Edited version of your written advice

Authorisation Number: 1012997136333

Date of advice: 12 April 2016

Ruling

Subject: Trust - assessable income

Questions and answers

Is the Estate liable to pay tax on interest earned on funds held in a controlled money account, on trust, by an appointed manager?

No.

This ruling applies for the following period

1 July 2015 to 30 June 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity X made a complaint that the advisors, to the Estate, misappropriated funds.

A manager was appointed (Appointed Manager).

The funds subject to Entity X's complaint, and in which the previous advisors are in dispute of who is presently entitled to them, came out of the Estate.

The Appointed Manager placed the funds into a controlled money account; the Appointed Manager is the sole signatory to the account.

During the time the funds have been held on trust, interest has accrued.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 254

Reasons for decision

Trustee is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as follows:

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.

Section 254 of the ITAA 1936 applies to make the trustee responsible for the income tax affairs of the monies and assets to which they have a fiduciary duty to control.

Section 254 of the ITAA 1936 provides that a trustee:

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

d) is hereby authorized and required to retain from time to time out of any money which comes to him in his 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) 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 has retained, or should have retained, under paragraph;

(d) but shall not be otherwise personally liable for the tax.

Generally, if no one is presently entitled to the net income held on trust, the trustee is assessed under section 99A of the ITAA 1936 and liable to pay tax on the net income held on trust at the maximum rate of personal income tax.

There is no definition of the term 'presently entitled' in the income tax legislation. Generally, for a beneficiary to be presently entitled, 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 High Court has in Harmers & Ors v Federal Commissioner of Taxation (1991) 22 ATR 726 at 271 (Harmer) held that, a beneficiary is presently entitled to a share of the income of a trust estate if at least by the end of the year of income:

• The beneficiary has an interest in the income which is both vested in interest and vested in possession; and

• The beneficiary has a present legal right to demand and receive payment of the income. This includes beneficiaries that, but for their legal disability, are vested in interest and possession to that income.

Harmer strengthened the principles of present entitlement by confirming that the beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. The interest must not be contingent but must be such that the beneficiary may demand immediate payment of that income. If the beneficiary is under a legal disability such as infancy or insanity, the interest must be such that the beneficiary would have been able to demand immediate payment of the income had there been no disability or incapacity.

In the Full High Court decision in Harmers, it was held that no beneficiary was presently entitled to Court Order money which was invested in a building society account. The taxpayers were solicitors acting for parties in dispute over certain moneys. Subsequently, the Court ordered that the money be paid out to the solicitors to be invested with a building society in the names of the claimants' solicitors to be held on trust by them pending determination of the proceedings.

It was held by the High Court that the interest derived on the moneys deposited into the bank account before the making of any order was interest to which no beneficiary was presently entitled.

It was determined that the respective interests of the individual claimants were, at best, contingent, upon an order being made in his or her favour. Unless and until such and an order was, made no claimant had a vested interest in the moneys lodged with the building society or in the interest earned on it. It follows that none of the claimants were 'presently entitled' to the income of the fund and, accordingly, the solicitors were assessable pursuant to section 99A of the ITAA 1936 in respect of the interest earned during those financial years in which no beneficiary was presently entitled.

Application to the circumstances

The funds held, on trust by the Appointed Manager, in the controlled money account, relate to costs owed by the Estate to its former advisors.

The former advisors are unable to agree on how these funds should be divided between them. Therefore, no one is presently entitled to the funds and or interest that have accrued while being held in the controlled money account.

Accordingly, as no one is presently entitled to the net income held on trust, the trustee, in this case the Appointed Manager is assessed and liable to pay the tax and not the Estate.