Edited version of private advice

Authorisation Number: 1052352898470

Date of advice: 20 March 2025

Ruling

Subject: Commissioner discretion - subsection 100AA(4) of the ITAA 1936

Question 1

Will the Commissioner exercise the discretion in subsection 100AA(4) of the Income Tax Assessment Act 1936 (ITAA 1936) to disregard the failure of the Trustee to notify the tax exempt beneficiaries of their present entitlement to a share of the trust fund at the end of two months after the end of the relevant income year as required in paragraph 100AA(1)(c) of the ITAA 1936?

Answer 1

No

This ruling applies for the following period:

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 was established after 1985. The appointor passed away X years later and it substantially implemented upon their death when the bulk of the estate was left to the Trust.

The appointor did not have any children or any immediate relatives. The net income of the Trust may only be distributed, in the absolute discretion of the Trustee, to the charities as are described in the Trust Deed. Any undistributed net income remaining in any financial year must be distributed equally between the named Primary Beneficiaries, all of which are charities and all of which are endorsed income tax exempt deductible gift recipients.

B Pty Ltd (the Trustee) is the Trustee of the Trust. As at the vesting date the trust will be wound up and the capital distributed equally to the Primary Beneficiaries.

There was a change of one of the appointors of the trust in the X year.

The Trustee failed to satisfy the two-month requirement regarding notifying in writing the Beneficiaries of the present entitlement for X years. The Trustee had relied upon the previous tax agent to notify the primary beneficiaries of their pending entitlements each year. The previous tax agent failed to notify the primary beneficiaries.

The Trust had net income for the period. The primary beneficiaries have now received their entitlements for the period of the private ruling request.

The Trustee has notified the Primary Beneficiaries in accordance with section 100AA for the most recent financial year, that they will be receiving distributions of income.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 100AA(1)

Income Tax Assessment Act 1936 subsection 100AA(2)

Income Tax Assessment Act 1936 subsection 100AA(3)

Income Tax Assessment Act 1936 subsection 100AA(4)

Income Tax Assessment Act 1936 subsection 100AA(5)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Specific anti-avoidance rules prevent trustees from using tax-exempt entities to avoid tax (sections 100AA and 100AB of the ITAA 1936).

Broadly, the anti-avoidance rules apply if a tax-exempt beneficiary is presently entitled to trust income for an income year and:

•                the trustee does not notify the beneficiary of their entitlement or pay the income within two months of the end of the year - this is the pay or notify rule, or

•                the beneficiary's entitlement exceeds a 'benchmark percentage' - this is the benchmark percentage rule.

This section does not apply to a trust estate that is a managed investment trust (subsection 100AA(7) of the ITAA 1936).

The Trustee can be treated as having given 'the exempt entity notice in writing of the present entitlement' when they pay the exempt entity the amount of their distribution (subsection 100AA(2) of the ITAA 1936).

Effective from 29 June 2011, subsection 100AA(3) of the ITAA 1936 treats an exempt entity as not being presently entitled, and having never been presently entitled, to an amount of trust income to the extent that the trustee failed to notify the exempt entity (in writing) at the end of 2 months after the end of the relevant income year of the present entitlement. This share of net income is instead assessed to the trustee.

Commissioner's discretion

However, subsection 100AA(4) of the ITAA 1936 provides subsection (3) does not apply if the Commissioner decides that the failure of the trustee to notify should be disregarded.

In making a decision under subsection 100AA(4) of the ITAA 1936 (or refusing to make such a decision), the Commissioner must have regard to the following in subsection 100AA(5) of the ITAA 1936:

(a) the circumstances that led to the failure mentioned in paragraph (1)(c);

(b) the extent to which the trustee has taken action to try to correct the failure and if so, how quickly that action was taken;

(c) whether this section has operated previously in relation to the trustee, and if so, the circumstances in which this occurred;

(d) any other matters that the Commissioner considers relevant.

The explanatory memorandum (Chapter 2 - Interim changes to improve the taxation of trust income) provides the following example in relation to the Commissioner's discretion:

Example 2.33

In the 2010-11 income year, the Smith Trust generated $10,000 of interest income. The trust has no other income or expenses and its taxable income is therefore $10,000.

The trustee of the Smith Trust makes the Quay Trust, a charitable entity, presently entitled to all of the interest income. Ignoring the anti-avoidance rule, the Quay Trust would be notionally assessed on all of the trust's taxable income of $10,000 (although that income would be exempt from tax).

However, the Smith Trust is unaware that the Quay Trust is an exempt entity until 30 September 2011 and therefore does not inform the Quay Trust of its entitlement before 31 August 2011, but rather at the (later) time when its accounts are prepared and it notifies all beneficiaries of their entitlements for trust purposes. When the Smith Trust becomes aware that the Quay Trust is an exempt entity it takes immediate action to notify the Quay Trust of its entitlement.

As the Smith Trust has taken immediate action to notify the Quay Trust of its entitlement, and it was not unreasonable for the Smith Trust to be unaware of the Quay Trust's taxation status, the Commissioner decides to exercise his discretion under subsection 100AA(4) of the ITAA 1936 to disregard the failure of the trustee of the Smith Trust to comply with subsection 100AA(1) of the ITAA 1936.

Therefore, the Quay Trust is notionally assessed on all of the Smith Trust's taxable income of $10,000. Had the Commissioner not exercised his discretion, the trustee of the Smith Trust would have been assessed and liable to pay tax under section 99A of the ITAA 1936 on all of its taxable income of $10,000.

Application to your circumstances

In this case, the Trustee relied on the previous tax agent to notify the primary beneficiaries of their pending entitlements each year. The Trustee failed to satisfy the two-month requirement regarding notifying in writing the beneficiaries of their present entitlement. Further, payments of the relevant distributions years were not made to the beneficiaries in each of the relevant years. The beneficiaries were notified of their entitlements in the 20XX-XX financial year and the monies were paid on this date.

Based on the information provided to the Commissioner, no action was taken by the Trustees to correct these failures for some time. We consider a period of almost X years to be a significant amount of time during which the monies remained within the trust and were withheld from the beneficiaries. Of note, these circumstances can be clearly distinguished from the example set out above where:

•                the trustee was unaware of the relevant trust's taxation status

•                action was taken immediately to rectify the issue

We acknowledge the example is not exhaustive of all circumstances where the Commissioner's discretion should be exercised. However, it cannot be said in this case that the Trustee was unaware of the status of the beneficiaries given the broader purpose of the trust.

In this case the circumstances that led to the failure are the mistakes of a previous tax agent. However, we consider it was the trustee's responsibility to ensure the relevant requirements were met. We note that certain individuals were responsible for making the payments to the primary beneficiaries. Also, the Trust was in existence for a significant period before the years in question where the requirements were not met.

Further, it took a substantial period, almost X years, for the failures to be corrected in contrast to the example above where the error was corrected within a month.

The Commissioner has also considered other factors, together with the above, namely that the Trust was in existence for a significant period, the Trustee's ongoing and yearly obligations in declaring their annual reports, and also the wider community whereby as an example an error or oversight was beyond their control, discovered and rectified earlier.

The Commissioner acknowledges this section has not operated previously in relation to this trustee, nor has the trust requested the discretion previously. However, having considered the circumstances and the relevant factors, the Commissioner will not exercise the discretion in subsection 100AA(4) of the ITAA 1936 to disregard the failure of the Trustee to notify the beneficiary charities (exempt entities) of their present entitlement to a share of the Trust Fund.