Edited version of your written advice

Authorisation Number: 1051239598605

Date of advice: 23 June 2017

Ruling

Subject: Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936)

All legislative references are to the ITAA 1936.

Prior to the vesting of the family trust:

Question 1

Will a prescribed person’s share of the net income as a beneficiary of a testamentary trust from a distribution made by the family trust (including the dividend sourced from the liquidation of the company), be excepted trust income of the beneficiary within the meaning of subsection 102AG(2)?

Answer

Not applicable

Question 2

Will the Commissioner exercise his discretion under subsection 99A(2) so that the trustee of a testamentary trust is assessed and liable to pay tax under section 99 on the share of the net income of the testamentary trust referable to the trust income to which no beneficiary is presently entitled provided that the assets of the testamentary trust remain as described in the Private Binding Ruling (PBR) application, as invested, realised and reinvested from time to time?

Answer

Not applicable

Upon the vesting of the family trust:

Question 3

Will a prescribed person’s share of the net income as a beneficiary of a testamentary trust derived from money or property distributed to it by the family trust be excepted trust income of the beneficiary within the meaning of subsection 102AG(2)?

Answer

Not applicable

Question 4

Will the Commissioner exercise his discretion under subsection 99A(2) so that the trustee of a testamentary trust is assessed and liable to pay tax under section 99 on the share of the net income of the testamentary trust referable to the trust income to which no beneficiary is presently entitled provided that the assets of the testamentary trust remain as described in the PBR application, including the proceeds of investment of those assets as invested, realised and reinvested from time to time?

Answer

Not applicable

This ruling applies for the following periods:

● Income year ending 30 June 2017

● Income year ending 30 June 2018

● Income year ending 30 June 2019

● Income year ending 30 June 2020

● Income year ending 30 June 2021

The scheme commences on:

1 July 2016

Relevant facts and circumstances

1. The deceased died leaving a Will and an estate comprising personal and business assets. At the time of their death, a substantial part of the assets which the deceased accumulated as a result of their business activities were held by the company. All the shares in the company are held by the trustee company in its capacity as trustee of the family trust. The family trust was established in YYYY and the shares in the company were acquired prior to 20 September 1985.

2. At the time of their death, the deceased was a director and secretary of both the company and trustee company and they were also the guardian and appointer of the family trust. The deceased had a partner, adult children and grandchildren (including minors). The deceased’s children and accountant, individual A, are the executors and trustees of the Will (estate trustees).

3. In the Will, the deceased made specific bequests for the benefit of their partner and children. The Will then provide for the deceased’s residuary estate to be held equally upon four discretionary testamentary trusts for the grandchildren. The trustees of the testamentary trusts are capable of inclusion as income and capital beneficiaries of the family trust.

4. The deceased sought to ensure that the shares in the trustee company (and consequently the assets of the family trust) were effectively treated as assets of their estate. In particular, clause 6 of their Will provides:

To transfer my shares in [the trustee company] as trustee of the [family trust] (a discretionary trust) to my trustees so that each holds an equal number of shares in that company upon condition that:

(a) all decisions of both directors and shareholders must be by no less than four of them one being the said [A];

(b) subject to clause [Y] of this Will the company will sell and convert into cash all the assets of the [family trust] and distribute one half of the proceeds between my children in equal shares and the other half equally between each of the four trusts established for my grandchildren under clauses [D, E and F] of this Will.

5. The family trust’s representative has advised that, notwithstanding the intention and desire on the part of the deceased to impose specific testamentary trust obligations in respect of the shares in the trustee company, those obligations would have the effect of fettering the discretion of the estate trustees in the discharge of their obligations under the trust deed. Accordingly, what were clearly wishes of the deceased with regard to the trust assets is a matter which would be taken into account by the estate trustees in the exercise of their discretion, but would not be binding upon them.

6. The shares in the trustee company have been transferred to each of the estate trustees. The estate trustees have determined that Individual B (one of the deceased’s children) should be sole director of the trustee company. B, as sole director of the trustee company, after consultation with their siblings and applying their independent Will, is disposed to honour the deceased’s wishes and to cause the trustee company to make the distributions referred to in clause X of the Will.

7. The family trust’s representative has advised that the assets of the company have now been disposed of and the company holds only cash. The trustee company (as sole shareholder of the company) and the directors of the company will cause the company to be placed in voluntary liquidation and appoint a liquidator. The proceeds of the liquidation will be received by the family trust and disposed of in accordance with the determination of B as sole director of the trustee company.

8. The family trust’s representative indicates that on the assumption that the decision is made in accordance with the deceased’s wishes as stated in clause X of the Will, the proceeds of the liquidator’s distribution will be divided into equal parts for distribution to the children and the grandchildren’s four testamentary trusts. The proposed trust distributions will be made by the trustee company as part of the vesting of the family trust.

9. The trust deeds for the family trust and the four testamentary trusts contain no definition of 'income’ or 'capital’. It is acknowledged by the family trusts’ representative that the liquidator’s distribution and the amount distributed upon vesting of the family trust to the testamentary trusts will both be characterised as capital of the trust.

10. The minor grandchildren will all be a 'prescribed person’ under subsection 102AC(1) for the purposes of Division 6AA and none will be an 'excepted person’ for the purposes of subsection 102AC(2).

Assumptions

11. Administration of the estate will be completed prior to the year ending 30 June YYYY and each of the grandchildren’s testamentary trusts will receive an equal share of the deceased’s residuary estate in the year ending 30 June YYYY.

12. The company will be put into liquidation during the year ending 30 June YYYY. There will be no liquidator’s distribution from the family trust to the grandchildren’s testamentary trusts during the year ending 30 June YYYY. Rather, the liquidator’s distribution will form part of the capital distributions made by the family trust in favour of the testamentary trusts in the income year in which the vesting of the family trust occurs.

13. The family trust will vest in favour of the testamentary trusts during the year ending 30 June ZZZZ following the completion of the liquidation of the company.

14. Following administration of the estate and the vesting of the family trust, each of the grandchildren’s testamentary trusts will have received an equal share of the deceased’s residuary estate; an equal share of the liquidator’s distribution upon the winding up of the company; and an equal share of any interest income derived by the family trust from the short-term investment of the proceeds of the liquidator’s distribution.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 subsection 102AC(1)

Income Tax Assessment Act 1936 subsection 102AC(2)

Income Tax Assessment Act 1936 subsection 102AG(2)

Reasons for decision

We have provided private binding rulings to the testamentary trusts which are the entities that the questions in this ruling relate to. Given that these questions are not relevant to the family trust, the answers to them are not applicable.