Edited version of private advice

Authorisation Number: 1051677097670

Date of advice: 13 May 2020

Ruling

Subject: Trust - section 99 and small business CGT concessions

Question

Will the Commissioner exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the Trustee on income that no beneficiary is presently entitled to under section 99 of the ITAA 1936?

Answer

Yes.

Question 2

Will the trustee be entitled to apply the 50% capital gains tax (CGT) discount to the capital gain made on the sale of the estate assets under Division 115 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The trust was created by the Will of the deceased who died in 20XX

Probate was received in 20XX.

Under the Will, all assets were left to the five charities.

In the year ending 30 June 20XX, income from the estate included the following:

·         Interest income

·         Franked dividends

·         Franking credits

·         Foreign sourced income

·         Capital Gains from sale of shares.

No beneficiary is presently entitled in the 20XX income year.

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 1997 section 115-5

Reasons for decision

Question 1

Summary

After consideration of the relevant factors, the Commissioner is of the opinion that it would be unreasonable that section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) should apply in relation to the trustee of the trust in the relevant income years. Accordingly, section 99 of the ITAA 1936 will apply

Detailed reasoning

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.

Section 99A applies in relation to all trusts unless:

·         the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii)

·         the trust is a bankrupt estate; paragraphs 99A(2)(b) and (c)

·         the trust is a trust that consists of property referred to in paragraph 102AG(2)(c)

and the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances.

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2) states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A to apply.

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will.

If no part of the net income is distributed to beneficiaries, and section 99A is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual.

In forming an opinion pursuant to section 99A(2) whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) to have regard to certain matters. It specifies the matters to be considered to include:

·         The manner and price at which the trust acquired its assets;

·         Whether any special rights or privileges are attached to, or conferred on or in relation to, the trust property; and

·         Such other matters as the Commissioner thinks fit.

These matters look at the source of the trust capital, including whether any loans have been made to the trust. The source(s) of the trust's income are also considered, as are any benefits conferred upon the trust, and any rights and privileges conferred on or attached to property held by the trust.

In determining the weight to be given to the matters described in subsection 99A(3), Windeyer J has stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that:

The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate .... That purpose I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose.

In these circumstances, the trust has been created through a Will satisfying the eligibility for the Commissioner's discretion. The trust was created out of the Will of the deceased. It was a trust whose assets come directly from the assets of the deceased. There are no other suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind.

Therefore, it would be reasonable for the Commissioner to apply his discretion to allow section 99 of the ITAA 1936 to apply and the trustee to be taxed at ordinary marginal rates.

Question 2

Summary

As the trustee will be assessed under section 99 of the ITAA 1936, the trustee is entitled to the 50% Capital Gains Tax (CGT) discount on the sale of the assets of the estate provided the assets were held of a minimum of 12 months.

Detailed reasoning

Under section 115-5 of the Income Tax Assessment Act 1997(ITAA 1997) you make a discount capital gain if the following requirements are satisfied:

·         you are an individual, a trust or a complying superannuation entity

·         a capital gains tax (CGT) event happens to an asset you own

·         the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 19XX

·         you acquired the asset at least 12 months before the CGT event, and

·         you did not choose to use the indexation method.

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year.

In your case, you, as trustee of a deceased estate, have disposed of assets held by the deceased in the form of shares. Provided the shares were held by the deceased for a minimum of 12 months, you are able to discount the capital gain made by 50%.

Since you will be assessed under section 99 of the ITAA 1936 as opposed to section 99A of the ITAA 1936, you will still be able to have the benefit of the CGT discount (section 115-222(2) of the ITAA 1997).