Edited version of private advice

Authorisation Number: 1051778892399

Date of advice: 12 November 2020

Ruling

Subject: Income taxation of trusts

Issue 1 - Administration

Question 1

Is the Trustee required to advise the Commissioner of certain details about the beneficiaries pursuant to Division 6D of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Is the Trustee required to give the Commissioner an Annual Investment Income Report (AIIR) pursuant to section 393-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No.

Issue 2 - Withholding tax

Question 3

Is the Trustee required to withhold tax from payments made to beneficiaries that are residents for tax purposes?

Answer

No.

Question 4

Is the Trustee required to withhold tax pursuant to subsection 128B(2) of the ITAA 1936 from interest income in respect of the 20XX income year paid to beneficiaries that are non-residents for tax purposes?

Answer

Yes.

Question 5

Is the Trustee required to withhold tax under Division 11A of the ITAA 1936 from the corpus amount paid to beneficiaries that are non-residents for tax purposes?

Answer

No.

Issue 3 - Trustee liability

Question 6

Is the Trustee assessed and liable to pay tax for the 20XX income year pursuant to subsection 99A(4) of the ITAA 1936 in respect of the share of the net income of the trust estate to which no beneficiaries are presently entitled for that year?

Answer

Yes.

Question 7

Is the Trustee assessed and liable to pay tax for the 20XX income year pursuant to subsection 98(3) of the ITAA 1936 in respect of the share of the net income of the trust estate to which beneficiaries that are non-residents for tax purposes and are not under a legal disability are entitled for that year?

Answer

No.

Question 8

Is the Trustee assessed and liable to pay tax for the 20XX income year pursuant to subsection 98(1) of the ITAA 1936 in respect of the share of the net income of the trust estate to which beneficiaries that are residents for tax purposes are entitled for that year, where those beneficiaries are under a legal disability and are represented by a guardian, power of attorney holder or trustee?

Answer

No.

Issue 4 - Calculation of net income

Question 9

Is the Trustee required to include interest income in respect of the period to xx xx 20XX in the calculation of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year?

Answer

No.

Question 10

Is the Trustee required to include interest income in the calculation of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year?

Answer

Yes.

Question 11

For the purposes of calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year, is a deduction available under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for legal costs?

Answer

Yes.

Question 12

For the purposes of calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX and 20XX income years, is a deduction available under section 25-5 of the ITAA 1997 for costs incurred by the Trustee in managing the tax affairs of the Trust?

Answer

Yes.

Relevant facts and circumstances

The Trustee began to hold an amount (i.e. the corpus amount) on trust for the beneficiaries during the income year ended 30 June 20XX.

The Trustee is required to distribute the corpus amount (and interest income derived upon the corpus amount after application of expenses) to the beneficiaries in the 20XX income year.

The Trustee has received interest income on the corpus amount in both the 20XX and 20XX income years. Interest income attributable to the 20XX income year will be distributed to the beneficiaries in the 20XX income year, however interest income attributable to the 20XX income year cannot be distributed to the beneficiaries in the 20XX income year.

The Trustee has incurred costs, including costs associated with managing the tax affairs of the Trust in the 20XX and 20XX income years, and legal costs arising from legal action.

Most of the beneficiaries are residents for Australian tax purposes, however some are non-residents for Australian tax purposes. Additionally, some beneficiaries are under a legal disability and are represented by a guardian, power of attorney holder or trustee.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 s 95

Income Tax Assessment Act 1936 s 98

Income Tax Assessment Act 1936 s 99A

Income Tax Assessment Act 1936 Division 6D

Income Tax Assessment Act 1936 s 102UA

Income Tax Assessment Act 1936 s 102UB

Income Tax Assessment Act 1936 s 102UC

Income Tax Assessment Act 1936 s 102UK

Income Tax Assessment Act 1936 Division 11A

Income Tax Assessment Act 1936 s 128A

Income Tax Assessment Act 1936 s 128B

Income Tax Assessment Act 1936 s 128D

Income Tax Assessment Act 1936 Part VA

Income Tax Assessment Act 1936 s 202D

Income Tax Assessment Act 1936 Sch 2F Division 272

Income Tax Assessment Act 1936 Sch 2F s 272-5

Income Tax Assessment Act 1997 s 6-5

Income Tax Assessment Act 1997 s 8-1

Income Tax Assessment Act 1997 s 25-5

Income Tax Assessment Act 1997 s 995-1

International Tax Agreements Act 1953 section 4

Taxation Administration Act 1953 Sch 1 Part 2-5

Taxation Administration Act 1953 Sch 1 s 12-250

Taxation Administration Act 1953 Sch 1 s 393-10

Taxation Administration Regulations 2017 s 41

Reasons for decision

Issue 1 - Administration

Question 1

Summary

The Trustee is not required to advise the Commissioner of certain details about the beneficiaries pursuant to Division 6D of the ITAA 1936.

Detailed reasoning

Division 6D of the ITAA 1936 can require the trustee of a trust to advise the Commissioner of certain details about a beneficiary, including their tax file number. Section 102UA of the ITAA 1936 provides:

102UA What this Division is about

(1)          [Net income of trustee beneficiaries] The main purpose of this Division is to ensure that the trustee of a closely held trust with one or more trustee beneficiaries that are presently entitled to a share of the income or of a tax-preferred amount of the trust advises the Commissioner soon after the end of the year of income of certain details about those trustee beneficiaries. This will allow the Commissioner to check whether the assessable income of the trustee beneficiaries includes the correct share of net income, and whether the net assets of the trustee beneficiaries reflect the receipt of the tax-preferred amounts.

(2)          [Trustee beneficiary] To achieve this purpose, the Division:

(a)          provides for the trustee to correctly identify the trustee beneficiaries within a specified period after the end of the year of income; and

(b)          if the trustee fails to do so, provides for taxation at a penalty rate (in the case of net income) or offences under the Taxation Administration Act 1953 (in the case of tax-preferred amounts).

...

Accordingly, Division 6D imposes an obligation on the trustee of closely held trusts to advise the Commissioner of the details of beneficiaries that are presently entitled to a share of the income of the trust. Section 102UK of the ITAA 1936 provides further information about the beneficiary details that must be provided by the trustee:

102UK Trustee beneficiary non-disclosure tax where no correct TB statement

(1)          Subject to subsection (2A), this section applies if:

(a)          a share of the net income of a closely held trust for a year of income is included in the assessable income of a trustee beneficiary of the trust under section 97; and

(b)          the share comprises or includes an untaxed part; and

(c)           the trustee of the closely held trust is not covered by a determination under subsection (1A) for the year of income; and

(d)          during the TB statement period in relation to the year of income, the trustee of the closely held trust does not make and give to the Commissioner a correct TB statement about the share.

...

Section 102UB of the ITAA 1936 provides that the term 'closely held trust' is given meaning by subsection 102UC(1) of the ITAA 1936. Section 102UC of the ITAA 1936 provides:

102UC Closely held trust

(1) A closely held trust is:

(a)          a trust where an individual has, or up to 20 individuals have between them, directly or indirectly, and for their own benefit, fixed entitlements to a 75% or greater share of the income, or a 75% or greater share of the capital, of the trust; or

(b)          a discretionary trust;

except where the trust is an excluded trust.

...

(4)          In this section:

discretionary trust means a trust is not a fixed trust within the meaning of section 272-65 in Schedule 2F.

excluded trust means:

(a)          a trust to which paragraph (b), (c) or (d) of the definition of excepted trust in section 272-100 in Schedule 2F applies; or

...

fixed entitlement has the meaning given by sections 272-5, 272-10, 272-15 and 272-40 in Schedule 2F.

...

Accordingly, the requirements in Division 6D of the ITAA 1936 do not apply to trusts that are not closely held trusts. A trust is not a closely held trust if more than 20 individuals have fixed entitlements to a 75% or greater share of the income or a 75% or greater share of the capital of the trust.

The meaning of 'fixed entitlements' is given by Division 272 of Schedule 2F to the ITAA 1936. Section 272-5 of Schedule 2F of the ITAA 1936 provides:

272-5 Fixed entitlements to share of income or capital of a trust

(1)          [Meaning of fixed entitlement] If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

...

Thus, a beneficiary will have a fixed entitlement to a share of the income or the capital of a trust if they have a vested and indefeasible interest in a share of income of the trust or of the capital of the trust.

In the circumstances, the beneficiaries will have a fixed entitlement to a share of the income or the capital of a trust. The terms of the Trust mean that there are more than 20 beneficiaries that will have fixed entitlements to a 75% or greater share of the income or the capital of the Trust.

Accordingly, the Trust is not a closely held trust. Thus, Division 6D of the ITAA 1936 will not apply to the Trustee, with the effect the Trustee will not be required to advise the Commissioner of certain details of the beneficiaries.

Question 2

Summary

The Trustee is not required to give the Commissioner an AIIR pursuant to section 393-10 of Schedule 1 to the TAA.

Detailed reasoning

Section 393-10 of Schedule 1 to the TAA sets out when an entity is required to give the Commissioner an AIIR. It provides:

393-10 Annual investment income reports

(1)          An entity must give to the Commissioner a report, for a *financial year, on all *Part VA investments in relation to which it was an *investment body at any time during the year.

(2)          The report must be in the *approved form.

(3)          The report must be given to the Commissioner within the following period after the end of the financial year:

(a)          the period the Commissioner specifies by legislative instrument; or

(b)          otherwise - 4 months.

Note: Section 388-55 allows the Commissioner to defer the time for giving an approved form.

(4)          The report need not include particulars of an investment for which return during the *financial year was less than $1.

(5)          Despite subsection (1), the entity need not give to the Commissioner a report, for a *financial year during which the total number of *Part VA investments in relation to which it was an *investment body is less than:

(a)          the number the Commissioner specifies by legislative instrument; or

(b)          otherwise - 10.

(5A) Paragraph (5)(b) does not apply to an *investment body that is a *managed investment trust.

(6)          Subsection (1) does not apply to an *investment body in relation to a *financial year for which the investment body has complied with an *arrangement in force between the investment body and the Commissioner relating to the reporting on *Part VA investments.

The terms 'Part VA investment' and 'investment body' are defined in section 995-1 of the ITAA 1997:

995-1 Definitions

(1) In this Act, except so far as the contrary intention appears:

...

investment body for a *Part VA investment has the meaning given by section 202D of the Income Tax Assessment Act 1936.

...

Part VA investment means an investment of a kind mentioned in section 202D of the Income Tax Assessment Act 1936.

...

Section 202D of the ITAA 1936 sets out the investments to which Part VA of the ITAA 1936 (and therefore section 393-10 of Schedule 1 to the TAA) apply. Subsection (1) contains a table that sets out various investments and investment bodies to which Part VA of the ITAA 1936 applies:

202D Explanation of terms: investment, investor, investment body

(1A) This section:

(a)          applies to a non-share equity interest in the same way as it applies to a share; and

(b)          applies to an equity holder in the same way as it applies to a shareholder.

(1)          [Investments to which Part applies] Investments of the kinds mentioned in column 1 of the following table are investments to which this Part applies, whether or not the investments come into existence before the commencement of this section:

Table

(2)          [Investor, investment body] In relation to an investment of a kind mentioned in column 1 of an item in the table in subsection (1):

(a)          the investor is the person specified in column 2 of the item; and

(b)          the investment body is the person specified in column 3 of the item.

...

None of the items in the table are relevant to the Trustee. The Trustee is therefore not an investment body within the meaning of Part VA of the ITAA 1936.

Accordingly, the Trustee is not subject to the requirement in subsection 393-10(1) of Schedule 1 to the TAA to give an AIIR to the Commissioner.

Issue 2 - Withholding tax

Question 3

Summary

The Trustee will not be required to withhold from payments made to beneficiaries that are residents for tax purposes.

Detailed Reasoning

There is no requirement for the Trustee to withhold tax from distributions to beneficiaries that are residents.

Question 4

Summary

The Trustee is required to withhold tax pursuant to subsection 128B(2) of the ITAA 1936 from interest income in respect of the 20XX income year paid to beneficiaries that are non-residents for tax purposes.

Detailed Reasoning

Division 11A of the ITAA 1936 sets out the requirement to withhold tax from certain amounts paid to non-residents. This is supported by the machinery provisions for the collection of withholding tax contained in the Pay As You Go (PAYG) provisions of Part 2-5 of Schedule 1 to the TAA.

Section 128A of Division 11A of the ITAA 1936 contains certain deeming rules in respect of beneficiaries of trusts. It provides:

128A Interpretation

...

(3)          [Trust estate beneficiary deemed to have derived income] For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he or she became so entitled.

...

Taxation Ruling IT 2680: Income tax: withholding tax liability of non-resident beneficiaries of Australian trusts further provides:

...

5. A non-resident beneficiary is liable for withholding tax when the beneficiary derives a dividend or interest included in the income of an Australian trust estate. The time at which the beneficiary derives the dividend or interest income is when the beneficiary becomes presently entitled to it. The terms of a trust may dictate that a beneficiary becomes presently entitled to certain income before the end of an income year.

...

Accordingly, Division 11A of the ITAA 1936 operates to impose withholding tax on dividend, interest and royalty amounts when a non-resident beneficiary of a trust becomes presently entitled to the amount. Thus, in the circumstances, when the Trustee makes a non-resident beneficiary that is not under a legal disability presently entitled to an amount that includes an interest component, the Trustee may be required to withhold.

Section 128B of the ITAA 1936 sets out the circumstances in which withholding tax is payable in respect of interest paid to non-residents. It provides:

128B Liability to withholding tax

(1A) [Person to whom this section applies] In this section, a reference to a person to whom this section applies is a reference to the Commonwealth, a State, an authority of the Commonwealth or of a State or a person who is, or persons at least 1 of whom is, a resident.

...

(2) [Interest derived on or after 1 January 1968 by a non-resident] Subject to subsection (3), this section also applies to income that:

(a) is derived, on or after 1 January 1968, by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or

...

...

(5) [Rate of tax payable on interest] A person who derives income to which this section applies that consists of interest is, subject to subsections (6) and (7), liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies.

In the circumstances, interest income is paid to the Trustee, who is a person in Australia. The beneficiaries will subsequently become entitled to receive the interest income once they are made presently entitled to a share of the income of the trust estate by the Trustee.

The machinery provisions for the collection of interest withholding tax are contained in the PAYG provisions of Part 2-5 of Schedule 1 to the TAA. Section 12-250 of Schedule 1 to the TAA sets out when amounts are required to be withheld from interest payments received for foreign residents. It provides:

12-250 Interest payment received for foreign resident

(1)          An entity that receives a payment of interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) must withhold an amount from the payment if:

(a)          the entity is a person in Australia or an *Australian government agency; and

(b)          a foreign resident is or becomes entitled:

(i) to receive the interest or part of it from the entity, or to receive the amount of the interest or of part of it from the entity; or

(ii) to have the entity credit to the foreign resident, or otherwise deal with on the foreign resident's behalf or as the foreign resident directs, the interest or part of it, or the amount of the interest or of part of it.

For limits on the amount to be withheld, see section 12-300.

(2)          The entity must withhold the amount:

(a)          if the foreign resident is so entitled when the entity receives the payment - immediately after the entity receives the payment; or

(b)          if the foreign resident becomes so entitled after the entity receives the payment - immediately after the foreign resident becomes so entitled.

Section 41 of the Taxation Administration Regulations 2017 (TAR) sets out the rate of withholding applying to interest payments. Section 41 provides:

41 Interest payments

The amount to be withheld under section 12-245, 12-250 or 12-255 in Schedule 1 to the Act from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) is an amount equal to 10% of the amount of the interest.

Section 41 of the TAR therefore requires an amount equal to 10% of the amount of the interest be withheld. This rate applies unless a double tax agreement to which subsection 4(2) of the International Tax Agreements Act 1953 stipulates that a different rate of withholding applies.

Accordingly, the Trustee will generally be required to withhold an amount equal to 10% of the amount of interest included in distributions to non-resident beneficiaries that are not under a legal disability.

Question 5

Summary

The Trustee is not required to withhold tax under Division 11A of the ITAA 1936 from the corpus amount paid to beneficiaries that are non-residents for tax purposes.

Detailed Reasoning

The Trustee is not required to withhold tax from the corpus amount paid to beneficiaries that are non-residents for tax purposes and not under a legal disability.

Issue 3 - Trustee liability

Question 6

Summary

The Trustee is assessed and liable to pay tax for the 20XX income year pursuant to subsection 99A(4) of the ITAA 1936 in respect of the share of the net income of the trust estate to which no beneficiaries are presently entitled for that year.

Detailed Reasoning

Division 6 of Part III of the ITAA 1936 sets out the income tax treatment of the net income of a trust estate.

Section 99A of the ITAA 1936 (which is part of Division 6) sets out when a trustee is assessed and liable to be taxed at the special rate. It provides:

99A Certain trust income to be taxed at special rate

...

(4) [Tax liability of trustee for net trust income] Where there is no part of the net income of a resident trust estate:

(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

(c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

...

Subsection 99A(4) of the ITAA 1936 applies to the Trustee as no beneficiary is presently entitled to the net income of the trust estate.

Thus, the Trustee will be assessed and liable to tax for the 20XX income year pursuant to subsection 99A(4) of the ITAA 1936 in respect of the share of the net income of the trust estate to which no beneficiaries are presently entitled for that year.

Question 7

Summary

The Trustee is not assessed and liable to pay tax for the 20XX income year pursuant to subsection 98(3) of the ITAA 1936 in respect of the share of the net income of the trust estate to which beneficiaries that are non-residents for tax purposes and are not under a legal disability are entitled for that year.

Detailed Reasoning

Section 98 of the ITAA 1936 sets out when a trustee is assessed in respect of the share of the net income of the trust estate to which a beneficiary that is a non-resident and not under a legal disability is presently entitled. It provides:

98 Liability of trustee

...

(2A) [Application of subs (3)] If:

(a) a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate:

(i) is a non-resident at the end of the year of income; and

ii) is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate;

(iii) is not a beneficiary to whom section 97A applies in relation to the year of income; and

(iv) is not a beneficiary to whom subsection 97(3) applies; and

(b) the trustee of the trust estate is not assessed and is not liable to pay tax under subsection (1) or (2) in respect of any part of that share of the net income of the trust estate;

subsection (3) applies to the trustee in respect of:

(c) so much of that share of the net income of the trust estate as it attributable to a period when the beneficiary was a resident; and

(d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

(3) [Tax liability of subs (2A) trustee] A trustee to whom this subsection applies in respect of an amount of net income is to be assessed and is liable to pay tax:

(a) if the beneficiary is not a company - in respect of the amount of net income as if it were the income of an individual and were not subject to any deduction; or

...

...

Accordingly, subsections 98(2A) and 98(3) of the ITAA 1936 broadly provide that the Trustee will be assessed and liable to pay tax in respect of the share of the net income of the trust estate to which a non-resident beneficiary that is not under a legal disability is presently entitled. The Trustee is assessed to the extent that the net income is attributable to sources in Australia as if it were the income of an individual and were not subject to any deduction.

This rule is however modified in the case of amounts subject to withholding tax by section 128D of the ITAA 1936:

128D Certain income not assessable

Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga), (jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.

...

Accordingly, amounts that are subject to withholding tax by section 128B of the ITAA 1936 are not assessable income and not exempt income.

The interest income paid to non-resident beneficiaries that are not under a legal disability is subject to withholding tax pursuant to subsection 128B(2) of the ITAA 1936. Accordingly, section 128D of the ITAA 1936 will apply to treat the interest income as non-assessable non-exempt income.

Thus, the Trustee will not be assessed and liable to pay tax under subsection 98(3) of the ITAA 1936 in respect of the share of the net income of the trust estate to which beneficiaries that are not residents of Australia for tax purposes and are not under a legal disability are entitled for the income year ending 30 June 20XX on the basis that the amounts constituting net income of the trust estate (i.e. interest income) are subject to withholding tax under section 128B of the ITAA 1936.

Question 8

Summary

The Trustee is not assessed and liable to pay tax for the 20XX income year pursuant to subsection 98(1) of the ITAA 1936 in respect of the share of the net income of the trust estate to which beneficiaries that are residents for tax purposes are entitled for that year, where those beneficiaries are under a legal disability and are represented by a guardian, power of attorney holder or trustee.

Detailed Reasoning

Subsection 98(1) of the ITAA 1936 sets out when the trustee is assessed in respect of the share of the net income of the trust estate to which a resident beneficiary that is under a legal disability is presently entitled. It provides:

98 Liability of trustee

(1) [Tax liability of trustee or beneficiary under legal disability] Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of:

(a) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(b) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

as if it were the income of an individual and were not subject to any deduction.

...

Accordingly, section 98(1) of the ITAA 1936 applies to assess and tax the Trustee in respect of resident beneficiaries that are under a legal disability.

However, it is understood in most cases that the Trustee will make a guardian, power of attorney holder or trustee presently entitled to a share of the income of the trust estate to which a resident beneficiary under a legal disability is otherwise entitled. This guardian, power of attorney holder or trustee is not likely to be under a legal disability.

Accordingly, the Trustee will not be assessed and liable to pay tax for the 20XX income year pursuant to subsection 98(1) of the ITAA 1936 in respect of the share of the net income of the trust estate to which beneficiaries that are residents of Australia for tax purposes are presently entitled, where those beneficiaries are under a legal disability and are represented by a guardian, power of attorney holder or trustee.

Issue 4 - Calculation of net income

Question 9

Summary

The Trustee is not required to include interest income in respect of the period to xx xx 20XX in the calculation of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year.

Detailed Reasoning

The Trustee is not required to include interest income in respect of the period to xx xx 20XX in the calculation of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year.

Question 10

Summary

The Trustee is required to include interest income in the calculation of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year.

Detailed Reasoning

Subsection 95(1) of the ITAA 1936 sets out the meaning of 'net income' for the purposes of Division 6. It provides:

95 Interpretation

(1) In this Division:

...

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

...

...

Subsection 95(1) of the ITAA 1936 therefore provides that the net income of the trust estate is the total assessable income of the trust estate less certain allowable deductions to be calculated as if the trustee were a resident taxpayer in respect of that income.

Accordingly, if an amount is assessable as ordinary income under section 6-5 of the ITAA 1997, then the amount will form part of the 'net income' for the purposes of Division 6 of the ITAA 1936. Interest income is usually an amount assessable as ordinary income.

The interest income is therefore assessable as ordinary income under section 6-5 of the ITAA 1997, and will form part of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the income year ended 30 June 20XX.

Accordingly, the Trustee is required to include interest income in the calculation of the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year.

Question 11

Summary

For the purposes of calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX income year, a deduction is available under section 8-1 of the ITAA 1997 for legal costs.

Detailed Reasoning

Subsection 95(1) of the ITAA 1936 sets out the meaning of 'net income' for the purposes of Division 6. It provides:

95 Interpretation

(1) In this Division:

...

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

...

...

Subsection 95(1) of the ITAA 1936 therefore provides that the net income of the trust estate is the total assessable income of the trust estate less certain allowable deductions to be calculated as if the trustee were a resident taxpayer in respect of that income.

Accordingly, if an amount may be deducted as a general deduction under section 8-1 of the ITAA 1997, then the amount will be included in the calculation of 'net income' for the purposes of Division 6 of the ITAA 1936.

Section 8-1 of the ITAA 1997 sets out when an amount can be deducted from assessable income as a general deduction. It provides:

8-1 General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

...

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

(3) A loss or outgoing that you can deduct under this section is called a general deduction.

Accordingly, an amount may be deducted from assessable income if it is incurred in gaining or producing assessable income to the extent that the amount is not capital or of a capital nature. Thus, legal expenses may be deductible to the extent they are incurred in gaining or producing assessable income.

Legal costs were incurred to secure the whole of the benefit of an amount that included assessable and non-assessable components. The legal costs may therefore be deductible under section 8-1 of the ITAA 1997 to the extent that they were incurred to secure the assessable components and are not capital or of a capital nature.

Accordingly, for the purposes of calculating the net income of the trust estate under

subsection 95(1) of the ITAA 1936 for the 20XX income year, a deduction is available under section 8-1 of the ITAA 1997 for legal costs to the extent that they were incurred to secure the assessable components and are not capital or of a capital nature.

Question 12

Summary

For the purposes of calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX and 20XX income years, a deduction is available under section 25-5 of the ITAA 1997 for costs incurred by the Trustee in managing the tax affairs of the Trust.

Detailed Reasoning

Subsection 95(1) of the ITAA 1936 sets out the meaning of 'net income' for the purposes of Division 6. It provides:

95 Interpretation

(1) In this Division:

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net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

...

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Subsection 95(1) of the ITAA 1936 therefore provides that the net income of the trust estate is the total assessable income of the trust estate less certain allowable deductions to be calculated as if the trustee were a resident taxpayer in respect of that income.

Accordingly, if an amount may be deducted as a specific deduction under section 25-5 of the ITAA 1997, then the amount will be included in the calculation of 'net income' for the purposes of Division 6 of the ITAA 1936.

Subsection 25-5(1) of the ITAA 1997 allows a deduction for tax-related expenses, including managing tax affairs or complying with an obligation imposed by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity.

However, subsection 25-5(4) of the ITAA 1997 provides that a deduction is not available under subsection 25-5(1) of the ITAA 1997 for capital expenditure. Although, for the purposes of subsection 25-5(1) of the ITAA 1997, expenditure is not capital expenditure merely because the tax affairs concerned relate to matters of a capital nature.

The Trustee has incurred tax-related expenses in its administration of the Trust. These are tax-related expenses for the purpose of subsection 25-5(1) of the ITAA 1997.

Accordingly, for the purposes of calculating the net income of the trust estate under subsection 95(1) of the ITAA 1936 for the 20XX and 20XX income years, a deduction is available under section 25-5 of the ITAA 1997 for costs incurred by the Trustee in managing the tax affairs of the Trust.