Edited version of private advice

Authorisation Number: 1051540480443

Date of advice: 5 July 2019

Ruling

Subject: Income of a trust estate

Question

Is the Capital Gain from the transfer of the Trust Property taxable under section 99A of the Income Tax Assessment Act 1936 to the Trust?

Answer

No

This ruling applies for the following period:

The income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In mth/20XX, the Trust was established by the Company.

The Trust was established for a purpose. The trust deed has a dissolution clause that requires the net assets of the Trust to be distributed to another organisation with similar purposes.

The Company is endorsed as exempt from income tax as a registered charity, and operates a public fund that is endorsed as a deductible gift recipient.

In mth/20XX the Trustee of the Trust purchased Trust Property.

The Company provided the funding for the purchase of the Trust Property. The Trust pays interest on the loan at commercial interest rates.

The Company operates from the Trust Property.

In mth/20XX, the Trustee resolved to dissolve the Trust and distribute the Trust Property to the Company. The resolution was made under the dissolution clause.

The Trust will make a capital gain from the transfer of the Trust Property.

In mth/20XX, the Trustee resolved to distribute the capital gain to the Company. The resolution was made under the dissolution clause.

The Trustee has accounted for the capital gain as income.

Relevant legislative provisions

Subsection 6(1) of the Income Tax Assessment Act 1936

Section 95 of the Income Tax Assessment Act 1936

Section 97 of the Income Tax Assessment Act 1936

Section 98 of the Income Tax Assessment Act 1936

Section 99 of the Income Tax Assessment Act 1936

Section 99A of the Income Tax Assessment Act 1936

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 10-5 of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision

Division 6 of Part III of ITAA 1936 sets out the income tax treatment of the net income of a trust estate as defined under section 95 of that Act.

Section 95 of the ITAA 1936 defines 'net income' in relation to a trust estate to mean the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income and were a resident, less allowable deductions (except certain defined deductions).

Subsection 6(1) of the ITAA 1936 provides that assessable income has the meaning given in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), which refers to sections 6-5 and 6-10 among others of that Act. Section 6-5 provides that assessable income includes ordinary income, and section 6-10 provides that assessable income includes statutory income. Capital gains are a form of statutory income included in assessable income (section 10-5 of the ITAA 1997).

The liability to taxation on the net income of a trust is generally determined under the following sections of the ITAA 1936:

·         Section 97 - applies where a beneficiary of a trust that is not under a legal disability is presently entitled to a share of the income of the trust estate. The beneficiary will be assessed on the share of the net income that they are entitled to.

·         Section 98 - applies where a beneficiary of a trust that is under a legal disability is presently entitled to a share of the income of the trust estate. The trustee of the trust will be assessed and liable to pay tax in respect of the share of the net income that the beneficiary is entitled to, as if the income was the income of a resident individual and was not subject to any deductions.

·         Section 99 or 99A - apply where there is no beneficiary presently entitled to some or all of the net income of the trust. Where section 99 applies the trustee of the trust will be assessed and liable to pay tax on the relevant part of the net income as if the income was the income of a resident individual and was not subject to any deductions. Where section 99A applies, the trustee of the trust will be assessed and liable to pay tax on the relevant part of the net income at a rate declared by Parliament.

A beneficiary is 'presently entitled' to a share of the income of a trust estate, if:

(a)     the beneficiary has as 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 income year and whether or not the trustee has the funds available for immediate payment (see Harmer & Ors v Federal Commissioner of Taxation 91 ATC 5000 at 5004).

For section 97 of the ITAA 1936 to apply, there must be a beneficiary of the trust estate.

The Butterworths Australian Legal Dictionary (1997) states that a beneficiary is 'a person who, by being in a particular kind of legal (including equitable) relationship, receives or is to receive a benefit, profit, or advantage'.

In accordance with the dissolution clause, the Trustee has passed a resolution to transfer the Trust Property, and the capital gain that results from the transfer of the Trust Property (which the Trustee has treated as trust income) to the Company; in effect, the Trustee has resolved to distribute the income of the Trust to the Company.

For the income of a trust to be assessable under section 97 of the ITAA 1936, there must be a beneficiary, who is 'presently entitled' to a share of the income of the trust estate. To be 'presently entitled' to the income of a trust estate the beneficiary must, among other things, have a legal right to demand and receive payment of the income (see above).

Ordinarily, it is the Attorney General (the Crown) who can enforce a trust for charitable purposes. However, where a charity is seeking to recover property to which it claims to be entitled or to protect property to which it claims to have an interest, the charity itself can bring the action. In Uniting Church in Australia Property Trust (NSW) v Monsen [1978] 1 NSWLR 575 Rath J stated (at 591):

It seems to me that the Attorney-General is not a necessary party in proceedings in which an existing charity, whether incorporated or not, is seeking to recover property to which it claims to be entitled or to protect property in which it claims an actual or contingent interest. The plaintiffs in this case are asking the Court to make an order declaring their interest in certain names, and an order restraining the defendants from dealing with those names contrary to the interest so declared. In my opinion,... it is not necessary that the Attorney-General should be a party, either as plaintiff or defendant. The Court has before it the parties who have an interest in litigating the issues involved.

Following the resolution of the Trustee to distribute the capital gain to the Company, the Company has a vested interest in the income of the trust estate (the capital gain from the transfer of the Trust Property) that cannot be defeated; the Company has a right to demand and receive that amount which it can enforce through the Courts. The Company's right to demand and receive the income of the Trust (the capital gain) represents a present entitlement to a share of the income of the Trust.

As the Company is presently entitled to the income of the Trust, section 97 of the ITAA 1936 would apply to assess the Company in respect of the net income of the Trust were the Company not exempt from income tax.