Edited version of private advice

Authorisation Number: 1052154685919

Date of advice: 5 December 2023

Ruling

Subject: Family trust distribution tax and death of the specified individual

Question 1

Will the repayment of the Loans be distributions of income or capital to the deceased estate of X for the purposes of sections 272-45 or section 272-60 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will the payment of the Unpaid Present Entitlements (UPEs) be distributions of income or capital to the company for the purposes of section 272-45 or section 272-60 of Schedule 2F to the ITAA 1936?

Answer

Yes.

Question 3

Will the repayment of the Loans trigger a liability for Family Trust Distribution Tax (FTDT) under section 271-15 of Schedule 2F of the ITAA 1936 for the trust?

Answer

No.

Question 4

Will the payment of the UPEs trigger a liability for FTDT under section 271-15 of Schedule 2F of the ITAA 1936 for the trust?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2023

Income year ended 30 June 2024

Income year ended 30 June 2025

The scheme commenced on:

1 July 2004

Relevant facts and circumstances

The taxpayer is a trust which made a family trust election nominating X as the specified individual. X died and their estate is being administered by their executors.

Unpaid present entitlements (UPEs)

The company was 100% owned by X immediately before their death and was a member of the family group of the trust under subsection 272-90(5) of the ITAA 1997.

X's shares in the Company provided them with rights to all of the income and capital of the company.

The executors of X's estate now hold the shares as part of the administration of the estate.

The company was made presently entitled to income as declared by the trust. Some of these are unpaid. In respect of the unpaid present entitlements (UPEs):

•         the company was made presently entitled to income of the trust as a beneficiary of the trust in the relevant years and, accordingly, income of the trust was credited to the Company.

•         the company reported the amounts as their income in the relevant years and was taxed on those amounts as income.

The trust proposes to pay the total outstanding UPE balance to the company in full.

Loans

X made payments to the trust at various times as loans to the trust (Loans).

The Loans were made to fund the working capital of the trust.

X's estate and proposals

X's executors are in the process of administering their estate.

To help facilitate the administration of X's estate, the trust proposes:

•         to pay the UPEs to the Company; and

•         to pay the balance of loans to the executors of X's estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F Section 271-5

Income Tax Assessment Act 1936 Schedule 2F Section 271-15

Income Tax Assessment Act 1936 Schedule 2F Section 272-45

Income Tax Assessment Act 1936 Schedule 2F Section 272-60

Reasons for decision

Question 1

Will the repayment of the Loans be distributions of income or capital to the deceased estate of X for the purposes of sections 272-45 or section 272-60 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

No.

Detailed reasoning

Section 272-45

Section 272-45 of Schedule 2F to the ITAA 1936 specifies the situations when a trust will be considered to make a distribution of income or capital to a beneficiary. It provides as follows:

'..A trust distributes income or capital of the trust to a person if it:

(a) pays or credits the income or capital in the form of money to the person; or

(b) transfers the income or capital in the form of property to the person; or

(c) reinvests or otherwise deals with the income or capital on behalf of the person or in accordance with the directions of the person; or

(d) applies the income or capital for the benefit of the person;

in the person's capacity as a beneficiary of the trust..'

In this case, X had made genuine loans to the trust for their working capital requirements.

The loan repayments are not to made to X (or their estate) in their 'capacity as beneficiary of the trust'. They are, instead, made pursuant to the debtor and creditor relationship between X and the trust that arises as a result of the loan; and are, specifically, in the nature of repayments by debtor to creditor. Consequently, the loan repayments will fall outside the scope of section 272-45.

Section 272-60

Section 272-60 of Schedule 2F to the ITAA 1936 specifies other situations when a trust will be considered to make a distribution (outside of circumstances covered by section 272-45, 272-50 or 272-55). These situations include those in which a trust distributes income or capital of the trust to a person who is not a beneficiary of the trust: see the ATO view in Taxation Determination TD 2017/20 Income tax: is a person who is not a beneficiary of a trust capable of having a distribution made to them for the purposes of section 272-60 of Schedule 2F of the Income Tax Assessment Act 1936? (TD 2017/20)

Section 272-60 provides:

Section 272-60 Other Distributions of income and capital

272-60(1)

A company, partnership, or trust (an entity) also distributes income or capital to a person in circumstances not covered by section 272-45, 272-50 or 272-55 if it:

(a) pays (including by way of a loan) or credits money of the entity to the person, or reinvests such money for the person; or

(b) transfers property of the entity to, or allows use of property of the entity by, the person; or

(c)deals with money or property of the entity for or on behalf of the person or as the person directs; or

(d) applies money or property of the entity for the benefit of the person; or

(e) extinguishes, forgives, releases, or waives a debt or other liability owed by the person to the entity.

Limits on distributions

272-60(2)

However, subsection (1) only applies if, and to the extent that:

(a) the amount paid, credited, reinvested, or applied, the value of the property transferred, or the value of the other thing done.

exceeds:

(b) the amount or value of any consideration given in return.

Character of distributions

272-60(3)

Each thing that is a distribution because of subsection (1) is a distribution of income unless it is clear that the money or property concerned was capital, or that the debt or liability was attributable to capital, of the entity.

In this case, when the trustee repays the loan to the deceased estate of X, the trustee will pay money to a person for the purposes of paragraph 272-60(1)(a).

However, there is a limit imposed on the distributions by subsection 272-60(2). Subsection 272-60(1) only applies to the extent that the amount paid exceeds the amount of any consideration given in return.

TD 2017/20 provides as follows:

Consideration given in return for distribution

18. The interpretation in this Determination is further supported by subsection 272-60(2), which provides that an amount is only a distribution within the extended meaning of 'distributes' to the extent that it exceeds the amount or value of any consideration given in return for the benefit described. The existence of this provision confirms that the extended definition in subsection 272-60(1) is capable of applying to transactions which would not be 'distributions' in the ordinary sense.

19. In the context of the trust loss measures, and having regard to the language used in the legislation, it is considered that this limitation on the extended definition is designed to ensure that genuine commercial dealings do not inappropriately give rise to a liability to pay FTDT.

Consideration for a distribution made as an ordinary incident of business on arm's length terms

20. The amount or value of consideration given for a distribution transaction is a question of fact. However, in practice the Commissioner will infer that the amount or value of a benefit provided to a person does not exceed the amount or value of consideration given in return where the relevant transaction:

•         occurs on arm's length terms, and

•         is an ordinary incident of a business being carried on by the trust.

As per paragraph 20 of TD 2017/20, the amount or value of consideration given for a distribution transaction is a question of fact.

In this case, X made a genuine loan of moneys (on on-call terms and at nil interest rate) to the trust for genuine commercial purposes - that is, to satisfy the trust's working capital requirements.

It is proposed that the trust make a repayment of the outstanding balance of the Loans to the deceased estate of X to extinguish the outstanding loan. Under section 272-60 of Schedule 2F ITAA 1936, the payment is only a distribution within the extended meaning of 'distributes' to the extent that it exceeds the amount or value of any consideration given in return for the benefit described. The 'consideration' in this case is the balance of the loan.

The repayment of the loan balance will not be distributions of income or capital to the deceased estate of X for the purposes of section 272-60 of Schedule 2F to the ITAA 1936 because the amount repayable will not exceed the relevant 'consideration' given by X, being the balance of the loan.

Question 2

Will the payment of the Unpaid Present Entitlements (UPEs) be distributions of income or capital to the company for the purposes of section 272-45 or section 272-60 of Schedule 2F to the ITAA 1936?

Summary

Yes.

Detailed reasoning

Section 272-45

The company was 100% owned by X and was a beneficiary of the trust.

The company had previously received income distributions from the trust which were unpaid.

The proposed payment of UPEs by the trust to the company will be a distribution under section 272-45. Although such amounts were amounts to which the company was made presently entitled, a 'distribution' will technically be made when the amount is paid to the company. This is because the payment will fall within the scope of paragraph 272-45(a) as a payment made by a trust to the company in its capacity as beneficiary of the trust,

Question3

Will the repayment of the Loans trigger a liability for Family Trust Distribution Tax (FTDT) under section 271-15 of Schedule 2F of the ITAA 1936 for the trust?

Summary

No

Detailed reasoning

Section 271-15 provides as follows:

271-15(1)

This section applies if:

(a) a trustee makes a family trust election in relation to a trust and

(b) at any time while the election is in force (including a time before it was made), the trust confers a present entitlement to, or distributes, income or capital of the trust:

(i) upon or to a person who is neither the individual specified in the family trust election nor a member of the individual's family group in relation to the conferral or distribution or

(ii) upon or to the individual specified in the election or a member of the individual's family group, where the individual or member is the trustee of a trust or the member is a trust, that is not included in the individual's family group in relation to the conferral or distribution.

271-15(2)

If this section applies:

(a) if the trustee is an individual - the trustee is liable to pay tax, as imposed by the Family Trust Distribution Tax (Primary Liability) Act 1998, on the amount or value of the income or capital to which the entitlement relates, or that is distributed; or

(b) if the trustee is a company - the trustee, together with each person who was a director of the company at the time of the conferral or distribution, is jointly and severally liable to pay tax, as imposed by the Family Trust Distribution Tax (Primary Liability) Act 1998, on the amount or value of the income or capital to which the entitlement relates, or that is distributed.

As determined in question 1, payment of the Loans will not be distributions of income or capital to the deceased estate of X for the purposes of section 272-45 or section 272-60 of Schedule 2F to the ITAA 1936. Further, being loan repayments, they are not in the nature of a conferral of a present entitlement. Consequently, the payment of the Loans will not trigger a liability for Family Trust Distribution Tax (FTDT) under section 271-15.

Question 4

Will the payment of the UPEs trigger a liability for FTDT under section 271-15 of Schedule 2F of the ITAA 1936 for the trust?

Summary

No

Detailed reasoning

Section 271-15 provides as follows:

271-15(1)

This section applies if:

(a) a trustee makes a family trust election in relation to a trust and

(b) at any time while the election is in force (including a time before it was made), the trust confers a present entitlement to, or distributes, income or capital of the trust:

(i) upon or to a person who is neither the individual specified in the family trust election nor a member of the individual's family group in relation to the conferral or distribution or

(ii) upon or to the individual specified in the election or a member of the individual's family group, where the individual or member is the trustee of a trust or the member is a trust, that is not included in the individual's family group in relation to the conferral or distribution.

271-15(2)

If this section applies:

(a) if the trustee is an individual - the trustee is liable to pay tax, as imposed by the Family Trust Distribution Tax (Primary Liability) Act 1998, on the amount or value of the income or capital to which the entitlement relates, or that is distributed; or

(b) if the trustee is a company - the trustee, together with each person who was a director of the company at the time of the conferral or distribution, is jointly and severally liable to pay tax, as imposed by the Family Trust Distribution Tax (Primary Liability) Act 1998, on the amount or value of the income or capital to which the entitlement relates, or that is distributed.

A 'person' includes a company: section 995-1 of the ITAA 1997.

Prior to their death, X had a 100% ownership of the shares in the company, which provided them with rights to all its income and capital. After their death, section 272-40 applies to deem X as continuing to have that entitlement as long as it is held by the executors of their estate:

272-40 CONTINUED HOLDING OF FIXED ENTITLEMENT WHERE DEATH OCCURS

If, immediately before an individual dies, he or she has a fixed entitlement to a share of the income or capital of a trust, partnership or company directly or indirectly, and for his or their own benefit, the individual is taken to continue to have the entitlement for so long as:

(a) it is held by someone as trustee of the individual ' s estate; or

(b) it is held by someone who received it as a beneficiary of the estate.

As the executors of X's estate now hold the shares as part of the administration of their estate, X is taken by virtue of section 272-40 to continue to have fixed entitlements to all the income and capital of the company for the purposes of subsection 272-90(5); the consequence of which the company continues to be a member of their family group.

Therefore, while the proposed payment of UPEs by the trust to the company will be a 'distribution' under section 272-45, it will not attract FTDT under section 271-15 as the distribution will be considered to be made within the family group.