Edited version of private advice

Authorisation Number: 1052323267254

Date of advice: 25 October 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 year ended 30 June 20XX to 20YY?

Answer

Yes.

This ruling applies for the following periods:

Income Year ended 30 June 20XX

Income Year ended 30 June 20XY

Income Year ended 30 June 20YY

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This Private Ruling Application is based on the facts and circumstances set out below.

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 XX/XX/XX;

•         Your response to our Further Information Request email dated XX/XX/XX (including the supporting documentation); and

•         Your response to our Further Information Request email dated XX/XX/XX.

The Deceased died on XX/XX/XX.

The Will of the Deceased (the Will) was dated XX/XX/XX. (Copy provided).

Probate was granted in respect of the Will on XX/XX/XX (Copy provided).

The trust is a deceased estate (the Trust). The Executors as Trustees of the Trust are: Individual A and Individual B (the Trustees).

The beneficiaries defined in the Will are the Deceased's children, his son Individual C and his daughter Individual D.

Clause X of the Will stated as follows.

Trust's Assets

The Trust's assets are outlined in the Probate documents (Annexure B - Inventory of Property).

The assets of the Trust consisted of the following:

•         Public company shares.

•         Performance rights and options granted by Company A, which are tied to public company shares.

•         Australian real property.

•         Cash, cash equivalents and personal assets (e.g. bank accounts, insurance policies).

The property of the Trust did not consist of any of these assets:

•         shares in any private companies or units in any private trusts;

•         other property acquired at non-arm's length value; or

•         loan provided to related parties.

The total market value of assets of the Deceased at the date of the Deceased's death was $X,XXX,XXX.

Aside from the Deceased's performance options and rights under the employee share scheme (ESS), the assets of the Trust (as disclosed under Annexure B - Inventory of Property) have been liquidated and distributed evenly between the two testamentary trusts for the Deceased's children in accordance with his will.

The Trust currently holds cash to cover outstanding and expected ATO liabilities.

The Period of Administration of the Deceased Trust is not finalised purely because of the vesting requirements of the ESS entitlements.

Company A's Performance Options and Rights

Prior to the Deceased's death, he was an executive at Company A.

During his employment at Company A, the Deceased was granted performance options and rights under an ESS, contingent on continuing employment and the satisfaction of vesting conditions.

The participation of the options and rights under the ESS are governed by the terms and conditions set out in the Invitation Letter and the Plan Rules. A copy of these documents was provided, and form part of the facts of the ruling.

The Invitation Letter stated the following terms.

The Plan Rules provided the following terms.

All of the Deceased's performance options and rights entitlements vested in the Trustees. These performance options and rights are disclosed within Annexure B - Inventory of Property. They form part of the residual estate of the Deceased and will be dealt with in accordance with Clause X.X of the Will.

Your response to our Further Information Request dated XX/XX/XX (Your Response) provided the following details on the performance options and rights referred as Tranche 1,2,3 and the final tranche.

Upon meeting the vesting conditions prescribed in the Invitation Letter, the Trust disposed of the vested performance options and rights as soon as it was feasible and practicable to do so. The only income of the Trust derived is from these performance options and rights entitlements. In each of the income years ended 30 June 20XX, 20XX, and 20XX, the Trust had immediately triggered a disposal event in accordance with the agreement with Company A.

The Trust's Income Tax Returns have been lodged by the Trustees for the income years ended 30 June 20XX, 20XX, 20XX and 20XX.

The last tranche of these performance options and rights have now vested and the Executors are making arrangements to dispose of this final tranche prior to 30 June 20XY.

Your PBR application dated XX/XX/XX also submitted that the Period of Administration of the Deceased Estate has not been finalised primarily because of the vesting requirements of the ESS entitlements. The Trustees are awaiting Company A to process the final tranche disposal before completing the administration process.

It is anticipated that the administration of the estate of the deceased will be completed in income year ending 30 June 20YY.

Assumptions

Throughout the Ruling Period:

(a)  The Trust Deed (the Will) will not be amended.

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

                              (i)            property vested in the Trustees (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 or conversion of these assets of the Trust (including from the exercise of performance options and rights entitlements); and

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

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

­   public company shares or other direct, or indirect, interests in widely-held entities;

­   performance rights and options granted by Company A tied to public company shares;

­   Australian real property; and

­   cash.

(d)  The Trustees will administer the Trust in a conventional manner and not as a tax avoidance device.

(e)  The Trustees 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 Paragraph 99A(2)(b)

Income Tax Assessment Act 1936 Paragraph 99A(2)(c)

Income Tax Assessment Act 1936 Paragraph 99A(2)(d)

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 for the income year ended 30 June 20XX to 20YY.

Therefore, the Commissioner will exercise the discretion, under subsection 99A(2) of the ITAA 1936 to allow section 99 to apply where the Trustees of the Trust are liable to pay tax on income to which no beneficiary is presently entitled during the income year ended 30 June 2023 to 30 June 2025.

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.

Purpose of section 99A of the ITAA 1936

Section 99A of the ITAA 1936 was introduced by the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964[1]. In its original form, it did not apply to deceased estates.

When section 99A of the ITAA 1936 was amended in 1979 to apply to deceased estates, the EM to the Income Tax Assessment Amendment Bill (No. 6) 1979 stated (in relation to the exercise of the discretion in subsection 99A(2)):

The criteria that the Commissioner is to use in considering whether it would be unreasonable that section 99A of the ITAA 1936 should apply in these cases will remain essentially the same as at present (sub-section 99A(3)). This will enable the result that, unless there are tax avoidance connotations, accumulating income in these cases will continue to be taxed under section 99, on the same basis as at present. (Because there had been tax avoidance exploitation of an earlier exclusion of deceased estates from the ambit of section 99A, those estates were, by section 6 of the Income Tax Assessment Amendment Act (No. 2) 1977, in that year brought within its scope.) [Note to Clause 13] [Emphasis added]

In the High Court case of Giris Pty. Ltd. V. Federal Commissioner Of Taxation[2] (Giris) Windeyer J described the purpose of section 99A of the ITAA 1936 as:

That purpose I take it is to enable the Commissioner to keep s. 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. [at 384]

This view was confirmed by Stephen J in the High Court case of Perron (as trustee for the L.M. Brennan Trust) v. Federal Commissioner of Taxation:[3]

The views of Windeyer J. in the Giris case regarding the legislative purpose given effect to by sec. 99A(2) have already been quoted in the Commissioner's letter. I would, with respect, adopt those views of that legislative purpose. [at 4171]

Therefore, it is reasonable to conclude that the purpose of section 99A of the ITAA 1936 is to prevent the use of trusts to avoid tax.

The language of the text contained in section 99A of the ITAA 1936, and case law, confirms that the type of tax avoidance at which section 99A is directed is broader than that facilitated by the use of multiple trusts.

In Giris, the High court commented that:

•         ' ... the discretion is wide and though being really legislative in nature, what is relevant to its formation may range over an extremely wide spectrum of fact and consideration ...' [per Barwick J., at 374]

•         'Here the Commissioner's discretion is apparently at large... I assume that [the Commissioner] is to be guided and controlled by the policy and purpose of the enactment, so far as that is manifest in it. ... ' [Per Windeyer J., at 384]

ATO Guidance

Public Information Bulleting PIB No. 4: Income of a trust estate to which no beneficiary is presently entitled was published by the ATO in April 1965.

Although PIB No. 4 is considered to be relevant when considering the way in which the Commissioner considers the exercise of the discretion in subsection 99A(2) of the ITAA 1936 its relevance is diminished due to events subsequent to its issue such as:

•         Legislative amendments to section 99A; and

•         Court and Board of Review decisions on s 99A(2).

For instance, the Commissioner is required to consider the matters in subsections 99(3) and 99(3A) of the ITAA 1936 in forming his opinion for the purposes of the discretion in subsection 99A(2). It is noted that subsection 99(3A) was inserted into the ITAA 1936 in 1980.

Factors to be considered for the purposes of the discretion in subsection 99A(2) of the ITAA 1936

In Case A50[4] G. R. Thompson (Member) proposed a number of factors that should be considered for the purposes of the discretion in subsection 99A(2) of the ITAA 1936: [at 302]

1. Protection of the revenue - This first proposition needs no lengthy exposition. It accords with my understanding of a clear policy of the Income Tax Assessment Act, and indeed of all taxing statutes. In the Income Tax Assessment Act, it finds its highest point in sec. 260.

2. The interests of taxpayers generally - This principle is, I think, complementary to the first principle, for it is trite to say that each successful tax avoiding scheme results in a proportionate increase in the tax burden to be borne by all other taxpayers. In taking into account this principle, it would, I think, be relevant to consider whether the type of arrangement under consideration in any particular case is wide-spread or increasing in its incidence. The discretion could then be exercised to discourage practices which are causing the tax burden to fall unevenly on taxpayers within a particular class.

3. Protection of legitimate and reasonable family and business arrangements - The right of an individual to deal with his own property and to arrange the affairs of his family and his business in any way that he sees fit, subject only to the restrictions imposed by statute or common law, is, I think, well entrenched in the sociological, political and legal structure of the Australian community. It seems to me that it would be inappropriate to use a discretion under a taxing statute to discourage the exercise of that right except in cases where such an exercise is to the detriment of the community at large.

4. Arrangements for the good of the public generally - One can readily envisage arrangements which fall for consideration under sec. 99A being of such a kind that, if such arrangements were discouraged, the springs of charity might tend to dry up. An example of such an arrangement would be a voluntary trust established inter vivos for the maintenance or education either of an infant or of a person of full age who is, say, mentally defective to the extent that he is under legal disability. The purpose and effect of such a trust could be to prevent the beneficiary from becoming a charge on the State. I would regard it as inappropriate, in the absence of any countervailing consideration, to use the discretion under sec. 99A to discourage such a charitable exercise.

5. Trusts arising out of the exercise of a public duty - Under this head I would include the administration of trusts such as those imposed upon trustees in bankruptcy by the Bankruptcy Act or those imposed upon officers of the court by order of the various courts. Under the broad terms of sec. 99A these fall for consideration and it seems to me that, to the extent to which the discretion under sec. 99A would be exercised to the detriment of such trusts, the purposes of the statute or the order under which the trusts come into being would be frustrated.

In considering these matters in Case A50 Thompson stated that [at 302 and 303]:

15. On the foregoing broad bases, it seems to me to be possible to distinguish in particular cases those in which it would be proper to invoke the deterrent effect that can arise by the exercise of the discretion one way or the other... The process of forming the opinion that one is obliged to form will involve the difficult, but perhaps not impossible, task of weighing the merits of each case to decide whether they fall on the side of those practices that ought to be discouraged because of the preponderance of undesirable elements or on the side of those which ought not to be discouraged because they produce a desirable social result.

16. ... A wide survey and close scrutiny of all the surrounding circumstances, including, but not by any means limited to, 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 the manner in which the arrangement is administered, would be called for. This enquiry should, I think, furnish the mind in such a way that the scale will fall either on the side of practices which ought to be discouraged or on the side of those which ought not to be the subject of any deterrent. [Emphasis added]

The factors proposed by Thompson in Case A50 seem to be derived from the Judgement of Barwick CJ in Giris (at 4017) when he commented that:

... [the Commissioner] is able to make the choice in exercise of what, for want of a more precise expression I shall call a legislative discretion: he can apply one section rather than the other if he thinks it unreasonable to apply the latter of them. I have been unable to find any content for the word ''unreasonable'' in the context of the two sections except considerations of a kind upon which a legislature acts in deciding whether an enactment or its particular terms are or are not unreasonable having regard to the interests of the public generally, of the citizen to be affected, of the Revenue and of the requirements of those policies, political, economic and fiscal which the Parliament is prepared to sanction... [Emphasis added]

In Case A50 Davies (in commenting on Windeyer J's comments at 4017 in Giris) stated that:

What their Honours had in mind, I think, was this. Trusts are a proper means of achieving legitimate social, family and business objectives, objectives of a non-fiscal nature. They are also a means of achieving fiscal objectives, a means of avoiding or lessening the burden of tax. ... In cases where trusts are used as instruments to achieve both fiscal and non-fiscal ends - and competent draftsmen properly keep taxation laws in mind when preparing documents which affect a client's property and income - a decision must be reached, on the facts of each particular case as to which should prevail on the balance, the interests of the Revenue or the legitimate interests of the beneficiaries under the trust. [At 297]

In Case B66[5], J. D. Davies (Member) (at 320 and 321) also relevantly commented that:

Section 99A of the Act is not, in my opinion, a section designed to bring down specific practices - multiple trusts, the conversion of income receipts into capital repayments and the like - but, on the contrary, is a section which prescribes a general rule applicable unless the Commissioner, or a Board on a review, is of the opinion that, in the particular case, it is unreasonable for it to be so. The cases where, in my view, it is unreasonable for the section to apply are those where the application of the section inhibits the achievement of what are primarily non-fiscal, social, family or business ends. This is not such a case. [Emphasis added]

It is considered that the matters enunciated by Thompson in Case 50 satisfy the requirements of Giris and provide an appropriate framework containing the relevant matters to be considered by the Commissioner in relation to the discretion in subsection 99A(2) of the ITAA 1936.

Application of the legislation to the facts

The Trust was created under the terms of the Will of the Deceased (dated XX/XX/XX) 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 Trustees have retained, and will retain, net income during the income years ended 30 June 20XX to 30 June 20YY.

The net income for these income years will fall to be assessed to the Trustees 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 held by the Trustees consist of:

­   assets vested in them (as Executor of the Will 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;

­   cash earned from holding those assets; and

­   cash from the sale of those assets of the Trust.

• The assets held by the Trustees 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.

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) 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 section 99A(2), 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 Trustees have 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) 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 Trustees are the executor of a deceased estate, and have exercised, and will exercise, their powers under the Will 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 is a deceased estate wherein the assets of the deceased are being, and will be, administered by the Trustees 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) 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 deceased estate that resulted from the Will of the Deceased dated XX/XX/XX.

­   the Trust is still in the 'period of administration' (per Taxation Ruling IT 2622) such that no beneficiary has been made presently entitled to the income of the Trust.

­   The period of administration of the Trust is not finalised purely because of the vesting requirements of the ESS entitlements. The last tranche of these performance options and rights have now vested and the Executors are making arrangements to dispose of it. It is anticipated that the administration of the estate of the deceased will be completed in income year ending 30 June 20YY.

Conclusion as to whether it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of the Ruling Period

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 ended 30 June 20XX to 30 June 20YY:

­   The Trustees have retained, and will retain, an amount of trust income.

­   The Trust has been in its 'period of administration' (per Taxation Ruling IT 2622).

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

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

­   The Trustees have not entered into, 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.

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 ended 30 June 20XX to 30 June 20YY.

[1] Act No. 110 of 1964.

[2] (1969) 119 CLR 365.

[3] 72 ATC 4169; (1972) 128 CLR 595.

[4] 69 ATC 288.

[5] 70 ATC 319.