Edited version of private advice

Authorisation Number: 1052219521201

Date of advice: 7 February 2024

Ruling

Subject: Derivation of income

Question

Are you assessable on the interest derived on your share of funds invested by XX in term deposits, in a bare trust arrangement, on your behalf?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20YY.

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You have a Memorandum of Understanding of Trustee for the Trust signed by XX (as Trustee of the Trust) and you (as Beneficiary of the Trust) that states XX has invested funds from a trust distribution to you on your behalf in a term deposit and that XX has no interest your portion of the funds held in the term deposit, other than as trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5(1)

Income Tax Assessment Act 1997 section 6-5(2)

Income Tax Assessment Act 1997 section 6-5(4)

Reasons for decision

Question 1

Are you assessable on the interest derived on your share of funds invested by XX in term deposits, in a bare trust arrangement, on your behalf?

Summary

You are assessable on the interest derived on your share of funds invested by XX in term deposits, in a bare trust arrangement, on your behalf.

Detailed reasoning

Subsection 6-5(1)of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts (called ordinary income).

Subsection 6-5(2) of the ITAA 1997 states that as an Australian resident, your assessable income includes ordinary income you derive either directly or indirectly, from all sources whether in or out of Australia, during the income year.

Subsection 6-5(4) of the ITAA 1997 states that when working out whether you have derived an amount of ordinary income, and when it was derived, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

You have a Memorandum of Understanding signed by both you and XX, stating that XX held and continued to hold and invest your share of the funds from the Trust distribution on your behalf and for your benefit, at all times during the financial year and that XX has no interest in your portion of the funds held in the term deposit, that they invested on your behalf, other than as trustee.

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 at paragraph 35 states:

35. It is said that a bare trust is one where the trustee has no active duties to perform.

In Herdegen v. Federal Commissioner of Taxation (1988) 20 ATR 24; 88 ATC 4995, Gummow J said at ATR 32; ATC 5003:

Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party. The beneficiary may of course hold the equitable interest upon a sub-trust for others or himself and others: see Halsbury's Laws of England, 4th ed., Vol. 48, 'Trusts', para. 938. The term is usually used in relation to trusts created by express declaration. But it has been said that the assignor under an agreement for value for assignment of so-called 'future'' property becomes, on acquisition of the title to the property, trustee of that property for the assignee (Palette Shoes Pty Ltd v. Krohn (1937) 58 CLR 1 at p. 27) and this trust would answer the description of a bare trust. Also, the term 'bare trust' may be used fairly to describe the position occupied by a person holding the title to property under a resulting trust flowing from the provision by the beneficiary of the purchase money for the property.

In GST RulingGSTR 2008/3 Goods and services tax: dealings in real property by bare trusts paragraph 337 states:

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties.

In your situation, XX's duties as trustee involved depositing the funds on your behalf, in term deposits in a banking institution. XX did not need to perform any other duties or actively manage the funds in any other way.

Therefore, we accept that a bare trust arrangement was in place, and that XX dealt with your share of the funds on your behalf. The interest amounts earned on your share of the funds XX invested in the term deposits on your behalf are assessable to you in the financial year.