Edited version of private advice

Authorisation Number: 1052310201080

Date of advice: 25 September 2024

Ruling

Subject: Trust vesting

Question

Is the net income of the Trust only assessable to the specified beneficiaries after the date the trust vested?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust Deed provides that prior to vesting, Trust income may be applied for the benefit of any one or more of the general beneficiaries.

The Deed states that post vesting, Trust funds and income are to be held on trust for the benefit of the specified beneficiaries.

The Schedule lists the general beneficiaries which include Person A and Person B.

The Schedule lists the specified beneficiaries as being relatives of Person A and Person B.

The Trust vested on XX/XX/20XX, as specified in the Schedule.

The trustee was unaware that the Trust had vested.

No action was undertaken to extend the Trust vesting date prior to it vesting.

Financial statements and income tax returns have been lodged for the Trust for the 20XX and 20XX income years with Person A receiving trust income as a beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97

Reasons for decision

Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) concerns inter alia the taxation of a beneficiary's share of a trust's taxable income (section 97 of the ITAA 1936) except for amounts dealt with by Division 207 of the ITAA 1997.

The relevant share in the context of section 97 of the ITAA 1936 is determined by reference to the beneficiary's proportionate entitlement to the trust's distributable income (that is, its share of trust income for trust law purposes).

Section 97 operates regardless of whether a present entitlement to distributable income has been paid.

Under section 97 of the ITAA 1936, a beneficiary who is not under a legal disability and presently entitled to a share of the 'income of the trust estate' is assessed on 'that share' of the trust's taxable income worked out under section 95 of the ITAA 1936. That taxable income is referred to as the 'net income' of the trust estate.

Taxation ruling TR 2018/6: Income tax: trust vesting - consequences of a trust vesting discusses the income tax consequences of a trust vesting and explains that issues can arise when the vesting date of a trust is mistakenly thought to have been extended. Prior to a trust vesting, it may be possible for the trustee to postpone the vesting of the trust and choose a later date as the new vesting date. However, once the vesting date has passed, the trust has vested and it is no longer possible for the vesting date to be changed; the interests in the trust property become fixed at law.

Paragraph 12 of TR 2018/6 explains that on a trust's vesting date, the interests in the property of the trust become vested in interest and possession. A trustee no longer has any power to appoint the income or capital of the trust.

Paragraph 23 of TR 2018/6 provides that in the following income years of a trust vesting, the takers on vesting will usually have a fixed entitlement to the income of the trust estate and be assessable on their corresponding share of the net income. Because all of the income of the trust will flow to a beneficiary post-vesting according to their entitlement, none of the net income will fall to be assessed to the trustee.

Importantly, paragraph 24 of TR 2018/6 states that a payment or other purported distribution of income or capital by a trustee post-vesting that is not consistent with the beneficiaries fixed interests is in breach of trust and void, and otherwise not effective.

In this case, only the specified beneficiaries of the Trust are presently entitled to the income of the trust after the vesting date. This is so regardless of the wishes of the individual beneficiaries of the Trust following the vesting date. The Commissioner does not have any discretion to vary the law in regard to issues relating to the vesting date of a trust.