Edited version of private advice

Authorisation Number: 1052321924416

Date of advice: 25 October 2024

Ruling

Subject: Commissioner's discretion - trusts

All legislative references in this document are to the Income Tax Assessment Act 1936unless otherwise specified.

Question 1

Will the Commissioner exercise the discretion not to apply section 99A and tax the net income of the Testamentary Trust to which no beneficiary is presently entitled under section 99?

Answer

Yes.

This ruling applies for the following periods

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

1.  The Individual (the Deceased) died on X June 20XX.

2.  The Will of the Deceased (the Will) was dated X December 20XX (copy provided).

3.  Probate was granted in respect of the Will on X September 20XX (copy provided).

4.  The Testamentary Trust is one of the three testamentary trusts established under the clauses of the Will and received one third of the residuary estate of the Deceased. The Testamentary Trust was established to benefit the Deceased's adult child (Individual A), who is the principal beneficiary of the Testamentary Trust.

5.  The Testamentary Trust was established on X March 20XX.

6.  The trustee of the Testamentary Trust is Company B (the Trustee), with Individual A as the sole director of this company.

7.  The First Schedule of the Will is entitled 'Testamentary Trust' and contains the terms upon which the Trustee must hold the various parts of the residuary estate on trust (the Trust Deed).

8.  The Trust Deed of the Testamentary Trust has not been amended.

9.  The Applicant has advised that the residuary assets distributed from the deceased estate to the Testamentary Trust primarily consist of managed funds, shares and fixed interest securities which were owned by the Deceased during their lifetime. The assets held in the Testamentary Trust are sourced solely from the deceased estate and income accumulated on those assets.

10.  The Trustee does not hold shares, units or other similar interests that carry rights to receive discretionary distributions of income or capital. The Trustee is not a discretionary object in relation to another trust.

11.  The Trustee intends that the income of the trust estate will be used to pay inter alia for the education costs of the grandchildren of Individual A. As the grandchildren are not yet of school age, and there may be additional grandchildren in future, the intention is to accumulate the income of the trust estate for the year ended 30 June 20XX and subsequent income years, until the youngest grandchild reaches secondary school age.

12.  The Trustee also intends to accumulate a portion of income each year, to retain funds within the trust to be used for the benefit of the other grandchildren once they reach secondary school age.

13.  Based on the forecasts provided by the Trustee, it is expected that the Trustee will accumulate a portion of income of the trust estate for the years ending 30 June 20XX to 30 June 20XX.

14.  The distributions of trust income for income years ended 30 June 20XX and 30 June 20XX were made to Individual A.

Assumptions

15.  Throughout the Ruling period:

(a)           The Trust Deed will not be amended.

(b)           The property of the Testamentary Trust will consist only of:

(i)            property vested in the Trustee (that was vested in the Executor of the Estate of the Deceased 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;

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

(iii)            property from the sale of these assets of the Testamentary Trust; and

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

(c)           The assets of the Testamentary Trust will consist only of:

•                    public company shares or other direct, or indirect, interests in widely-held entities (including managed funds and fixed interest securities);

•                    Australian real property; and

•                    cash.

(d)           The distributions of income to the beneficiaries of the Testamentary Trust will be paid out, or applied, to the relevant beneficiary within 2 years of the end of the relevant income year.

(e)           The Trustee will administer the Testamentary Trust in a conventional manner (as a testamentary trust) and not as a tax avoidance device.

(f)           The Trustee will not enter into arrangements beyond the purpose for which section 99 of the ITAA 1936 was retained or of a type that the Commissioner will seek to discourage.

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)

Reasons for decision

Summary

16.  After consideration of the relevant factors, the Commissioner is of the opinion that it would be unreasonable that section 99A should apply in relation to the Testamentary Trust in relation to the income years ended 30 June 20XX to 30 June 20XX.

17.  Therefore, the Commissioner will exercise the discretion, under subsection 99A(2) to allow section 99 to apply to the income years ended 30 June 20XX to 30 June 20XX where the Trustee of the Testamentary Trust is liable to pay tax on income to which no beneficiary is presently entitled.

Detailed Reasoning

The relevant legislation

Section 99A

18.  Under subsection 99A(2), 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...'.

19.  Instead section 99 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).

20.  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).

21.  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) and include a trust estate that resulted from a will (paragraph 99A(2)(a)).

22.  In forming the opinion for the purposes of subsection 99A(2), the Commissioner is required to have regard to the matter subsections 99A(3) and (3A). These subsections specifically state:

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

23.  The Testamentary Trust was created under the terms of the Will of the Deceased and is considered to be a 'trust estate ... that resulted from a will' for the purposes of subparagraph 99A(2)(a)(i).

24.  The Trustee has resolved to accumulate part of the net income of the Testamentary Trust for the income year ended 30 June 20XX and anticipates that it will accumulate a portion of the net income of the Testamentary Trust for the income years ended 30 June 20XX to 30 June 20XX. This net income will fall to be assessed to the Trustees under section 99A 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)).

25.  In forming the opinion for the purposes of subsection 99A(2), 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)

26.  The Applicant has advised that the assets held by the Trustee consist only of assets solely from the deceased estate and income accumulated on those assets. These assets include managed funds, shares and fixed interest securities which were owned by the Deceased during their lifetime.

27.  Accordingly, these assets represent:

(i)            property vested in the Trustee under the terms of the Will of the Deceased;

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

(iii)            property from the sale of these assets of the Estate; and

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

28.  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 to related parties.

29.  No property has been transferred or lent to the Testamentary Trust nor any specifical rights, privileges or benefits conferred upon the Testamentary Trust.

Consideration of paragraph 99A(3)(c)

30.  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) are encapsulated by the matters enunciated by Member Thompson in Case A50 (69 ATC 288).

31.  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.

32.  Each of these matters will be considered in turn:

(i)            The Revenue should be protected against tax avoiding devices:

Based on the information available, the Trustee has not used (and will not use) their powers under the Trust Deed to avoid tax.

(ii)          The interests of taxpayers generally should be protected:

In considering the exercise of the discretion in subsection 99A(2) 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 Deed in a conventional manner (and not as a tax-avoidance device).

(iii)         The right of the subject to make legitimate and reasonable arrangements relating to family and business matters should be protected:

The Testamentary Trust's assets primarily consist of assets owned by the Deceased when they died and/or assets acquired from the sale of these assets and the Testamentary Trust is being administered by the Trustees in a conventional manner.

(iv)         Arrangements which are for the good of the public generally should not be discouraged:

The Testamentary Trust is not a trust of the type that is relevant to this matter.

(v)          Trusts which arise out of the exercise of a public duty should not be penalised:

The Testamentary Trust is not a trust of the type that is relevant to this matter.

Surrounding circumstances to also be considered

33.  In Case A50 Thompson suggested that [at 302 and 303], in the process of forming an opinion for the purposes of subsection 99A(2) 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.

34.  In relation to these 'surrounding circumstances' it is noted that:

•                     the trust is a testamentary trust that resulted from the Will of the Deceased; and

•                     the Applicant has advised that the Trustee has resolved to accumulate part of the net income of the Testamentary Trust for the income year ended 30 June 20XX and expects to accumulate a portion of the net income of the Testamentary Trust for the income years ended 30 June 20XX to 30 June 20XX (which is permitted under the Trust Deed).

Conclusion as to whether it is unreasonable for section 99A to apply to the Testamentary Trust in respect of the income years ended 30 June 20XX to 30 June 20XX

35.  The matters that are considered to be particularly relevant to forming the opinion for the purposes of subsection 99A(2) are:

•                     The Testamentary Trust resulted from a Will and satisfies the requirements of paragraph 99A(2)(a).

•                     In the income years ended 30 June 20XX to 30 June 20XX:

o        The Trustee will have retained a portion of trust income.

o        Tax has not been avoided by the exercise of the powers available to the Trustee under the Trust Deed.

o        The Testamentary Trust will be administered in a conventional manner by the Trustee and not as a tax avoidance device.

o        The Trustee will not enter into arrangements beyond the purpose for which section 99 was retained in the ITAA 1936 or a type that the Commissioner will seek to discourage.

•                     The assets held by the Trustee consist of:

o        assets vested in it (as Trustee) under the terms of the Will of the Deceased; and/or

o        property from the sale of the assets of the Estate that has been reinvested or held as cash.

•                     The assets held by the Trustee do not consist of:

o        investments in any private companies or private trusts;

o        other assets acquired at non-arm's length value; or

o        loans provided to related parties.

•                     The Trustee is not avoiding tax by exercising the powers available to them under the terms of the Trust Deed.

36.  Having regard to the above matters, and the legislated purpose of section 99A 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 Testamentary Trust in respect of the income years ended 30 June 20XX to 30 June 20XX.