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Edited version of your written advice
Authorisation Number: 1013074699518
Date of advice: 18 August 2016
Ruling
Subject: Present entitlement and assessability of trust income
Question
Under the terms of the trust, is the beneficiary presently entitled to the income of the trust and assessable under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) on this trust income?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2016
Relevant facts and circumstances
The testamentary trust was created by the Will of the deceased.
The Trustee is the deceased individual's adult child. The adult child has a life interest in the income of the trust. The adult child is not under a legal disability.
The adult child holds the assets of the trust estate in trust for the grandchildren of the deceased, to apply the income of the trust to the benefit of the grandchildren during their minority and to inherit the assets of the trust, on the death of the adult child, upon each grandchild reaching the age of 25.
The two adult grandchildren have no income entitlement while the child is alive.
The trustee and beneficiaries of the trust are Australian residents for tax purposes.
No loan has been made to or from the testamentary trust.
No property has been added to the testamentary trust.
The assets in the trust are a bank account, shares in listed companies and commercial property.
No shares are held in private companies.
All assets of the trust are unencumbered.
The estate has been fully administered.
You have provided a copy of the Will.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 97
Reasons for decision
The liability of beneficiaries and trustees of a trust estate to pay tax under Division 6D of the ITAA 1936 turns on whether or not a beneficiary is 'presently entitled to a share of the income of the trust estate".
Subsection 97(1) of the ITAA 1936 is the primary provision under which presently entitled beneficiaries are assessed on their share of the net income of the trust estate.
There is no statutory definition of 'present entitlement' so its meaning, is derived from general law. In essence a beneficiary is presently entitled to a share of the income of the trust estate if, and only if:
(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession, and
(b) The beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.
In practical terms, it is only possible to determine whether a beneficiary has a present entitlement by considering the terms of the trust deed and the factual circumstances.
If there is a term in the trust deed that specifies a beneficiary is to receive a fixed proportion of the income of the trust each year, then that beneficiary is presently entitled to that proportion of the trust income each year.
The question of whether a beneficiary is presently entitled to income of the trust must be answered during the income year in question. There can be no present entitlement during an income year where a determination to distribute income to a beneficiary is made by the trustee after the end of the income year.
Clause 8(b) of the Will states that:
'…..to hold upon trust to invest the same and to pay the income therefrom to my said son during his lifetime"……..
This clause clearly indicates that the adult child is presently entitled to the income of the trust each year and therefore would be assessable on the trust income under section 97 of the ITAA 1936.
There does not appear to be any discretion to accumulate income in the trust other than under Clause 12. This clause gives some discretion to the trustees with regards to the application of income at the time when the infant beneficiaries were in minority. We consider that paragraphs 12 (a), (b) and (c) are only applicable during that period of time.
There are currently only X adult grandchildren. Therefore there are no infant beneficiaries in their minority. At this time the trustee does not have, a discretion, under Clause 12 to apply any income for the benefit of these beneficiaries or the discretion to accumulate surplus income.