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Edited version of your written advice
Authorisation Number: 1051205290649
Date of advice: 23 March 2017
Ruling
Subject: Present entitlement
Question 1
Were the beneficiaries presently entitled to the income of the trust for the year ended 30 June 2015 under the terms of section 101 of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes.
Question 2
If the answer to question 1 is yes will the proportionate approach be applied to allocate the portion of taxable income to each beneficiary based on their relative proportion of the payments received?
Answer
Yes.
Question 3
Does the fact that there is no written resolution mean that no beneficiary is presently entitled to the income of the trust for the year ended 30 June 2015?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
The taxable income and trust income for the year ended 30 June 2015 is $X.
During the 2014-15 financial year the trust made payments to the beneficiaries.
These payments were made pursuant to consent orders issued by the Court.
No formal resolution was made by the trustee for the allocation of trust income for the year ended 30 June 2015.
The trustee has the power, under the trust deed, to pay or apply income of the trust estate for the benefit of the beneficiaries.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 97
Income Tax Assessment Act 1936 section 101
Reasons for decision
Section 97 of the ITAA 1936 relies on present entitlement of a share of the income of the trust estate to determine the related share of the net income of the trust to be periodically included in the assessable income of the beneficiary.
The ordinary meaning of present entitlement has been determined over time by the courts (Harmer v. FCT [2001] FCA 51; FCT v. Bamford [2010] HCA 10; Colonial First State Investments Pty Ltd v. FCT [2011] FCA 16): a beneficiary will be presently entitled to income of a trust estate if:
● 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, whether or not the precise entitlement can be ascertained before the end of the relevant income year and whether or not the trustee has funds available for immediate payment.
Section 101 of the ITAA 1936 states that where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises the trustee's discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary's benefit by the trustee in the exercise of that discretion.
The proportionate approach
Taxation Determination TD 2012/22 considers whether a beneficiary's share of the net income of a trust estate worked is out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled.
TD 2012/22 states that:
To determine the share of net income of a trust estate to be included in a beneficiary's assessable income under paragraph 97(1)(a) of the ITAA 1936, the beneficiary must:
i. calculate how much of the income of the trust estate they are (or are taken to be) presently entitled to, as percentage share of that income; and
ii. apply that percentage to the net income of the trust estate.
This approach is often referred to as the 'proportionate approach' to the assessment of trust net income.
Application to your circumstances
In this case the beneficiaries of the trust have received payments from the trust in the 2014-15 financial year. These payments were made pursuant to consent orders issued by the Court. The trustee has the power, under the trust deed, to pay or apply income of the trust estate for the benefit of the beneficiaries. We accept in the circumstances that the beneficiaries were presently entitled, in accordance with section 101 of the ITAA 1936, to the amounts paid to them in the 2014-15 financial year.
The absence of a resolution in the circumstances does not prevent the beneficiaries from being presently entitled.
As discussed, a beneficiary's share of the net income of a trust estate is worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled.