Edited version of private advice

Authorisation Number: 1052234358344

Date of advice:

Ruling

Subject: Deceased sstate

Question 1

Is the amount received by the Trust from the legacy of the Will assessable income of the Trustee for the purposes of the definition of net income in section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will a cash distribution made by the Trustee to the beneficiaries from the corpus of the Trust be free of any income tax under section 99B of the ITAA 1936?

Answer

Yes

Question 3

Will a CGT event happen under section 104-25 (CGT event C2), section 104-75 (CGT event E5), section 104-85 (CGT event E7) of the Income Tax Assessment Act 1997 (ITAA 1997) when the proposed cash distribution is made by the Trustee to the beneficiaries from the corpus of the Trust?

Answer

No

This ruling applies for the following periods:

1 July 202x to 30 June 202x

The scheme commenced on:

1 July 202x

Relevant facts and circumstances

The deceased passed away leaving a Will.

The deceased was an Australian resident for tax purposes.

The deceased's wife passed away some time the deceased. The deceased's wife was an Australian resident for tax purposes.

The Trust is a discretionary trust, which was established with a Trust Deed as a discretionary trust, with a corporate Trustee.

The Trust, and two individual beneficiaries (the Individuals) of the Will and Trust are Australian residents.

The Trust Deed provides that the beneficiaries of the Trust shall comprise of persons which include the Individuals.

The Trust Deed of the Trust provides that the Trustee shall pay, apply or set aside the income of the Trust to the beneficiaries or any one of them, or accumulate the whole or any part of the income.

With regard to the capital of the fund the provision regarding distribution prior to termination of the Trust is similar to the "income" provisions, that is, the Trustee has sole discretion for the application of any capital.

The only assets of the Trust are cash amounts held in term deposits and bank investments.

The Trustee is considering making cash distributions from the corpus of the Trust with a view possibly bringing the Trust to an early end and letting each beneficiary go their own way.

To date no corpus distributions have been made to the Individuals or anyone else.

The directors of the Trustee discussed with the beneficiaries the asset position of the Trust, and they are aware that the Trust does not currently operate a business and is not likely to commence any business operation. It is desirous of making cash distribution to the beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 98B

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 128-10

Summary

The amount received by the by the Trustee from the legacy in the Will is not assessable income to the Trust for the purposes of the definition of net income in section 95 of the ITAA 1936.

Reasons for decision

Net income is defined in section 95 of the ITAA 1936 as:

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.

Under subsection 6-5(1) of the ITAA 1997, assessable income includes income according to ordinary concepts, otherwise known as 'ordinary income'.

Subsection 6-5(2) of the ITAA 1997 provides that an Australian resident's assessable income includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

There is no single test to determine whether an amount is 'income according to ordinary concepts', however there are three principal categories in which income is considered to be 'ordinary income':

•         income from rendering personal services, including employment income

•         income from property, such as rent, interest and dividends, and

•         income from carrying on a business.

The following factors have been developed by the Courts to help determine whether a receipt has the characteristics of income:

•         the receipt is earned

•         the receipt is expected

•         the receipt is relied upon

•         the receipt has an element of periodicity, recurrence or regularity

•         the receipt is for the replacement of income.

Section 6-10 of the ITAA 1997 includes statutory income in assessable income; statutory income includes other amounts that are not ordinary income and are included by provisions about assessable income. For example, a net capital gain is statutory income.

Subsection 102-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes any net capital gains made during the income year.

Section 102-20 of the ITAA 1997 provides that a taxpayer may make a capital gain or loss when a CGT event occurs to a CGT asset. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as being any kind of property or a legal or equitable right that is not property.

Cancellation, surrender and similar endings: CGT event C2

Section 104-25 provides that CGT event C2 occurs when an intangible asset ceases to be owned as a result of:

a.    being redeemed or cancelled

b.    being released, discharged or satisfied

c.     expiring

d.    being abandoned, surrendered or forfeited

e.    if the asset is an option, being exercised, or

f.      if the asset is a convertible interest, being converted.

When a person dies any capital gain or loss from a CGT event (such as CGT event C2) that results for a CGT asset they owned just before dying is disregarded under section 128-10 of the ITAA 1997.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that are included in assessable income but are not ordinary income, including certain payments by trusts.

Based on the facts in this case, the legacy of the Will that were transferred by the Executor to the Trust under the terms of the Will, does not have the character of ordinary or statutory income for the Trust, therefore the amount will not be included in the assessable income of the Trust under section 6-5, section 6-10 or section 10-5 of the ITAA 1997.

Question 2

Summary

A cash distribution made by the Trustee to the beneficiaries from the corpus of the Trust will be excluded from income tax under section 99B of the ITAA 1936.

Detailed reasoning

Section 99B of the ITAA 1936 deals with the receipt of trust income that has not previously been subject to tax in Australia.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

However, subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:

a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income);

b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income;

(ba) an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the Income Tax Assessment Act 1997;

c) an amount:

(i)    that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or

(ii)   in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of section 98, 99 or 99A; or

(iii)  that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and is liable to pay tax under subsection 98(4);

d) an amount that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD;

e) if the beneficiary is a company - an amount that is or has been included in the assessable income of the beneficiary under section 102AAZD.

The Macquarie Dictionary (Online edition 2023) defines 'corpus' to mean 'a principal or capital sum, as opposed to interest or income'.

In this case the distributions are paid out of the corpus of the Trust and more importantly are amounts that, had they been received by the beneficiaries directly from the Will would not have been assessable incomes of the beneficiaries.

The Trust is a discretionary trust whose major asset are represented by cash in term deposits and bank investments.

Although a distribution that represents corpus of a trust is not assessable, paragraph 99B(2)(a) of the ITAA 1936 expressly states that the corpus of a trust estate does not include any part which is attributable to amounts derived by the trust estate that, if they had been derived by 'a taxpayer being a resident', would have been included in the assessable income of that taxpayer.

Further, paragraph 99B(2)(b) of the ITAA 1936 provides that an amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents an amount that, if it had been derived by 'a taxpayer being a resident', would not have been included in the assessable income of that taxpayer.

In this circumstance the proposed distributions will be made from the corpus of the Trust (and the exception in paragraph 99B(1)((a) of the ITAA 1936 does not apply), therefore the amounts will not be included in the assessable income of the beneficiaries.

Question 3

Summary

A CGT event will not happen under section 104-25 (CGT event C2), section 104-75 (CGT event E5), or section 104-85 (CGT event E7) of the ITAA 1997 when the proposed cash distribution is made by the Trustee to the beneficiaries from the corpus of the Trust.

Detailed reasoning

Capital gains provisions

Subsection 102-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes any net capital gains made during the income year.

Section 102-20 of the ITAA 1997 provides that a taxpayer may make a capital gain or loss when a CGT event occurs to a CGT asset. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as being any kind of property or a legal or equitable right that is not property.

Cancellation, surrender and similar endings: CGT event C2

Section 104-25 provides that CGT event C2 occurs when an intangible asset ceases to be owned as a result of:

a. being redeemed or cancelled

b. being released, discharged or satisfied

c. expiring

d. being abandoned, surrendered or forfeited

e. if the asset is an option, being exercised, or

f. if the asset is a convertible interest, being converted.

In order for section 104-25 of the ITAA 1997 to apply to an arrangement, it is necessary for a taxpayer to cease to own an intangible asset due to the asset being redeemed or cancelled, released, discharged or satisfied, expiring, abandoned, surrendered or forfeited, if the asset is an option, being exercised, or if the asset is a convertible interest, being converted.

As this does not happen when the proposed cash distribution will be made by the Trustee to the beneficiaries from the corpus of the trust CGT event C2 will not occur.

Beneficiary becoming entitled to a trust asset: CGT event E5

Subsection 104-75(1) of the ITAA 1997 provides that CGT event E5 will occur if a beneficiary of a trust estate becomes absolutely entitled to a CGT asset of a trust as against the trustee.

Draft 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 provides guidance on the Commissioner's view on what would constitute absolute entitlement for the CGT provisions. In particular, paragraph 10 explains that a beneficiary will have an absolute entitlement to a CGT asset where the beneficiary has a vested and indefeasible interest in the entire trust asset, to call for the assets to be transferred to them or to be transferred at their direction.

In these circumstances the proposed cash distribution will not result in a taxpayer obtaining a vested and indefeasible interest in an entire trust asset, such that they will not become absolutely entitled to a CGT asset of the trust as against the trustee, therefore section 104-75 of the ITAA 1997 will not be satisfied and CCT event E5 will not occur.

Disposal to beneficiary to end capital interest: CGT event E7

Subsection 104-85(1) of the ITAA 1997 provides that CGT event E7 will occur if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

In this circumstance, in making the proposed cash distribution the Trustee is not disposing of any CGT assets of the trust therefore subsection 104-85(1) of the ITAA 1997 cannot be satisfied and CGT event E7 will not occur.