Edited version of private advice

Authorisation Number: 1052282207663

Date of advice: 26 July 2024

Ruling

Subject: Commissioner's discretion - testamentary trust

Question

Will the Commissioner exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to apply progressive rates of tax as per section 99 of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

Mister X passed away on DD MM 20XX.

Trust X (the Trust) is a testamentary trust created under the will of Mister X dated DD MM 20XX (the Will). A copy of the Will has been provided.

The Trust is an Australian resident for tax purposes.

Under the terms of the Will, the Trust was created to share in Mister X's residuary estate.

All assets of the Trust are held for investment purposes and for the sole benefit of the beneficiaries under the terms of the Will.

A grant of probate document including full inventory detail of the property of the deceased estate and a list of assets transferred into the Trust from the deceased estate has been provided.

Under the Will, the beneficiaries of the Trust are defined as follows:

1. Mister X's child (the Beneficiary)
2. The children and grandchildren of the Beneficiary
3. The spouse of the beneficiary and the spouse of any children or grandchildren of the Beneficiary
4. Any eligible trusts or eligible corporations of the Beneficiary
5. Any charities or religious bodies as nominated by the trustee.

The beneficiaries of the Trust are residents of Australia for tax purposes.

Testamentary trust provisions are provided in clause X of the Will.

Rules of distribution of the Trust income are provided in clause XX of the Will.

The deed of the Trust has been amended multiple times. All amendments to the trust deed have been provided.

No other entity has directly or indirectly transferred or lent any property (including money) to, or conferred any benefits on, the Trust, nor have any special rights or privileges been conferred or attached to the assets of the Trust.

The Trust derived income from distributions from the assets it holds in the income year ended 30 June 20XX and 30 June 20XX. The financials of the relevant income years have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Sections 99 and 99A of the ITAA 1936 operate to tax trustees if there is part of the net income of a trust estate that is not taxed to a beneficiary under section 97 of the ITAA 1936 or to the trustee under section 98 of the ITAA 1936.

Section 99A of the ITAA 1936, which imposes a punitive rate of tax, applies automatically unless:

1. The trust estate is of a type specified in paragraphs (a)-(d) in subsection 99A(2) of the ITAA 1936; and
2. The Commissioner considers that it would be unreasonable for section 99A of the ITAA 1936 to apply (having regard to the circumstances in subsection 99A(3) of the ITAA 1936).

If the Commissioner forms the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply, the trustee will instead be assessed under section 99 of the ITAA 1936.

Income that is taxed under section 99A of the ITAA 1936 is subject to the top marginal rate of tax.

Comparatively, income that is taxed under section 99 of the ITAA 1936 is taxed at resident marginal tax rates, with or without the tax-free threshold, depending on eligibility.

Under section 99 of the ITAA 1936, the tax-free threshold is only available for deceased estates, where the deceased person died less than 3 years before the end of the relevant year of income (see subsection 12(6) of Schedule 10 of the Income Tax Rates Act 1986). This excludes testamentary trusts (and accordingly the tax-free threshold would not be available here).

Our analysis of the two requirements is outlined below.

Condition 1 - Trust resulted from a will

The trust estate must be of a type specified in paragraphs (a)-(d) in subsection 99A(2) of the ITAA 1936. A trust estate that resulted from a will, or an order of a court that varied or modified the provisions of a will, is a trust estate listed in subparagraph 99A(2)(a)(i) of the ITAA 1936.

In order for a trust to result from a will, it is necessary that the will should be the source of the funds and that the trust should be created in consequence of a provision in the will or court order itself (Case P53 82 ATC 247).

The Trust was created under the will of Mister X dated DD MM 20XX (the Will). The Trust had a right to a share of the residuary estate under clause X of the Will. Accordingly, the Trust is of a type to which the Commissioner's discretion under section 99A may be exercised, in accordance with subparagraph 99A(2)(a)(i) of the ITAA 1936.

Condition 2 - Commissioner considers it unreasonable to apply section 99A

The Commissioner must consider that it would be unreasonable for section 99A of the ITAA 1936 to apply, having regard to the circumstances in subsection 99A(3) of the ITAA 1936, as follows:

In forming and 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.

In determining the weight to be given to the matters described in subsection 99A(3) of the ITAA 1936, Windeyer J stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that:

The Commissioner is to ask himself whether it would be unreasonable that sec. 99A should apply to any particular trust estate.... That purpose I take it is to enable the Commissioner to keep sec. 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.

Based on the information provided, none of the adverse indicators described in subsection 99A(3) of the ITAA 1936 appear to be present, as follows:

• The share of the residuary estate distributed from the deceased estate to the Trust were made up of x and x.
• The assets held in the testamentary trust are solely from the deceased estate, and the income distributed from those assets.
• No other entity has directly or indirectly transferred or lent any property (including money) to, or conferred any benefits on, the testamentary trust, nor have any special rights or privileges been conferred or attached to the assets of the testamentary trust.
• The Trust has not invested in any private companies or other non-arm's length assets or provided any loans to related parties.

After considering the matters in subsection 99A(3) of the ITAA 1936 the Commissioner concludes that no attempt has been made to increase the assets of the trust and that the trust consists of property held by the deceased and distributed solely from the deceased estate.

Conclusion

After consideration of the conditions of section 99A of the ITAA 1936, the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the net income of the Trust.

The trustee of the Trust will instead be assessed under section 99 of the ITAA 1936 for any trustee assessments.

The assessable income of the testamentary trust will be subject to resident marginal tax rates (without the tax-free threshold).