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Edited version of your written advice
Authorisation Number: 1051432275196
Date of advice: 12 October 2018
Ruling
Subject: Trust income - Section 99
Question
Will the Commissioner exercise his discretion to tax the income of the testamentary trust that resulted from a Will under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936 where no beneficiary is presently entitled?
Answer
Yes.
This ruling applies for the following period:
Income year ended 30 June 2017
Income year ended 30 June 2018
Income year ending 30 June 2019
Income year ending 30 June 2020
Income year ending 30 June 2021
Income year ending 30 June 2022
The scheme commences on:
1 July 2016
Relevant facts and circumstances
The Estate of the deceased is a deceased estate that came into existence in 2017.
The Executors of the Will and Trustees of the Estate of the deceased are relatives of the deceased.
Administration of the deceased estate is ongoing.
A named beneficiary of the estate is a relative the deceased who is X years old; a minor.
The Will bequeaths the sum of $X to be held on trust and shared equally between the relative of the deceased and a sibling, on the condition that they successfully reach an age specified in the Will. There are no deeds for the trusts as yet but the Will calls for the creation of testamentary trusts.
The testamentary trust for the relative (the Trust) will hold the sum of $X with an initial sum of $X.
The funds will be invested conservatively and the relative will receive the income held on trust when they attain the specified age, in addition to the $X as specified in the Will.
The Trust will accrue and re-invest all earnings unless they are drawn upon to cover education and living costs for the relative. The advice you have obtained is that such drawings would be consistent with the wording of the will and Australian State law for deceased estates.
No other funds from outside the deceased estate will be brought into the estate or into the Trust.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 99
Income Tax Assessment Act 1936 Section 99A
Income Tax Assessment Act 1936 Subsection 99A(2)
Income Tax Assessment Act 1936 Subsection 99A(3)
Income Tax Rates Act 1986 Schedule 10
Income Tax Rates Act 1986 Section 12
Reasons for decision
Testamentary trusts
Section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a special rate of tax will apply to certain trust income. The special rate of tax will apply to a share of trust income to which no beneficiary is presently entitled. The applicable tax rate is the highest marginal rate of tax for resident individuals.
However, subparagraph 99A(2)(a)(i) of the ITAA 1936 provides that the special rate of tax will not apply to a trust estate that resulted from a will if the Commissioner is of the opinion that it would be unreasonable for the special rate of tax apply to that trust income. This includes both the estate of a deceased person and testamentary trusts established pursuant to the terms of a will.
If the Commissioner is of the opinion that it would be unreasonable for the special rate of tax to apply to the trust income, then more concessional rates of tax will apply under section 99 of the ITAA 1936.
Section 99A(3) of the ITAA sets out factors which the Commissioner considers in deciding that it would be unreasonable for section 99A of the ITAA to apply:
In forming an opinion for the purposes of subsection (2):
(a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;
(b) if a person who has, at any time, directly or indirectly:
(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or
(ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised;
has not, at any time, directly or indirectly:
(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or
(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;
the Commissioner shall have regard to that fact; and
(c) the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.
Application to your circumstances
In your case, the relative is not presently entitled to the income of the deceased estate. Their right to the income is contingent as the Will stipulates that they will only receive the income upon attaining a specified age. As no beneficiary is presently entitled, the net income falls under section 99A of ITAA 1936 and is taxed at the maximum rate of personal tax.
However, a testamentary trust will be created from the deceased estate to hold and invest the relative’s $X. That is, the assets of the Trust will come directly from the assets of the deceased and there is a definable relationship of blood between the deceased person and the beneficiary. There are no other suggestions that the manner in which the trust is created will be for any reason other than the ordinary and traditional kind.
Having regard to the factors in subsection 99A(3) of the ITAA 1936, the Commissioner considers that it would be unreasonable to apply section 99A of the ITAA 1936 to the income of the Trust.
Accordingly, section 99 of the ITAA 1936 will apply to the income of the Trust.