Edited version of your written advice

Authorisation Number: 1012989532792

Date of advice: 24 March 2016

Ruling

Subject: Commissioner's discretion under section 99A of the Income Tax Assessment Act 1936.

Question 1

Will the Commissioner exercise his discretion not to apply the provisions of section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and assess the trust estate under section 99 of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The trust was created by the will of the deceased who died in 20XX.

Under the will, four properties were left in trust for the deceased's grandchildren until they reach the age of 21 years.

Each grandchild was assigned a particular property and a proportionate share of the accumulated income conditional upon reaching 21 years old.

The only assets of the trust are the properties and a bank account for banking rents and paying property expenses.

The trust has no liabilities and each year the trustee will be assessable on the net rent as no beneficiary is presently entitled.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(2)

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 applies in relation to all trusts unless: 

• the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii)

• 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 in such circumstances. 

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2) 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 to apply. 

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) 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 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 an opinion pursuant to section 99A(2) whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) to have regard to certain matters. It specifies the matters to be considered to include:

• The manner and price at which the trust acquired its assets;

• Whether any special rights or privileges are attached to, or conferred on or in relation to, the trust property; and

• Such other matters as the Commissioner thinks fit.

These matters look at the source of the trust capital, including whether any loans have been made to the trust. The source(s) of the trusts income are also considered, as are any benefits conferred upon the trust, and any rights and privileges conferred on or attached to property held by the trust.

In determining the weight to be given to the matters described in subsection 99A(3), Windeyer J has stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that:

The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate …. That purpose I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose.

In these circumstances, the trust has been created through a will satisfying the eligibility for the Commissioner's discretion. The trust was created out of the will of the deceased. It was a trust whose assets come directly from the assets of the deceased and there is a definable relationship ordinarily of blood or marriage between the deceased person and the beneficiaries. 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 would be 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.