Edited version of private advice

Authorisation Number: 1051760637680

Date of advice: 30 September 2020

Ruling

Subject: Commissioner's discretion in subsection 100AA(4)

Question

Will the Commissioner exercise the discretion in subsection 100AA(4) of the Income Tax Assessment Act 1936 (ITAA 1936) to disregard the failure of the Trustee to notify the tax exempt beneficiaries of their present entitlement to a share of the trust fund at the end of two months after the end of the relevant income year as required in paragraph 100AA(1)(c) of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June XXXX

Year ended 30 June XXXX

The scheme commences on:

1 June XXXX

Relevant facts and circumstances

The Trust was established by Deed of Trust dated 27 January XXXX.

A company was named in the Trust Deed as the Original Trustee of the Trust.

By Deed of Appointment dated 28 January XXXX the Original Trustee retired; and Mr X and Ms Y were appointed as Trustees in its place.

Clause XX of the Trust Deed provides:

·         The 'Primary Beneficiaries' of the Trust means Mr X and Ms Y but if one of the Primary Beneficiaries predeceases the other, then it shall mean the survivor.

·         The 'Vesting Day' means the day on which the last survivor of the Primary Beneficiary shall die.

Mr X died in year XXXX without appointing a new trustee in his place.

Ms Y continued to act as Trustee until her death in year XXXX without appointing a new

trustee in her place.

Clause XX of the Trust Deed provides that on the death of the last of Mr X and Ms Y as Primary Beneficiaries the power to appoint a new trustee in place of a deceased or retiring trustee is vested in their legal personal representatives.

The XYZ Trustees (XYZ) is the legal personal representative (Executor) of Ms Y pursuant to the Grant of Probate of Ms Y's Will made by the Supreme Court of the relevant State in October XXXX.

XYZ appoints itself as Trustee of the Trust by Deed Poll dated December XXXX.

XYZ as Trustee of the Trust would administer the vesting of the Trust upon the terms of the Trust Deed and the terms contained in the December Deed Poll (the Deed Poll).

By the Deed Poll, it is declared that neither Mr X nor Ms Y has remained as Trustees of the Trust. The legal personal representatives of the Estate of Mr X are discharged from any obligations they may have had (if any) as a putative trustee.

Pursuant to clause XX of the Trust Deed and to the extent permitted or required by section 14 of the relevant Trustee Act, XYZ is appointed as Trustee and XYZ consents to act as Trustee of the Trust.

As from the execution of the Deed Poll:

·         XYZ is bound by the Trust Deed;

·         the interest of Ms Y as former Trustee and the Trust Fund vests in XYZ as the new Trustee;

·         XYZ shall perform all obligations which Mr X and Ms Y properly incurred as Trustee of the Trust and which have not been performed at the time the Deed Poll is executed;

·         XYZ shall do all things necessary to give effect to the Deed Poll and the Trust Deed including but not limited to:

·         undertaking its collateral obligation under clause XX of the Will;

·         to distribute the Trust Fund and the Net Income in accordance with clause XX of the Trust Deed; and

·         prepare final accounts for the Trust in accordance with clause XX of the Trust Deed.

Clause XX of the Trust Deed provides that at Vesting Day the Trustee will stand possessed of the Trust Fund and the net income to be distributed in the same manner and upon the same terms and conditions as those expressed for the distribution of the residuary estate of the last survivor of the Primary Beneficiaries as contained in that person's Will.

Clause XX of the Trust Deed provides that the Trustee will keep a complete and accurate record of all receipts and expenses on account of the Trust Fund; prepare accounting report at the end of a financial year based on normally accepted accounting procedures; and the report will include the names and addresses of persons holding of all or any portions of the assets of the Trust.

XYZ as Trustee of the Trust, is entitled to rely upon the indemnity provided in clause XX of the Trust Deed including any Claim or Loss in respect of the Trust; and that the Trust bears the costs of preparing and stamping the Deed Poll and any documents required.

The Will of Ms Y

Clause XX of the Will provides that the Executor will hold the remaining XX share of the residuary estate to be distributed to a certain number of exempt entities (registered charities).

Based on clause XX of the Trust Deed, the Vesting Day of the Trust is the date of death of Ms Y (the Deceased).

As at the vesting date, the registered charities (tax exempt beneficiaries) were presently entitled to a certain percentage of the income and capital of the Trust Fund.

XYZ was unable to pay or notify the tax exempt beneficiaries of their entitlement to a share of the trust fund until after probate was granted to XYZ as Executor. It is only after the Grant of Probate that XYZ as the Executor was able to deal with the affairs of the Deceased.

It's confirmed that XYZ notified the tax exempt beneficiaries of their entitlements to the income and capital of the Trust Fund in a letter dated April XXXX. The beneficiaries were advised that their interest in the Trust was the same as their entitlement in the residue of the Estate of Ms Y.

It's also confirmed that section 100AA has not operated previously in relation to the Trustee.

Relevant legislative provisions

Income Tax Assessment Act 1936

Section 100AA

Subsection 100AA(1)

Subsection 100AA(3)

Subsection 100AA(4)

Subsection 100AA(5)

Income Tax Assessment Act 1997

Subsection 995-1(1)

Trustee Act 1936 (SA)

Section 14

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1936 unless otherwise stated.

Subsections 100AA(1) and (3) provide that an exempt entity will not be treated as being presently entitled to an amount of the income of a trust estate, to the extent that the trustee failed to notify the entity of its present entitlement of that amount at the end of two months after the end of the relevant income year as required in paragraph 100AA(1)(c). Consequently, the trustee will be assessed on the amount of the trust income under section 99A.

However, the Commissioner has the discretion to disregard the trustee's failure to notify within the required time period - see subsection 100AA(4).

Subsection 100AA(5) provides that in exercising the discretion, the Commissioner must have regard to the following:

a)    the circumstances that led to the failure mentioned in paragraph (1)(c);

b)    the extent to which the trustee has taken action to try to correct the failure and if so, how quickly that action was taken;

c)    whether the Commissioner has exercised the discretion previously in relation to the trustee, and if so, the circumstances in which this occurred;

d)    any other matters that the Commissioner considers relevant.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 provides that an exempt entity means:

·         an entity whose ordinary and statutory income is exempt from income tax by law; or

·         an untaxable Commonwealth entity as defined in section 195-1 of the GST Act 1999.

Application to your facts and circumstances

The entities named in the Will of Ms Y are exempt entities within the meaning of the tax law.

The last of the Primary Beneficiaries Ms Y died in June XXXX. Ms Y who acted as Trustee of the Trust since the death of the other Primary Beneficiary (Mr X) until her death had not appointed a new trustee in her place and in Mr X's place being the co-trustee of the Trust.

Due to the timing of Ms Y's death being close to the end of an income year, it was not possible for the Executor and Trustee (XYZ) to satisfy the requirements in paragraph 100AA(1)(c). The Grant of Probate to XYZ being the Executor of the Estate of Ms Y happened in the following income year.

Based on the facts and circumstances of the case and having regard to all the relevant factors in subsection 100AA(5), there is a reasonable case for the Commissioner to exercise the discretion in subsection 100AA(4) to disregard the failure of the Trustee (XYZ) to notify the exempt entities of their present entitlement to a share of the Trust Fund.

Therefore, subsection 100AA(3) will not apply to treat the exempt entities as not being presently entitled, and having never been presently entitled to the amounts equal to their share of the Trust Fund. The Trustee of the Trust (XYZ) will not be assessed under section 99A on the amounts in which the exempt entities are presently entitled to.