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Edited version of your written advice
Authorisation Number: 1051477030488
Date of advice: 24 January 2019
Ruling
Subject: whether any of the income of the X Trust should be included in your assessable income
Question 1
Is any of the net income of the X Trust included in your assessable income?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
01 July 2017
Relevant facts and circumstances
● The Trustee of the X Trust operates a retirement village, where you are a resident.
● As a lessee of a residential unit at the village, you are a Beneficiary under the Trust.
● Under the trust’s deed, you can become entitled to the assets of the trust in the following ways:
- if the trustee, after obtaining the necessary approvals, distributes surplus cash under clause Y;
- upon the vesting of the trust, under clause Z.
● No distribution of surplus has been made under clause Y of the Trust Deed.
● The assets of the Trust, including accumulated income, are deployed in the operation of the Retirement Village as working capital.
● No cash is actually distributed to Beneficiaries.
● The Trust’s sources of income, apart from levies, include fees for services provided to non-residents. The Residents’ levies are implicitly reduced having regard to the extent of any expected net income from other sources. However, it is not a case where a gross levy is struck and then the resident’s share of net income is offset against it.
● The difference between the income of the Trust as budgeted and the Trust’s outgoings is met by quarterly Levies imposed on the Beneficiaries of the Trust in proportion to their Unitholdings.
● There is a direct relationship between the income of the Trustee and the amount Levied upon the Beneficiaries in that the income of the Trustee is applied to decrease the amount otherwise payable by the Beneficiaries as Levies. In this sense, the income of the Trust is applied for the benefit of the Beneficiaries.
● You benefit in an indirect sense from some of this expenditure because you are a resident of the Retirement Village, but none of the expenditure is specifically for your benefit and you have no legal claim in respect of it.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 6
Income Tax Assessment Act 1936 subsection 97(1)
Income Tax Assessment Act 1936 section 97
Reasons for decision
In broad terms, Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’)1 determines who will be assessed for income tax purposes on parts of the net income of a trust and in what shares.
Where a beneficiary is presently entitled to a share of the trust’s income, that beneficiary is assessable on a corresponding share of the trust’s net income: subsection 97(1) of the ITAA 1936.
A beneficiary is only presently entitled to income if they have:
(a) an interest in the income which is both vested in interest and vested in possession; and
(b) 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. [FCT v. Bamford [2010] HCA 10 at [37]; 75 ATR 1; 2010 ATC 20-170; Harmer v. FCT (1991) 173 CLR 264 at [271]; 22 ATR 726; 91 ATC 5000.] (paragraph 13 of TD 2018/9)
The requirements for the existence of a present entitlement to the income of the Trust do not exist as:
(a) an interest in the income which is both vested in interest and vested in possession does not exist – any interest in the income under clause 4 of the Trust Deed (or any other clause) is a contingent one; and
(b) a present legal right to demand and receive payment of the income does not exist.
Accordingly, in respect of the Trust, you had nil assessable income under subsection 97(1) of the ITAA 1936 for the year of income ended 30 June 2018.
Note: subsection 95A(2) of the ITAA 1936 also does not apply to your circumstances as the requisite vested and indefeasible interests in the income of the Trust did not exist in the years of income being ruled upon. As stated by Hill J in in Trustees of the Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525: ‘…an interest in income will be vested where the holder has an immediate fixed right of present or future enjoyment. A contingent interest would not suffice. An interest will be indefeasible where it is not subject to any condition…’ [at 4541]