Edited version of private advice

Authorisation Number: 1051942015539

Date of advice: 20 January 2022

Ruling

Subject: Commissioner's discretion - trust estate

Question

Will the Commissioner exercise his discretion not to apply the provisions of section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and assess the trust estate under section 99 of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period: XXXX

Relevant facts and circumstances

Individual A passed away on XXXX.

Probate, with respect to Individual A's estate (the Estate), was granted on XXXX.

At the time of the death:

Individual A owned a 50% interest in the following land:

• Lot A; and
• Lot B

The trustee of Trust A owned 100% of the interest in the following land:

• Lot C

(collectively, the 'Lots')

Individual A acquired their original interest in the Lots A and B prior to 20 September 1985.

Individual A's Will required that the executors of the Estate dispose of the Estate's interest in Lots A and B.

To satisfy the requirements within Individual A's Will, the Executors disposed of the Estate's interest in Lots A and B.

The executors and the trustee of Trust A sought to dispose of the land (the Lots) in one parcel to maximise the sale value.

The executors of the Estate and trustee of Trust A entered into a Put and Call Agreement for the sale of the Lots on XXXX with an unrelated party.

Under the terms of the agreement, the purchaser was granted options to purchase the Lots over a period of 5 years from the date of the agreement. The Lots were divided into 4 separate parcels, and contracts of sale were entered into (through the exercise of the options) on the following dates:

•         XXXX;

•         XXXX;

•         XXXX; and

•         XXXX.

The executors of the Estates obtained a valuation of Lots A and B at the deceased's date of death to establish a cost base pursuant to section 128-15(4) of the Income Tax Assessment 1997.

The interest in these properties (i.e. Lots A and B) were sold by the executors of the Estate for an amount exceeding the cost base of the asset and the Estate has derived a capital gain.

The administration of the Estate has been affected by family conflict. The time taken to sell the land owned by the deceased and their spouse is the predominant reason for the delay in finalising the Estate.

Under the terms of the Will, the deceased's grandchildren were each bequeathed an amount upon attaining the age of X years.

The Estate cannot be finalised until the youngest grandchild attains the age of X - the youngest grandchild will reach that age on XXXX.

The residual balance of the Estate is to be distributed to a charitable trust (private ancillary fund) to be established and administered by the trustee of Trust A. The process of setting up the charitable trust is currently underway.

Having regard to when the youngest grandchild attains the age of X, it is anticipated that the Estate will be fully administered in the income year ending 30 June XXXX.

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)

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 ITAA 1936 should apply in relation to the trust estate in relation to the relevant years of income. 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 of the ITAA 1936 applies in relation to all trusts unless:

• the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii);or
• the trust is bankrupt estate; paragraphs 99A(2)(b) and (c); or
• 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.

Relevantly, subsection 99A(2) of the ITAA 1936 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 a trust estate 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 of the ITAA 1936 is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936.

In forming an opinion pursuant to section 99A(2) of the ITAA 1936 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, including:

• 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 relate to 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 is a deceased estate satisfying the eligibility for the Commissioner's discretion. The assets come directly from the assets of the deceased (the income of the Estate is only derived from assets held or deemed to belong to the Estate as at the date of death of the deceased) and there is a definable relationship ordinarily of blood or marriage between the deceased person and the beneficiaries. 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, in these circumstances, to allow section 99 of the ITAA 1936 to apply.