Edited version of your written advice

Authorisation Number: 1012760939955

Ruling

Subject: Trust income

Question 1

Will the trustee be assessed under section 98 of the Income Tax Assessment Act 1936 (ITAA 1936) for trust income received in respect of a beneficiary who is under 18 years of age at the end of the income year?

Answer

No

Question 2

Will the trustee be assessed under section 98 of the ITAA 1936 for trust income received in respect of a beneficiary who is over 18 years of age, but under 21 years of age at the end of the income year?

Answer

No

Question 3

Will the Commissioner exercise his discretion under section 99A of the ITAA 1936 to tax the trust under section 99 of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2009

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

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

The scheme commenced on:

1 July 200X

Relevant facts and circumstances

The trust was created as a result of the will the deceased.

The will provided that a portion of the residue of the estate was to be held on trust for those specified relatives who attain 21 years of age.

The relevant beneficiaries are full time students.

The relevant beneficiaries are prescribed persons.

The trust is only in receipt of excepted income.

Following the administration of the deceased's estate an amount was transferred to a managed fund.

No withdrawals on account of income earned or fund asset sales have been made from the managed fund to date.

The trust holds no other assets other than the managed fund.

100% of all income distributions have been reinvested by the trust via the managed fund.

The trust accounts keep record of the accumulated income derived by the managed fund. The balance sheet of the trust separates the total fund balance into separate accounts for each of the beneficiaries. However there is only one managed fund account.

Relevant legislative provisions

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 99A

Reasons for decision

Taxation of trust income

The taxation of the net income of a trust is determined under the following sections of the ITAA 1936:

• Section 97 applies where a beneficiary is presently entitled to a share of the net income and is not under a legal disability;

• Section 98 applies where a beneficiary is presently entitled but is under a legal disability; and

• Sections 99A and 99 apply where there is an absence of present entitlement of the beneficiary to all or some of the net income of a trust estate.

Legal disability

A beneficiary is under a legal disability if they are a minor at general law. Under the Age of Majority Act of each state, the age at which a minor will achieve legal competence is 18 years of age.

Present entitlement

There is no definition of the term 'presently entitled' in the income tax legislation; therefore, it is necessary to look at the meaning given to the term by the courts and further discussed in Taxation Ruling IT 319. In particular, in Taylor v. FCT (1970) 119 CLR 444; 1 ATR 582; 44 ALJR 148; 70 ATC 4026 (Taylor's Case) the meaning of present entitlement was considered for a beneficiary who was under a legal disability. Under the terms of the trust settlement in Taylor's case, the trust funds were to be used for the beneficiary's maintenance and education. Any excess income was to be accumulated and invested for the beneficiary until he attained 21 years of age or, if the beneficiary died before then, the funds would pass to the beneficiary's estate. In the relevant year the trustees did not exercise their discretion to pay out any part of the trust income and the whole amount was accumulated within the trust.

The court found that the beneficiary was presently entitled to trust income even though the beneficiary was under a legal disability because:

• the beneficiary had an absolutely vested interest in the accumulated income. That is, the beneficiary's interest was absolutely vested because the income passed to the beneficiary's estate if the beneficiary died before attaining 21 years of age and as such was indefeasible.

• the beneficiary would have succeeded in an action to recover the income from the trustees had it not been for the legal disability.

For a beneficiary to be presently entitled, therefore, they must have an absolute and indefeasible vested interest in the trust income. Where a beneficiary's interest in the trust income is contingent they will not be presently entitled.

The terms of the trust instrument will determine how any trust income can be distributed. In this case, based on the terms of the will that resulted in the trust, the beneficiaries do not have an absolute and indefeasible vested interest in the trust funds. One half of the residue of the estate is held for the specified relatives that survive the deceased and attain the age of 21. The funds will be returned to the deceased's residual estate should the beneficiary not attain the age of 21 years.

Therefore, in this case the trustee will be assessed under sections 99 or 99A of the ITAA 1936 in relation to an income year where the relevant beneficiary is under 21 years of age at the end of the income year.

Commissioner's discretion

Sections 99 and 99A of the ITAA 1936 apply to assess a trustee on income to which no beneficiary is presently entitled or income which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A of the ITAA 1936.

Section 99A applies in relation to all trusts unless:

• the trust resulted from a will; subparagraph 99A(2)(a)(i)

• the trust is bankrupt estate; paragraphs 99A(2)(b) and (c)

• the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) 

and the Commissioner forms the opinion that it would be unreasonable to apply section 99A of the ITAA 1936 in such circumstances.

Section 99A(2) of the ITAA 1936 gives the Commissioner a discretion to assess the trustee pursuant to section 99 of the ITAA 1936, rather than section 99A of the ITAA 1936, inter alia, in relation to a trust estate that resulted from a will, a codicil, an intestacy or a court order varying the provisions of a will, a codicil or the operation of the intestacy provisions

Subsection 99A(3) provides that in forming an opinion for the purposes of subsection 99A(2) the Commissioner is to have regard to certain matters.

(1) the circumstances in which and the conditions, if any, upon which, at any time-

a. property - including money - was acquired by or lent to the trust estate,

b. income was derived by the trust estate,

c. benefits were conferred on the trust estate, or

d. special rights or privileges - irrespective of whether they have been exercised - were conferred on or attached to property of the trust estate.

(1) whether any person, who has at any time, directly or indirectly-

a. transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

b. conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate, whether or not the right or privilege has been exercised,

(1) has at any time, directly or indirectly, done any similar thing in relation to any other trust estate.

(2) such other matters, if any, as he thinks fit.

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.

Having regards to the circumstances the Commissioner will exercise the discretion to assess the income of the trust in accordance with section 99 of the ITAA 1936.