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Edited version of your written advice
Authorisation Number: 1013034772663
Date of advice: 12 July 2016
Advice
Subject: Excepted income for trusts
Question
Will the assessable income derived by the Testamentary Trusts from distributions from the Family Trust, pursuant to the Testamentary Direction, be "assessable income of a trust estate from a will" within the meaning of section 102AG(2)(a) of the Income Tax Assessment Act 1936?
Advice
No
This advice applies for the following period:
Year ending 30 June 2015
The arrangement commences on:
1 July 2014
Relevant facts and circumstances
Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.
The Family Trust was established by deed of trust during the 200X-0X financial year.
The Family Trust is a discretionary trading trust.
The trustee of the Family Trust is a company. The company's current directors are an individual and their sibling. The individual (the testator) is the company's sole shareholder (i.e. the sole shareholder of the corporate trustee).
The will of the individual establishes a number of testamentary trusts in favour of their children.
The will leaves the individual's shares in the company to the Executrix of the estate with a direction they use the voting power attaching to the shares to cause you (the family trust) to distribute the whole of your corpus to the testamentary trusts.
The testamentary trusts, each being a trust in which one of the beneficiaries is a beneficiary of the Family Trust, are themselves beneficiaries of the Family Trust and any distribution to the testamentary trusts will not breach the terms of the Family Trust.
You have argued that the executrix, as the beneficial recipient of the shares, must, under the provisions of section 5 of the Trustee Act 1925 (NSW), obey the terms of the will and use their voting power to distribute your (family trust) corpus to the testamentary trusts; and, as a result, the distribution to the testamentary trusts will result from a will.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 102AG.
Reasons for decision
Note - testamentary direction was defined in the ruling application as the direction in clause 7 of the will.
The crux of this question rests upon whether clause 7 of the individual's will, which requires the voting powers of the shares in the corporate trustee of the Family Trust to be used in such a way as to cause a distribution of all the income and capital of the Family Trust to the Testamentary Trusts created by the will.
Based on the information provided to the Commissioner, there is no voting power attached to the shares in the corporate trustee of the Family Trust which could give effect to a distribution of the income and capital of the Family Trust in the manner contemplated by clause 7 of the will.
Instead, the directors of the corporate trustee must, as a separate decision, exercise the powers in clause 4.1 of the Family Trust deed in their trustee capacity. Such a decision by the trustee could not be considered legally compelled by either the will or a vote of the shareholders of the corporate trustee.
As such, for the purpose of the ruling question, an assumption needs to be included that a distribution from the Family Trust to the Testamentary Trusts would only occur if clause 7 of the will could legally compel the distribution. As it is our view that clause 7 of the will and any vote by the shareholders of the corporate trustee could not legally effect a distribution from the Family Trust to the Testamentary Trusts there would be no distribution for the purpose of the ruling.
The answer to the ruling question is therefore in the negative - as without the distribution from the Family Trust to the Testamentary Trust there is no assessable income that could be derived for subsection 102AG(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to apply to.