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Edited version of your written advice
Authorisation Number: 1013027686241
Date of advice: 07 April 2017
Ruling
Subject: Trustee obligations under section 254 of the Income Tax Assessment Act 1936 (ITAA 1936)
Question
Do you have obligations under section 254 of the TAA 1936 in your capacity as trustee of the Trust in respect of any gain made on the sale of the Property?
Answer
No, currently you have no retention obligations under section 254 of the ITAA 1936 in respect of the sale of the Property:
(a) The obligation to retain under paragraph 254(1)(d) does not arise until the Commissioner makes an assessment setting out the amount of income tax payable. No assessment has been made.
(b) Paragraph 254(1)(d) only requires you to retain amounts out of money that comes to you in your representative capacity. Due to the operation of the Family Court Order, none of the proceeds of the sales of the Property will come to you and therefore no obligation to retain any of these proceeds can arise under paragraph 254(1)(d).
This ruling only applies to section 254 and does not have any implications for any other provisions including Division 6 of Part III of the ITAA 1936 and Subdivision 115-C of the Income Tax Assessment Act 1997.
This ruling applies for the following periods:
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commences on:
xxx 20xx
Relevant facts and circumstances
The Trust was established by deed with the Company (that is now in liquidation) as the first trustee. An individual was the sole holder of the units in this trust which consists of the original Ordinary Units.
The Company is the current registered title holder of the Property.
The Property was rented out by the Trust.
The individual became bankrupt and a Trustee was appointed to the bankrupt estate under the Bankruptcy Act 1966 (Trustee in Bankruptcy). As a result of the bankruptcy, all of the units in the Trust formed part of the bankrupt estate.
The individual separated from their spouse and legal proceedings were initiated through the Family Court.
The bank took possession of the Property to exercise its power of sale pursuant to a registered mortgage.
The Family Court made orders that:
● the Trustee in Bankruptcy do all acts and things necessary to remove the Company as trustee of the Trust and to appoint you as trustee of that Trust.
● that you provide an undertaking consenting to your appointment as trustee on the basis that you and your employees, agents and servants can be remunerated and are entitled to indemnification out of the assets of the Trust. You were required to do all such things necessary to effect that appointment.
● upon the sale of the Property by the bank the parties agree that the balance of the proceeds, after the bank has deducted amounts owing under the secured mortgage, be paid into a controlled monies account to be held by the Trustee in Bankruptcy pending discharge of any liability they may have to pay the capital gains tax arising on the sale. The Trustee in Bankruptcy is required to distribute the surplus after any such tax liability is provided for in specified proportions between the spouse and the bankrupt estate.
You were appointed as the trustee of the Trust.
The individual was discharged from bankruptcy.
You have advised that a capital gain is expected to arise on the sale of the Property.
Relevant legislative provisions
Tax Assessment Act 1936 section 254
Detailed Reasoning
Section 254 imposes obligations on every trustee in respect of any income or any profits or gains of a capital nature derived by him or her in his or her representative capacity.
You are a trustee for the purposes of section 254 in accordance with the definition of 'trustee’ in section 6 of the ITAA 1936.
Section 254 is triggered at the moment a trustee derives any income, profits or gains in his or her representative capacity. Although you hold the equitable estate in the Property you are not entitled to receive any of the sale proceeds as a result of the court order and so are unlikely to have derived any gain capable of triggering section 254. Even if you do derive such a gain, paragraph 254(1)(d) only requires you to retain out of any moneys that come to you so much as is sufficient to pay the tax assessed in respect of the gain. No assessment has been made in respect of the gain and no monies have come to you.