ordinary legal technical meaning of the term then Division 245 will not apply in the factual matrix of this case as there is no commercial debt that is forgiven.

Issue 2

Section 100A ITAA 1936

Question 1

Does section 100A of the Income Tax Assessment Act 1936 apply in respect of any of the unpaid present entitlement's being released, waived or assigned by a beneficiary?

Answer

No

Detailed reasoning

ATO ID 2005/145 provides as follows:

Section 100A of the ITAA 1936 provides that where a beneficiary of a trust estate, who is not under a legal disability, is presently entitled to trust income, and that present entitlement is linked either directly or indirectly to a reimbursement agreement, the beneficiary is deemed not to be presently entitled to the income. Trust distributions which fall within section 100A of the ITAA 1936 are assessed to the trustee under section 99A of the ITAA 1936.

Subsection 100A (7) of the ITAA 1936 defines a reimbursement agreement to include,

   ...the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or persons.

Further, the term 'agreement' is defined in section 100A (13) of the ITAA 1936 to include any agreement, arrangement or understanding, whether formal or informal, express or implied, and either enforceable or unenforceable. However the term does not include any agreement entered into in the course of ordinary family or commercial dealing.

In Federal Commissioner of Taxation v. Prestige Motors Pty Ltd (1998) 82 FCR 195; 98 ATC 4241; (1998) 38 ATR 568, the court said that the wording of subsection 100A (13) was derived from the judgment of Lord Denning in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1; (1958) 11 ATD 442; (1958) 7 AITR 298, which referred to the application of section 260 of the ITAA 1936, as follows:

   In order to bring an arrangement within the section, you must be able to predicate by looking at the overt acts by which it was implemented that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.

The operation of s100A turns on the existence of a "reimbursement agreement". This expression is defined in subsection 100A(7), which, however, is affected by the provisions of the succeeding subsections, the most important of which is s100A(13) which defines the term "agreement" and has the effect of excluding from the scope of s100A an agreement entered into "in the course of ordinary family or commercial dealing".

Section 100A(7) provides that a reimbursement agreement means an agreement (as defined), whenever entered into, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons. "Agreement" is defined in s100A(13), as in other tax avoidance provisions of recent times, to mean any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings. However, as already indicated, the definition further provides that an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing is not to be an agreement for the purposes of the section.

Section 100A (8) to (13) contain other provisions that are of relevance in the interpretation of the term reimbursement agreement. These provisions are to the following effect:

(1) For an agreement to be a reimbursement agreement it must have been entered into for the purpose, or for purposes that included the purpose, of securing that the liability to income tax of any person in respect of any year of income is either eliminated or reduced (s100A(8)). An agreement is to be taken to have been entered into for such a purpose, or for purposes that included such a purpose, if any party to the agreement entered into it for that purpose, or for purposes that included that purpose, as the case may be (s100A(9)). The last-mentioned provision (i.e. s100A (9)) simply requires the agreement to have been "entered into for the purpose or for purposes that included the purpose..." and it would appear to be at least arguable that this requires that the purpose of each party to the agreement be of the requisite kind. The parties to an agreement may well enter into the agreement with different purposes and it is thought that to attribute to one party to an agreement a purpose of entering into the agreement simply because the other party to the agreement had such a purpose is, to say the least, somewhat inequitable.

(2) For the purpose of the definition of reimbursement agreement, the payment of money includes:

(a) the payment of money by way of loan (s100A (10)), and,

(b) the release, abandonment, failure to demand payment, or the postponement of payment, of a debt (s100A (12)).

In this case it is accepted that the proposed scheme can be viewed as ordinary family or commercial dealings. Section 100A ITAA 1936 will thus not apply.

Issue 3

Capital Gains Tax

Question 1

Do Capital Gains Tax events D1 and C2 occur upon creation and satisfaction/discharge of a UPE?

Answer

Yes, but it is appropriate to look through CGT events D1 and C2 (and any capital gain they may result in) as the rights incidentally created and discharged/satisfied merely facilitate the distribution of income from a trustee to a beneficiary.

Detailed reasoning

Subsection 108-5(1) of the ITAA 1997 defines a "CGT asset" as being any kind of property or a legal or equitable right that is not property.

As outlined above, a UPE is an equitable right that is proprietary in nature in the hands of a beneficiary that is presently entitled. It therefore satisfies the definition of "CGT asset" in subsection 108-5(1) of the ITAA97.

CGT event D1 occurs when a contractual, legal or equitable right is created.

CGT event C2 occurs when an intangible CGT asset comes to an end.

A beneficiary can become presently entitled to a share of the income of a trust estate pursuant to a term of the trust deed or by the exercise by a trustee of a power under a trust deed.

As a UPE is a CGT asset that comes into existence when a beneficiary of a trust becomes presently entitled to a share of the income of a trust estate, CGT event D1 occurs at either the time as specified under the relevant term or terms of the trust deed which confer present entitlement or when a valid trust resolution is made to apply a share of the income of the trust for the benefit of a beneficiary

Similarly, as a UPE is satisfied or discharged, and ends, when the amount of a beneficiary's present entitlement is paid to them, CGT event C2 occurs at the time of payment.

However, consistent with the approach outlined in Commissioner of Taxation v Dulux Holdings Pty Ltd & Ors [2001] FCA 1344, (the Dulux case), the Commissioner's position has been that it is appropriate to look through the legal rights incidentally created and discharged/satisfied when they are merely facilitating the real transaction, being the distribution of income from a trust to a beneficiary.

There appears to be no valid reason for departing from that position if a UPE is discharged/satisfied by way of payment. In those circumstances, the position prevents any issues of double taxation of trust distributions and although an alternative position could be to instead rely on the anti-overlap provisions in section 118-20 of ITAA 1997, the current position is a more practical approach to the issue.

Question 2

Does Capital Gains Tax event C2 occur upon cancellation/release/waiver of an unpaid present entitlement?

Answer

Yes, but it is not appropriate in these circumstances to look through the CGT event and any resultant capital gain as the right could not be said to have facilitated the distribution of income from a trustee to a beneficiary.

Detailed reasoning

An equitable interest can be released for consideration or, voluntarily, without consideration

A voluntary release needs to meet particular conditions for it to be effective and statute also requires "a disposition of an equitable interest" to be in writing ("disposition" is defined to include a release). A release of an equitable right, voluntary or for consideration, ends any right to enforcement or protection that may have previously existed and, in accordance with the doctrine of merger of estates, give the trustee absolute title to deal with the property the property the subject of the equitable interest being released.

A waiver is a voluntary release and consequently an effective waiver of a UPE will trigger CGT event C2.

The Commissioner's position consistent with the Dulux case (above) will not apply in these circumstances as a UPE that is subsequently waived could not be said to be incidental to and facilitating of a distribution of income from a trustee to a beneficiary.

Consequently, CGT event C2 should not be ignored when a UPE is waived and any resultant capital gain should be brought to account by the beneficiary.

Question 3

Does a Capital Gains Tax event occur upon assignment of an unpaid present entitlement?

Answer

Yes, CGT event A1 occurs and it is not appropriate in these circumstances to look through the CGT event and any resultant capital gain as the right could not be said to have facilitated the distribution of income from a trustee to beneficiary.

Detailed reasoning

In Australia, an equitable interest can be assigned pursuant to the relevant legislation in each jurisdiction. The relevant Victorian legislation is the Property Law Act (1958) (Vic). Although this opinion will not outline all the statutory requirements, one relevant requirement for the purposes of this opinion is that the assignment must be absolute such that it transfers unconditionally all the rights of the assignor in the chose of action to the assignee and the assignor divests themselves of the chose in action.

If the statutory requirements are met, no consideration is necessary for the assignment to be valid or fully effectual. The legislation provides a means whereby the legal owner of a chose in action can make a complete and perfect gift of it.

CGT Event A1 occurs upon disposal of a CGT asset. Pursuant to subsection 104-10(2) of the ITAA 1997, there is a requirement of a change of ownership, including a change in beneficiary ownership.

Accordingly, a valid statutory assignment of a UPE will trigger CGT event A1. For the same reasons as articulated above, CGT event A1 should not be ignored when a UPE is assigned and any resultant capital gain should be brought to account by the beneficiary.

Cost Base

The cost base principles outlined below in question 5 also apply in these circumstances.

Capital Proceeds

Where the assignment is made for consideration, the general rules about capital proceeds contained in section 116-20 of the ITAA 1997 will apply.

Where the assignment is made for no consideration, the principles outlined in question 5 (below) will also apply in these circumstances.

Question 4

If a Capital Gains Tax event occurs upon cancellation/release/waiver or assignment of an unpaid present entitlement resulting in a capital gain in the hands of a beneficiary, does section 118-20 of the ITAA 1997 apply to reduce the amount of the assessable capital gain by the amount that was previously included in the assessable income of the beneficiary when the distributions had been made?

Answer

Yes, section 118-20 of the ITAA 1997 applies to the extent that, in respect of the UPE, an amount or amounts have been included as assessable income by the respective beneficiary pursuant to either the ITAA 1997 or the ITAA 1936.

Detailed reasoning

Application of Section 118-20 of the ITAA 1997 - Waiver or Assignment of a UPE

The anti-overlap provisions contained in section 118-20 of the ITAA 1997 reduce a capital gain made from a CGT event if another provision of the ITAA 1997 or the ITAA 1936 includes an amount in assessable income, for any income year, in relation to the CGT asset and that amount is also taken into account in working out the amount of the capital gain made.

Accordingly, where a beneficiary's assessable income includes, in any year of income, an amount or amounts in respect of a UPE, e.g. by virtue of Division 6 or Division 7A of the ITAA 1936, any capital gain made upon subsequent waiver or assignment of that UPE will be reduced by those amount or amounts pursuant to section 118-20 of the ITAA 1997.

It is noted that, particularly following the decision in Bamford v Commissioner of Taxation [2010] HCA 10, the amounts to which a beneficiary may become presently entitled is subject to the terms of the trust and is separate and distinct to any share of the net income of the trust estate included in the assessable income of the beneficiary under Division 6 of the ITAA 1936. Therefore, even in circumstances where the capital proceeds equal the amount of the UPE, a residual capital gain may arise upon disposal or assignment of the UPE despite the application of section 118-20 of the ITAA 1997,

Question 5

Do the unpaid present entitlement's have a cost base for Capital Gains Tax purposes and if so, was the cost base at least the face value of the unpaid present entitlement?

Answer

The cost base will need to be determined on a case by case basis

Detailed reasoning

Cost Base

In most cases, the cost base of a UPE will be nil for the reasons that follow. However, the cost base will need to be determined on a case by case basis and after an analysis of the circumstances and the trust deed that lead to the beneficiary becoming presently entitled.

Subsection 110-25(2) of the ITAA 1997 defines the first element of the cost base to be the money paid (or required to be paid) or the market value of any property given (or required to be given) in acquiring the CGT asset. As the beneficiary never has any legal right to payment of the amount of the UPE against the trustee (such as a debt), the amount of the UPE cannot be said to have been paid or given (or required to be paid or given) to the trustee, by the beneficiary, to acquire the equitable right to demand and receive payment.

The market value substitution rule contained in section 112-20 of the ITAA 1997 will not apply because the exclusion contained in Item 1 of the table in subsection 112-20(3) will apply.

Capital Proceeds

As a waiver is a release without consideration, section 116-30 of the ITAA 1997 will apply to substitute the market value of the UPE at the time of waiver to be the capital proceeds received as a result of CGT event C2 occurring.

The market value of the UPE at the time of the CGT event will be at least the amount of the UPE. However, where the funds representing the UPE have been used by the trustee to administer the principal trust and invest in fungible or composite assets, the determination of the market value of the UPE must incorporate the value of any tracing rights in respect of those assets.

Issue 4

Ordinary Income

Question 1

Does the release, waiver and/or assignment by a beneficiary of a trustee's obligation to make a payment in respect of the unpaid present entitlement's in this arrangement cause an amount of ordinary income to arise under section 6-5 of the ITAA 1997 for any of the rulees?

Answer

No

Advice/Answers

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident for taxation purposes, includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources.

Subsection 6-5(4) of the ITAA 1997 states that a taxpayer derives an amount of ordinary income when the amount is:

· received by the taxpayer; or

· dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

Relevant factors in determining whether an amount is ordinary income has developed over time through case law. The guiding principles in determining what falls within ordinary income have been discussed in previous ATO Interpretative Decisions, some of which are set out below.

ATO ID 2003/42

ATO ID 2003/42 stated that whether an amount comes within section 6-5 of the ITAA 1997 depends on whether it represents income according to ordinary concepts. The ATOID cited Scott v. Federal Commissioner of Taxation (1966) 10 AITR 367; (1966) 117 CLR 514; (1966) 14 ATD 286 as follows:

Windeyer J stated that:

   'Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.'

It went on to say:

In G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; (1990) 21 ATR 1; 90 ATC 4413 the High Court considered the following factors were important in determining the nature of a receipt:

   'To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.'

ATO ID 2002/824

ATO ID 2002/824 discussed relevant factors in determining whether a payment is ordinary income as said that they include:

· whether the payment is the product of any employment, services rendered, or any business;

· whether the payment is expected and relied upon;

· the character of the payment in the hands of the recipient;

· whether the payment is received as a lump sum or periodically; and

· the motive of the person making the payment, although this is rarely decisive by itself.

A one-off payment, that was expected but not relied upon, and not related to work performed or an interest in property does not have the characteristics of ordinary income but is rather a capital receipt in the taxpayer's hands.

Section 6-10 of the ITAA 97 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income, and are also included in assessable income.

ATO ID 2009/112

ATO ID 2009/112 stated as follows:

Statutory income is an amount that is not ordinary income but is included in assessable income by a provision about assessable income - for example, section 97 of the Income Tax Assessment Act 1936 (ITAA 1936). That section provides that a taxpayer who is not under a legal disability and who is presently entitled to a share of the income of a trust estate must include in their assessable income that share of the net income of the trust calculated under section 95 of the ITAA 1936.

The facts in this ATO ID were that the individual was presently entitled to 50% of the income of a trust and thus had $100,000 of statutory income under section 97 of the ITAA 1936 (that is, 50% of the trust net income).

Where, as in this ATO ID, a trust's net income includes a net capital gain, Subdivision 115-C of the ITAA 1997 treats a beneficiary's share of the net income attributable to that gain as a capital gain which the beneficiary must include in the calculation of their own net capital gain.

The net capital gain is statutory income and included in the individual's assessable income under section 102-5 of the ITAA 1997. Thus it would not be included as an amount of ordinary income under section 6-5 of the ITAA 1997.

In applying these principles to the facts of the scheme to which this ruling relates, any release, waiver and/or assignment by a beneficiary of a trustee's obligation to make a payment in respect of the unpaid present entitlement's is not the product of any employment or services rendered or any business. Any gains that may be made by the rulees in relation to a waiver, release or assignment would not be expected, relied upon or be periodical. Even if the payment can be said to be expected, and perhaps relied upon, this expectation arises from a relationship in trust, rather than from a relationship within which personal services, or services are performed. (as per ATOID 2002/453 which states:

A lump sum payment received from the surrender of a sickness insurance policy does not relate to personal services, property, or the carrying on of a business. The lump sum more correctly relates to the personal circumstances of the taxpayer. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation arises from the investment in insurance, rather than from a relationship within which personal services are performed. Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

As can be seen in the answers to the CGT questions above any amounts will be statutory income if anything and thus will not also be classed as ordinary income.