Edited version of private advice

Authorisation Number: 1052310568735

Date of advice: 30 September 2024

Ruling

Subject: Commissioner's discretion - trust estate

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

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

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).

1. The Late XX (the Deceased) died on DD MM YYYY.
2. The Will of the Deceased (the Will) was dated DD MM YYYY (Copy provided).
3. Probate was granted in respect of the Will on DD MM YYYY (Copy provided).
4. The deceased's sibling XX, the deceased's relative XX and the deceased's partner XX were appointed to be executors and trustees (the Trustee) in accordance with Clause XX of the Will.
5. Pursuant to Clause XX of the Will the trustees shall pay or provide for my debts and funeral and testamentary expenses and all probate estate and other duties payable by reason of my death in respect of my estate and shall invest the residue of such moneys and shall hold such investments and all parts of my said real and personal estate for the time being unconverted (hereinafter called "my residuary estate") upon trust as follows:

(a)  From time to time during the discretionary period as hereinafter defined (hereinafter referred to as "the discretionary period") my trustees shall divide the income of my residuary estate into equal shares the number whereof shall be equal to the number of my sisters XX, XX, XX and XX as shall for the time being be living (plus one additional share at all times during this discretionary period while any children or child of my late sister XX shall be living). One share of such income shall be paid to each such sister of mine from the time being living and while any children or child of my said deceased sister shall be living the remaining share of such income shall be paid to such children or child if more than one equally between them. If at any time before the termination of the discretionary period no sister of mine shall be living but there shall be a living child or children of the said XX, the whole of the income of my residuary estate shall be paid to such child or children if more than one equally between them.

(b)  At the termination of the discretionary period my residuary estate shall be held as to both capital and income for all the grandchildren or the grandchild if only one of the said XX living at the termination of the discretionary period and the children or child then living of any of the deceased grandchild of the said XX who whether grandchildren or great grandchildren of the said XX attain the age of twenty one years if more than one in equal shares as tenants in common but so that the children of any deceased grandchild of the said XX shall take equally between them only the share which their deceased parent would have taken had he or she been living at the termination of the discretionary period and attained the age of twenty one years.

(c)   In the interpretation of this clause the discretionary period shall mean the period commencing at my death and terminating on the death of the last to die of all of the following persons namely my said sisters XX, XX, XX, and XX and the three children of my said deceased sister, XX, XX, and XX.

6. Pursuant to Clause XX of the Will moneys liable to be invested under this will may be invested in/or upon any of the following:

(a)  investments authorised by law for the investment of trust funds in the Commonwealth of Australia or any State thereof;

(b)  land situate in Australia or any interest therein;

(c)   deposit at interest or otherwise with any Bank;

(d)  fully paid or partly paid shares or debentures (as those expressions are defined by Section 5 of the Companies Act 1961 of Victoria) of any company (other than a company principally engaged in the business of drilling or searching for oil or mining) which has a share register within the Commonwealth of Australia.

(e)  The units of any Unit/Trust established in the Commonwealth of Australia.

7. A Trust Income Tax Return has been lodged by the Trustee for the income year ended DD MM YYYY.
8. 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.

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

a)    The Trust's listed All Current Liabilities of $xxx relates to unpaid present entitlements as at DD MM YYYY owing to the income beneficiary totalling $yyy, the creditor being accounting fee invoice not yet paid of $xxx and a provision for the income tax liability of $xxx.

The UPE owing to the beneficiary is paid in four interim paymets during the financial year with the balance owing paid after year end.

b)    You advised that due to the length of time and change in firms representing the Trust, you do not have a copy of the original inventory of Property for the purposes of the Probate.

10.  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 income of the Trust during the income year ended DD MM YYYY ($xxx) consisted of interest, dividends, distributions and capital gains.

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, his 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, his 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 Trust 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 Trust 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.