Edited version of private advice

Authorisation Number: 1052403990652

Date of advice: 17 June 2025

Ruling

Subject: Commissioner's discretion - trust estate

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?

Answer

Yes.

Question 2

Will subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain or capital loss the Trustee of the Trust makes from the transfer of the Relevant Assets to the Beneficiaries on, or before, the Distribution Date?

Answer

Yes.

Question 3

Will the modifications in subsection 128-15(4) of the ITAA 1997 apply to the cost base and reduced cost base of the Relevant Assets in the hands of the Beneficiaries?

Answer

Yes.

This ruling applies for the following periods:

Years ended 30 June 20XX to 30 June 20ZZ

The scheme commenced on:

Year ended 30 June 20XX

Relevant facts and circumstances

The Testamentary Trust was established as per the Will of the Deceased Individual.

The beneficiaries of the Testamentary Trust are relatives of the Deceased Individual.

The terms of the trust deed of the Testamentary Trust have not been amended.

The distribution date of the Testamentary Trust is 30 June 20ZZ (Distribution Date).

All the Relevant Assets are post-CGT assets (i.e., acquired by the Deceased on, or after, 20 September 1985).

The Trustees have retained income in the Testamentary Trust for the ruling period.

The assets held by the Trustees consist of:

           i.        property vested in the Trustees under the terms of the Will of the Deceased Individual;

           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).

The assets held by the Trustees only consist of cash at bank and managed fund investments and do not consist of:

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

•                     loans related to related parties;

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

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

Question 1

Summary

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 ZZ.

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 ZZ where the Trustees of the Testamentary Trust is liable to pay tax on income to which no beneficiary is presently entitled.

Detailed Reasoning

The relevant legislation

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...'.

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).

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).

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)).

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

The Trustees have resolved, or may resolve, to accumulate net income of the Testamentary Trust during the Ruling Period. 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)).

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)

The assets held by the Trustees consist only of cash at bank and managed fund investments and that these assets are made up of:

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

(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 Trust; and

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

In addition, 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.

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)

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.

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:

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

Based on the information available, the Trustees have not used their powers under the Testamentary Trust 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 Trustees have exercised their powers under the Trust 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 Trustee 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

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 testamentary trust that resulted from the Will of the Deceased Individual; and

•                     the Tax Agent has advised that, after considering the needs of the beneficiaries, the Trustees resolved (and may resolve during the Ruling Period) to accumulate the income of the Trust in accordance with the Will.

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 20YY to 30 June 20YY

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

The Trust resulted from a will and satisfies the requirement of paragraph 99A(2)(a).

Throughout the Ruling Period:

•                     The Trustees have retained, or may retain, an amount of trust income.

•                     Tax has not been avoided, 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, 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 assets held by the Trustees consist of:

•                     assets vested in them (as Trustees) under the terms of the Will of Deceased Individual; and/or

•                     property from the sale of the assets of the Trust that has been reinvested or held as cash.

The assets held by the Trustees do not consist of:

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

•                     loans provided to related parties.

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 ending 30 June 20XX to 30 June ZZ.

Question 2

Summary

ATO Practice Statement Law Administration PS LA 2003/12 (Capital gains tax treatment of the trustee of a testamentary trust) will apply to the Trustee of the Testamentary Trust (the Trustee), and subsection 128-15(3) of the ITAA 1997 will apply to disregard any capital gain or capital loss the Trustee makes from the transfer of the Relevant Assets to the Beneficiaries.

Detailed Reasoning

Division 128 of the ITAA 1997 sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative or passes to a beneficiary in your estate.

A CGT asset has the meaning given by section 108-5 of the ITAA 1997, where subsection 108-5(1), defines a CGT asset to be:

(a)          any kind of property; or

(b)          a legal or equitable right that is not property.

To avoid doubt, subsection 108-5(2) of the ITAA 1997 lists the following as CGT assets:

(a)          part of, or an interest in, an asset referred to in subsection (1);

(b)          goodwill or an interest in it;

(c)          an interest in an asset of a partnership;

(d)          an interest in a partnership that is not covered by paragraph (c).

Section 128-10 of the ITAA 1997, titled 'Capital gain or loss when you die is disregarded', states that when you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded.

Section 128-15 of the ITAA 1997, titled 'Effect on the legal personal representative or beneficiary', states the following at subsections 128-15(1), (2) and (3):

(1)          This section sets out what happens if a CGT asset you owned just before dying:

(a)        devolves to a legal personal representative; or

(b)        passes to a beneficiary of that person's estate.

(2)          The legal personal representative or beneficiary is taken to have acquired the asset on the day you died.

(3)          Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

Further, subsection 128-15(4) of the ITAA 1997 sets out modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary.

The term 'legal personal representative' (LPR) is defined in subsection 995-1(1) of the ITAA 1997 and relevantly includes 'an executor or administrator of an estate of an individual who has died'.

Section 128-20 of the ITAA 1997 defines when a 'CGT asset passes to a beneficiary' in a person's estate. Relevantly, this will happen if the person / beneficiary becomes the owner under the deceased's will (paragraph 128-20(1)(a)).

Subsection 128-20(2) of the ITAA 1997 provides that a CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your LPR transfers it under a power of sale.

Effect of PS LA 2003/12

Practice Statement Law Administration PS LA 2003/12: Capital gains tax treatment of the trustee of a testamentary trust (PS LA 2003/12) confirms the Commissioner's longstanding administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).

PS LA 2003/12 further confirms that, broadly stated, the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

Application to your circumstances

The Testamentary Trust was created under the Deceased's Will and is a testamentary trust.

Pursuant to Will, parts of the residue of the Deceased's estate was transferred to the Trustee of the Testamentary Trust.

Pursuant to the Will the Beneficiaries of the Testamentary Trust are the Deceased's relatives.

Further, all assets of the Testamentary Trust (which included the Relevant Assets only) are passed from the Deceased's estate. No assets have been acquired from elsewhere.

In this case, upon the distribution of the Relevant Assets to the Beneficiaries on, or before, the Distribution Date, PS LA 2003/12 will apply to treat the Trustee the same way as a legal personal representative for the purposes of Division 128 of the ITAA 1997 and not recognise any taxing point in relation to assets owned by the Deceased.

Accordingly, the administrative practice of PS LA 2003/12 will apply to disregard any capital gain or capital loss that the Trustee makes from the Proposed Transaction.

Question 3

Summary

PS LA 2003/12 will apply and the modifications in subsection 128-15(4) of the ITAA 1997 will apply to the cost base and reduced cost base of the Relevant Assets in the hands of the Beneficiaries.

Detailed Reasoning

Division 128 and Effect of PS LA 2003/12

The Reasons for Decision to Question 2 contains the discussion on the relevant provisions and legal principles.

Further, paragraph 3 of PS LA 2003/12 provides the following:

The cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased's legal personal representative.

If the deceased acquired the asset before 20 September 1985 (that is, pre-CGT), the acquisition cost will be equal to the market value at the date of the deceased's death. If the deceased acquired the asset on or after 20 September 1985, the beneficiary's acquisition cost will be determined in accordance with table items 1, 2, 3 or 3A of subsection 128-15(4) of the ITAA 1997.

Application to your circumstances

The administrative practice of PS LA 2003/12 will apply to not recognise any taxing point in relation to the post CGT assets owned by a deceased person until those Relevant Assets cease to be owned by the Beneficiaries).

When the Trustee transfers the Relevant Assets to the Beneficiaries, the cost base and reduced cost base of each asset in the hands of the Beneficiaries will be calculated in the same way as it would have been if the assets had passed to them from the Deceased's legal personal representative.

In this case, all the Relevant Assets are post-CGT assets (i.e., acquired by the Deceased on, or after, 20 September 1985).

Accordingly, the modifications in item 1 of the table in subsection 128-15(4) of the ITAA 1997 will apply to the cost base and reduced cost base of the Relevant Assets in the hands of the Beneficiaries.