Edited version of private advice

Authorisation Number: 1052172334379

Date of advice: 25 September 2023

Ruling

Subject: Commissioner's discretion - section 99A(2)

Question 1

Will the Commissioner exercise the discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the net income of the trust estate to which no beneficiary is presently entitled under section 99 of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

1.    The Late Individual A (the Deceased) died on in the year before this ruling commences.

2.    The Will of the Deceased (the Will) was provided.

3.    Probate was granted in respect of the Wil.

4.    Prospective beneficiaries of the Estate of the Deceased (the Estate) are as outlined in clauses of the Will.

5.    The executor and trustee for the Estate as outlined in clauses of the Will as the Deceased's son (the Trustee).

6.    The Estate's assets after distribution of jewellery, paintings and a sum of money to grandchildren was outlined in the Probate documents.

7.    Trust Income Tax Returns have been lodged by the trustee for the income years ended

8.    30 June 2020, 2021 and 2022.

9.    Trust Income Tax Returns for income years ended 30 June 2020 and 2021 were assessed to the Trustee at individual tax rates with the tax-free threshold (per section 1 of Schedule 10 of the Income Tax Rates Act 1986);

10.  The Trust Tax Return for the income year ended 30 June 2022 was assessed to the Trustee under section 2 of Schedule 10 of the Income Tax Rates Act 1986 (i.e., individual rates with no tax-free threshold) as, by 30 June 2022, the Deceased had not died less than 3 years before the end of the year of income.

11.  We requested further information. In our letter we also asked you to, among other things confirm that:

•                     The assets held by the Trustee consist of:

-              assets vested in him (as Executor of the Will and listed in the Inventory of Property annexed to the Grant of Probate document) under the terms of the Last Will and Testament of the Deceased;

-              cash earned from holding those assets; and

-              cash from the sale of those assets of the Estate.

•                     The assets held by the Trustee do not consist of:

-              investments in any private companies or private trusts;

-              other assets acquired at non-arm's length value; or

-              loans related to related parties

12.  In our recent letter we also asked, and you agreed to, the adding of the following assumptions to your Ruling:

Throughout the Ruling Period:

•                     The assets held by the Trustee will consist of:

-              assets vested in him (as Executor of the Will and listed in the Inventory of Property annexed to the Grant of Probate document) under the terms of the Last Will and Testament of the Deceased;

-              cash earned from holding these assets; and

-              cash from the sale of these assets of the Estate.

•                     The assets held by the Trustee will not consist of:

-              investments in any private companies or private trusts;

-              other assets acquired at non-arm's length value; or

-              loans provided to related parties.

•                     The Trustee will not avoid tax by exercising the powers available to him under the terms of the Last Will and Testament of the Deceased.

13.  The estate will be finalised during the Ruling Period.

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 1936 paragraph 99A(2)(a)

Income Tax Assessment Act 1936 subparagraph 99A(2)(a)(i)

Income Tax Assessment Act 1936 subsection 99A(3)

Income Tax Assessment Act 1936 paragraph 99A(3)(a)

Income Tax Assessment Act 1936 paragraph 99A(3)(b)

Income Tax Assessment Act 1936 paragraph 99A(3)(c)

Income Tax Assessment Act 1936 subsection 99A(3A)

Income Tax Assessment Act 1936 paragraph 102AG(2)(c)

Does IVA apply to this private ruling?

No

Reasons for decision

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 Estate in relation to any income year in the Ruling Period.

Therefore, the Commissioner will exercise the discretion, under subsection 99A(2) of the ITAA 1936 to allow section 99 to apply where the trustee of the Estate is liable to pay tax on income to which no beneficiary is presently entitled during the Ruling Period.

Detailed reasoning

The relevant legislation

Under subsection 99A(2) of the ITAA 1936, section 99A will not apply to the net income of a resident trust estate retained by certain trust estates where the '... Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income...'.

Instead section 99 of the ITAA 1936 will apply to that net income such that the net income of the trust will be taxed at the progressive rates applicable to certain individuals rather than at the flat top marginal tax rate (although, the availability of the tax-free threshold is only available to trustees of trusts where the relevant person died less than 3 years before the end of the relevant year of income).

In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936.

The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a)).

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matter subsections 99A(3) and (3A). These provide:

99A(3) In forming an opinion for the purposes of subsection (2):

(a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;

(b) if a person who has, at any time, directly or indirectly:

(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised;

has not, at any time, directly or indirectly:

(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c) the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.

99A(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Purpose of section 99A of the ITAA 1936

Section 99A of the ITAA 1936 was introduced by the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964[1]. In its original form, it did not apply to deceased estates.

When section 99A of the ITAA 1936 was amended in 1979 to apply to deceased estates, the EM to the Income Tax Assessment Amendment Bill (No. 6) 1979 stated (in relation to the exercise of the discretion in subsection 99A(2)):

The criteria that the Commissioner is to use in considering whether it would be unreasonable that section 99A of the ITAA 1936 should apply in these cases will remain essentially the same as at present (sub-section 99A(3)). This will enable the result that, unless there are tax avoidance connotations, accumulating income in these cases will continue to be taxed under section 99, on the same basis as at present. (Because there had been tax avoidance exploitation of an earlier exclusion of deceased estates from the ambit of section 99A, those estates were, by section 6 of the Income Tax Assessment Amendment Act (No. 2) 1977, in that year brought within its scope.) [Note to Clause 13] [Emphasis added]

In the High Court case of Giris Pty. Ltd. V. Federal Commissioner Of Taxation[2] (Giris) Windeyer J described the purpose of section 99A of the ITAA 1936 as:

That purpose I take it is to enable the Commissioner to keep s. 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. [at 384]

This view was confirmed by Stephen J in the High Court case of Perron (as trustee for the L.M. Brennan Trust) v. Federal Commissioner of Taxation:[3]

The views of Windeyer J. in the Giris case regarding the legislative purpose given effect to by sec. 99A(2) have already been quoted in the Commissioner's letter. I would, with respect, adopt those views of that legislative purpose. [at 4171]

Therefore, it is reasonable to conclude that the purpose of section 99A of the ITAA 1936 is to prevent the use of trusts to avoid tax.

That is, the language of the text contained in section 99A of the ITAA 1936, and case law, confirms that the type of tax avoidance at which section 99A is directed is broader than that facilitated by the use of multiple trusts.

In Giris, the High court commented that:

•                     ... the discretion is wide and though being really legislative in nature, what is relevant to its formation may range over an extremely wide spectrum of fact and consideration ... [per Barwick J., at 374]

•                     'Here the Commissioner's discretion is apparently at large... I assume that [the Commissioner] is to be guided and controlled by the policy and purpose of the enactment, so far as that is manifest in it. ... ' [Per Windeyer J., at 384]

ATO Guidance

Public Information Bulleting PIB No. 4: Income of a trust estate to which no beneficiary is presently entitled was published by the ATO in April 1965.

Although PIB No. 4 is considered to be relevant when considering the way in which the Commissioner considers the exercise of the discretion in subsection 99A(2) of the ITAA 1936 its relevance is diminished due to events subsequent to its issue such as:

•                     Legislative amendments to section 99A; and

•                     Court and Board of Review decisions on s 99A(2).

For instance, the Commissioner is required to consider the matters in subsections 99(3) and 99(3A) of the ITAA 1936 in forming his opinion for the purposes of the discretion in subsection 99A(2). It is noted that subsection 99(3A) was inserted into the ITAA 1936 in 1980.

Factors to be considered for the purposes of the discretion in subsection 99A(2) of the ITAA 1936

In Case A50[4] G. R. Thompson (Member) proposed a number of factors that should be considered for the purposes of the discretion in subsection 99A(2) of the ITAA 1936: [at 302]

1. Protection of the revenue - This first proposition needs no lengthy exposition. It accords with my understanding of a clear policy of the Income Tax Assessment Act, and indeed of all taxing statutes. In the Income Tax Assessment Act, it finds its highest point in sec. 260.

2. The interests of taxpayers generally - This principle is, I think, complementary to the first principle, for it is trite to say that each successful tax avoiding scheme results in a proportionate increase in the tax burden to be borne by all other taxpayers. In taking into account this principle, it would, I think, be relevant to consider whether the type of arrangement under consideration in any particular case is wide-spread or increasing in its incidence. The discretion could then be exercised to discourage practices which are causing the tax burden to fall unevenly on taxpayers within a particular class.

3. Protection of legitimate and reasonable family and business arrangements - The right of an individual to deal with his own property and to arrange the affairs of his family and his business in any way that he sees fit, subject only to the restrictions imposed by statute or common law, is, I think, well entrenched in the sociological, political and legal structure of the Australian community. It seems to me that it would be inappropriate to use a discretion under a taxing statute to discourage the exercise of that right except in cases where such an exercise is to the detriment of the community at large.

4. Arrangements for the good of the public generally - One can readily envisage arrangements which fall for consideration under sec. 99A being of such a kind that, if such arrangements were discouraged, the springs of charity might tend to dry up. An example of such an arrangement would be a voluntary trust established inter vivos for the maintenance or education either of an infant or of a person of full age who is, say, mentally defective to the extent that he is under legal disability. The purpose and effect of such a trust could be to prevent the beneficiary from becoming a charge on the State. I would regard it as inappropriate, in the absence of any countervailing consideration, to use the discretion under sec. 99A to discourage such a charitable exercise.

5. Trusts arising out of the exercise of a public duty - Under this head I would include the administration of trusts such as those imposed upon trustees in bankruptcy by the Bankruptcy Act or those imposed upon officers of the court by order of the various courts. Under the broad terms of sec. 99A these fall for consideration and it seems to me that, to the extent to which the discretion under sec. 99A would be exercised to the detriment of such trusts, the purposes of the statute or the order under which the trusts come into being would be frustrated.

In considering these matters in Case A50 Thompson stated that [at 302 and 303]:

15. On the foregoing broad bases, it seems to me to be possible to distinguish in particular cases those in which it would be proper to invoke the deterrent effect that can arise by the exercise of the discretion one way or the other... The process of forming the opinion that one is obliged to form will involve the difficult, but perhaps not impossible, task of weighing the merits of each case to decide whether they fall on the side of those practices that ought to be discouraged because of the preponderance of undesirable elements or on the side of those which ought not to be discouraged because they produce a desirable social result.

16. A wide survey and close scrutiny of all the surrounding circumstances, including, but not by any means limited to, an examination of the terms of any relevant instrument, the manner in which those terms have been or are capable of being implemented, the circumstances under which the trust is called into being, the overall effect achieved or sought to be achieved upon the tax affairs of all parties directly or indirectly affected by the trust and the manner in which the arrangement is administered, would be called for. This enquiry should, I think, furnish the mind in such a way that the scale will fall either on the side of practices which ought to be discouraged or on the side of those which ought not to be the subject of any deterrent. [Emphasis added]

The factors proposed by Thompson in Case A50 seem to be derived from the Judgement of Barwick CJ in Giris (at 4017) when he commented that:

... [the Commissioner] is able to make the choice in exercise of what, for want of a more precise expression I shall call a legislative discretion: he can apply one section rather than the other if he thinks it unreasonable to apply the latter of them. I have been unable to find any content for the word ''unreasonable'' in the context of the two sections except considerations of a kind upon which a legislature acts in deciding whether an enactment or its particular terms are or are not unreasonable having regard to the interests of the public generally, of the citizen to be affected, of the Revenue and of the requirements of those policies, political, economic and fiscal which the Parliament is prepared to sanction... [Emphasis added]

In Case A50 Davies (in commenting on Windeyer J's comments at 4017 in Giris) stated that:

What their Honours had in mind, I think, was this. Trusts are a proper means of achieving legitimate social, family and business objectives, objectives of a non-fiscal nature. They are also a means of achieving fiscal objectives, a means of avoiding or lessening the burden of tax. ... In cases where trusts are used as instruments to achieve both fiscal and non-fiscal ends - and competent draftsmen properly keep taxation laws in mind when preparing documents which affect a client's property and income - a decision must be reached, on the facts of each particular case as to which should prevail on the balance, the interests of the Revenue or the legitimate interests of the beneficiaries under the trust. [At 297]

In Case B66[5], J. D. Davies (Member) (at 320 and 321) also relevantly commented that:

Section 99A of the Act is not, in my opinion, a section designed to bring down specific practices - multiple trusts, the conversion of income receipts into capital repayments and the like - but, on the contrary, is a section which prescribes a general rule applicable unless the Commissioner, or a Board on a review, is of the opinion that, in the particular case, it is unreasonable for it to be so. The cases where, in my view, it is unreasonable for the section to apply are those where the application of the section inhibits the achievement of what are primarily non-fiscal, social, family or business ends. This is not such a case. [Emphasis added]

It is considered that the matters enunciated by Thompson in Case 50 satisfy the requirements of Giris and provide an appropriate framework containing the relevant matters to be considered by the Commissioner in relation to the discretion in subsection 99A(2) of the ITAA 1936.

Application of the legislation to the facts

The Estate was created under the terms of the Will of the Deceased and is considered to be a 'trust estate ... that resulted from a will' for the purposes of subparagraph 99A(2)(a)(i) of the ITAA 1936.

The Trustee has had, and will have, retained net income in respect of the income years throughout the Ruling Period. This net income will fall to be assessed to the Trustee under section 99A of the ITAA 1936 unless, in respect of each year, '... the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.' (subsection 99A(2))

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matters in subsection 99A(3) and 99A(3A).

Consideration of paragraphs 99A(3)(a) and (b) of the ITAA 1936

You have advised that:

•                     The assets held by the Trustee consist of:

-              assets vested in him (as Executor of the Will and listed in the Inventory of Property annexed to the Grant of Probate document) under the terms of the Last Will and Testament of the Deceased;

-              cash earned from holding those assets; and

-              cash from the sale of those assets of the Estate.

•                     The assets held by the Trustee do not consist of:

-              investments in any private companies or private trusts;

-              other assets acquired at non-arm's length value; or

-              loans related to related parties

Consideration of paragraph 99A(3)(c) of the ITAA 1936

In the current circumstances the 'other matters' that are considered to be relevant for the purposes of forming an opinion for the purposes of subsection 99A(2) are encapsulated by the matters enunciated by Member Thompson in Case A50.

Broadly, these matters involve the Commissioner having regard to the objects of the section in protecting, on the one hand, the revenue against tax avoiding devices and the interests of taxpayers generally in the equal distribution of the tax burden and, on the other hand, the right of the subject to make legitimate and reasonable family and business arrangements.

Each of these matters will be considered in turn:

1.            The Revenue should be protected against tax avoiding devices:

The Trustee has not, and will not, use his powers under the Will to avoid tax.

2.            The interests of taxpayers generally should be protected:

In considering the exercise of the discretion in subsection 99A(2) the Commissioner will consider whether the type of arrangement under consideration may cause the tax burden to fall unevenly on taxpayers. The discretion is to be exercised in way that will discourage arrangements that would otherwise result in tax avoidance.

In this case, the Trustee is the executor of a deceased estate, and has exercised his powers under the Will in a conventional manner (and not as a tax-avoidance device).

3.            The right of the subject to make legitimate and reasonable arrangements relating to family and business matters should be protected:

The Estate is a deceased estate wherein the assets of the deceased are being administered in a conventional manner.

4.            Arrangements which are for the good of the public generally should not be discouraged:

The Estate is not a trust of the type that is relevant to this matter.

5.            Trusts which arise out of the exercise of a public duty should not be penalised:

The Estate is not a trust of the type that is relevant to this matter.

Surrounding circumstances to also be considered

In Case A50 Thompson suggested that [at 302 and 303], in the process of forming an opinion for the purposes of subsection 99A(2) the Commissioner should undertake, '[a] wide survey and close scrutiny of all the surrounding circumstances, including, but not by any means limited to' [emphasis added]:

•                     an examination of the terms of any relevant instrument;

•                     the manner in which those terms have been or are capable of being implemented;

•                     the circumstances under which the trust is called into being;

•                     the overall effect achieved or sought to be achieved upon the tax affairs of all parties directly or indirectly affected by the trust; and

•                     and the manner in which the arrangement is administered.

In relation to these 'surrounding circumstances' it is noted that:

•                     The Estate is a deceased estate that resulted from the Will of the Deceased.

•                     The Estate is still in the 'period of administration' (per Taxation Ruling IT 2622) such that no beneficiary has been made presently entitled to the income of the Estate.

Conclusion as to whether it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of the income years ended 30 June 2020 to 2024

The matters that are considered to be particularly relevant to forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 are:

•                     The Estate resulted from a will and satisfies the requirement of paragraph 99A(2)(a).

•                     In each of the income years ending 30 June 2020 to 2022:

-        The Trustee has retained an amount of trust income.

-        The Estate has been in its 'period of administration' (per Taxation Ruling IT 2622).

-        Tax has not been avoided by the exercise of the powers available to the Trustee under the Will.

-        The Estate has been administered in a conventional manner by the Trustee and not as a tax avoidance device.

-        The Trustee has not entered into arrangements beyond the purpose for which section 99 was retained in the ITAA 1936 of a type that the Commissioner will seek to discourage.

•                     Assumptions have been included for the purpose of this private ruling that, throughout the Ruling Period:

-        The assets held by the Trustee will consist of:

o        assets vested in him (as Executor of the Will and listed in the Inventory of Property annexed to the Grant of Probate document) under the terms of the Last Will and Testament of Vera Woodgate;

o        cash earned from holding these assets; and

o        cash from the sale of these assets of the Estate.

-        The assets held by the Trustee will not consist of:

o        investments in any private companies or private trusts;

o        other assets acquired at non-arm's length value; or

o        loans provided to related parties.

-        The Trustee will not avoid tax by exercising the powers available to him under the terms of the Last Will and Testament of Vera Woodgate.

Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A to apply to the Trust in respect of each of the income years throughout the Ruling Period.

[1] Act No. 110 of 1964

[2] (1969) 119 CLR 365

[3] 72 ATC 4169; (1972) 128 CLR 595

[4] 69 ATC 288

[5] 70 ATC 319