Edited version of private advice

Authorisation Number: 1052239942764

Date of advice: 10 April 2024

Ruling

Subject: Subsection 99A(2) Commissioners discretion

Question

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, for the income years ended DD MM YYYY to DD MM YYYY?

Answer

Yes

This ruling applies for the following periods:

Year ending DD MM YYYY

Year ending DD MM YYYY

Year ending DD MM YYYY

Year ending DD MM YYYY

Year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

This description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are:

Your Private Binding Ruling ('PBR') Application dated DD MM YYYY;

The email from the ATO on DD MM YYYY; and

The email to the ATO from XX (and attachments dated DD MM YYYY).

The Late XX (the Deceased) died on DD MM YYYY.

The Will of the Deceased (the Will) was dated DD MM YYYY (Copy provided).

Probate was granted in respect of the Will on DD MM YYYY (Copy provided).

An amount was vested in XX as trustee (the Trustee) of the XX Trust (the Trust) in accordance with Clause XX of the Will.

Pursuant to Clause XX of the Will, XX is an equal beneficiary of two-thirds of the residuary estate (as defined in the Will) of the Deceased together with XX.

Pursuant to Clause XX of the Will, the Executors were directed to pay and/or transfer the share for each such beneficiary to the Trustee of a trust in respect of which the Primary Beneficiary (as defined in the Will) will be such beneficiary and otherwise to be held by the respective trustee thereof and dealt with on the terms conditions and trusts set out in the schedule to the Will.

Pursuant to Clause XX of the Will the trustee of each such trust is the Primary Beneficiary of such trust.

The obligation of the Executors to pay and/or transfer the share of a Primary Beneficiary in Clause XX was subject to the power of such Primary Beneficiary pursuant to Clause XX thereof, to in writing require the executor to pay or transfer any part or share of such beneficiary in the Residuary Estate to any other trust, as set out in that Clause, or to such beneficiary personally.

The Estate's assets are outlined in the Probate documents.

A Trust Income Tax Return has been lodged by the Trustee for the income year ended

DD MM YYYY.

We requested further information in our email DD MM YYYY. In our email we also asked you to, among other things confirm that:

The assets held by the Trustee consist of:

-       assets vested in them that were assets of the Late XX;

-       cash earned from holding those assets; and

§  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

In your email dated DD MM YYYY you have stated that for the year ended DD MM YYYY:

a)    The Trust income is $xxx.

b)    The net income is $yyy.

c)    The source of the Trust income was interest, dividends, distributions and capital gains from an investment portfolio managed by XX.

d)    No beneficiaries were made presently entitled to the Trust income.

e)    100% of the Trust income was retained by the Trustee.

14.  Certain Assumptions have been made for the purpose of making this private ruling.

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)

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 Trust in relation to the income years ended DD MM YYYY to DD MM YYYY.

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 Trust is liable to pay tax on income to which no beneficiary is presently entitled during the income years ended DD MM YYYY to DD MM YYYY.

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.

Application of the legislation to the facts

The Trust was created under the terms of the Will of the Late XX (dated DD MM YYYY) 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 retained net income during the income year ended DD MM YYYY.

The Trustee may retain net income in respect of an income year included in the Ruling Period.

This net income will fall to be assessed to the Trustee under section 99A of the ITAA 1936 unless, '... 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 of the Trust during the income year ended DD MM YYYY ($xxx) consisted of interest, dividends, distributions and capital gains from an investment portfolio managed by XX.

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) of the ITAA 1936 are encapsulated by the matters enunciated by Member Thompson in Case A50 ((1969) 69 ATC 288).

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:

In considering whether to exercise his discretion under subsection 99A(2) of the ITAA 1936, the Commissioner must have regard to preventing the use of trusts for tax avoidance, in particular by allowing the lower tax rate under section 99 to apply to trusts that have a tax avoidance purpose.

In this case, the Trustee has not used, and will not use, their powers under the Trust to avoid tax.

2. The interests of taxpayers generally should be protected:

In considering the exercise of the discretion in subsection 99A(2) of the ITAA 1936 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 has exercised, and will exercise, their powers under the Trust 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 Trust's assets consist of assets owned by the Deceased when they died. The Trust is being, and will be, administered by the Trustee 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) of the ITAA 1936 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 Trust is a testamentary trust that resulted from the Will of the Late XX dated DD MM YYYY.

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 DD MM YYYY to DD MM YYYY inclusive

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 Trust resulted from a will and satisfies the requirement of paragraph 99A(2)(a).
• In the income years ending DD MM YYYY to DD MM YYYY:

-       The Trust Deed will not be amended.

-       The Trustee will retain an amount of trust income.

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

-       The Trust has been, and will be, administered in a conventional manner by the Trustee and not as a tax avoidance device.

-       The Trustee has not, and will not enter 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.

• The property of the Trust will only consist of:

-       property vested in the Trustee (that was vested in the Executor of the Estate of the Late XX 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 individual;

-       property that represents accumulations of income or capital from property that satisfies the requirement in (i);

-       property from the sale of these assets of the Trust;

-       property from the re-investment of property that satisfies the requirement in (iii);

and

• 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 distributions of income to the beneficiaries of the Trust will be paid out, or applied, to the relevant beneficiary within 2 years of the end of the relevant income year.
• The Trustee will not avoid tax by exercising the powers available to them under the terms of the Trust Deed.

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 the income years ending DD MM YYYY to DD MM YYYY.