Edited version of private advice

Authorisation Number: 1052338510700

Date of advice: 4 December 2024

Ruling

Subject: Commissioner's discretion - section 99A

Question

If the trustee is assessable on income to which no beneficiary is presently entitled, will the Commissioner exercise his discretion not to apply the provisions of section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and assess the trustee under section 99 of the ITAA 1936?

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

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A (the deceased) and person B had several children who are now adults.

On XX XXXX 20XX, the deceased passed away leaving a final will and testament dated XX XXXX 20XX (the will).

At relevant times up to the time of the deceased's death:

(a) the deceased owned the property; and

(b) the deceased and others conducted a business on the property.

Person B and the children were the beneficiaries of the will.

The will appointed co-executors.

On XX XXXX 20XX, the co-executors were granted probate of the will. They continue to be the co-executors of the deceased's estate (the estate).

Generally, the same business activities that were carried on upon the property up to the time of the deceased's death continued to be carried on upon the property after the deceased's death.

The will was the subject of court proceedings involving claims for further provision.

On XX XXXX 20XX, person B and the children entered into a deed of settlement (the first deed) in respect of the deceased's will and estate.

Relevantly, the first deed:

(a) provided for person C to have an option to purchase the property at a price to be determined by the procedure it prescribed, and in any event to be sold, and for legacies to be funded in part by the proceeds of the sale of the property (the property sale); and

(b) recited that the deceased's business interest formed part of the residue of the deceased's estate and therefore fell to person B as the residuary beneficiary of the estate.

On XX XXXX 20XX, person B passed away leaving a final will and testament dated XX XXXX 20XX (person B's will).

The children were the beneficiaries of person B's will.

Person B's will appointed co-executors.

On XX XXXX 20XX, the co-executors were granted probate of person B's will. They continue to be the co-executors of person B's estate.

In general terms, the same business activities that were carried on upon the property up to the time of the deceased's death that had continued to be carried on upon the property after the deceased's death continued, again, to be carried on upon the property after person B's death.

The issues in dispute between the parties can be summarised as follows:

(a) A dispute with respect to the property sale.

(b) A dispute with respect to the deceased's business interest, person B's business interest and the basis and identity or identities of the persons or entities by whom the business activities carried on upon the property since prior to the deceased's death have been carried on upon the property at various times since the deceased's death (collectively, the disputes).

The disputes have prevented and are continuing to prevent the completion of the administration of the deceased's estate in accordance with the first deed and the completion of the administration of person B's estate.

In order to resolve the disputes and permit the completion of the administration of the deceased's estate and person B's estate, the parties have agreed to settle the disputes and make provision for the completion of the administration of person B's estate and the deceased's estate on the terms set out in a second deed of settlement (the second deed).

This decided various matters which in tum allows the outstanding tax returns to now be lodged.

The estimated taxable income amounts and types of income are as follows:

Year Amount Type

20XX $X X

20XX $X X

20XX $X X

20XX $X X

20XX $X X

20XX $X X.

The deceased was not an object of a discretionary trust.

The estate only consists of assets the deceased held, property that represents accumulations of income or capital from the deceased's assets and property from the sale of the deceased's assets.

The estate has not made any loans to beneficiaries.

The estate owes no unpaid present entitlements.

No special rights or privileges have been conferred on any property of the estate.

No money or property has been transferred to the estate.

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 subsection 99A(3)

Reasons for decision

Summary

As the deceased estate is not being used for the purpose of tax avoidance, it is appropriate for the Commissioner to exercise the discretion under subsection 99A(2) of the ITAA 1936 to assess the deceased estate under section 99 of the ITAA 1936 for the income years of the ruling.

Detailed reasoning

Section 99A of the ITAA 1936 applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to subsection 99A(2) of the ITAA 1936, forms the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply in relation to the deceased estate in relation to the particular years 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) of the ITAA 1936).

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) of the ITAA 1936 as follows:

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 to your situation

•         The estate is a deceased estate that resulted from the will of the deceased, dated XX XXXX 20XX which satisfies the requirement of paragraph 99A(2)(a) of the ITAA 1936.

•         The estate 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 estate.

•         The estate has not been fully administered at this point due to the deceased's assets not all being dealt with because of protracted litigation.

•         All of the estate's property has flowed from the deceased, that is, no property has been 'injected' into the estate.

•         The trustees are the executors of a deceased estate and have exercised their powers under the will in a conventional manner (and not as a tax-avoidance device).

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 of the ITAA 1936 to apply to the trust in respect of each of the income years throughout the ruling period.

Therefore, the Commissioner's discretion will be exercised for the income years included in the ruling period.