Edited version of private advice

Authorisation Number: 1052411149296

Date of advice: 19 June 2025

Ruling

Subject: Section 99B - testamentary trusts

Question 1

Will CGT Event E5 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to you in respect of the assets in the testamentary trust) on Person A's death?

Answer

No.Section 104-75(1) of ITAA 1997 states:

CGT event E5 happens if a beneficiary becomes absolutely entitled to aCGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Question 2

Will section 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the distributions made by the testamentary trust to you in the Income years ended 30 June 20XX to 30 June 20XX (ruling years)?

Answer

Yes.

Section 99B of the ITAA 1997 applies when amounts of foreign trust property are paid to you or applied for your benefit, and you are a beneficiary of the trust. Trust assets can include cash, land, shares and other assets. The amount or value of the trust property is included in your assessable income in the income year that you receive it.

Question 3

Will the exception in section 99B(2)(a) of the ITAA 1936 apply to the distributions made to B from the testamentary trust that represented the corpus of the testamentary trust?

Answer

Yes.

The exception in section 99B(2)(a) will not apply to the distributions.

In your situation, the distributions from the testamentary trust represent the corpus (principal) of the trust and are not attributable to income that would have been assessable if derived by a resident taxpayer, therefore, the exception in section 99B(2)(a) should apply. This means that these distributions would not be included in your assessable income.

Question 4

At the time of the transfer of the legal title to the (remaining) trust assets of the testamentary trust to you, will CGT event E5 occur, such as to give rise to a capital gains tax liability to you?

Answer

No.

Summary

From the information you provided it is not clear that you will be absolutely entitled to the relevant assets of the estate on transfer of legal title. However, since the trust is a testamentary trust, which falls under Division 128, CGT Event E5 would not apply to you in respect of the assets in the trust if you were, or became, absolutely entitled at the time of transfer.

Detailed reasoning

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with CGT consequences that arise from a deceased estate.

Any capital gain or loss made by a trustee of a deceased estate or LPR is disregarded under section 128-15 of the ITAA 1997 if an asset of the estate 'passes' to a beneficiary in accordance with section 128-20.

The trustee of a testamentary trust is treated in the same manner as the trustee of a deceased estate or LPR for the purposes of applying Division 128 of the ITAA 1997 (PS LA 2003/12).

Application to your situation

The trustee will be treated for the purposes of subsection 128-15(3) as a LPR at the time when an in-specie distribution of the property to the beneficiary, you, as provided for in the deceased's will, occurs.

Therefore section 128-15 applies to disregard any capital gain or loss made.

This private ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for tax purposes and are over the age of 21 years.

Person B, died in 20XX, leaving a last will and testament dated prior to passing. Executors of Person B's will were your uncle, Person C and a friend of your uncle, Person D.

The executors were both Country A tax residents and were appointed executors of Person B's estate.

The terms of the will provided that monetary legacies were to be gifted to Person B's grandchildren with the residue of the estate being divided - one half to the "XX Family Trust" and one half to "The Special Fund", the testamentary trust.

Person C and Person D were appointed trustees of the testamentary trust ("the trust").

Terms of the will included that Person B's daughter, Person A and the sole child, you, are the beneficiaries of the trust and following the death of Person A, the trust is to be held equally for Person A's children who were still living and who had attained the age of 21 years.

Terms of the will provides a broad power for the trustees to use the whole or so much of the income or capital of the "The Special Fund" as the trustees see fit and Clause 7(p) states that trustees may provide advances to children and grandchildren, in their absolute discretion, as they deem fit.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

This is to explain how we reached our decision. This is not part of the private ruling.

Question 1

Will CGT Event E5 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to you in respect of the assets in the testamentary trust on Person A's date of death?

Answer

No.

Summary

Section 104-75,CGT event E5,happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Section 128-15 ITAA 1997 deals with the effect of death and sets out what happens if a CGT asset you owned just before dying:

   (a) devolves to your legal personal representative; or

   (b) passes to a beneficiary in your estate.

Detailed reasoning

When a CGT asset is transferred to a beneficiary from a deceased estate, the capital gains tax consequences are generally deferred until a later CGT event occurs, such as when the beneficiary disposes of the asset.

Therefore, CGT Event E5 would not typically apply at the date of death for assets in a testamentary trust, as the transfer of assets from the deceased to the beneficiary is covered by Division 128.

Since the Trust is a testamentary trust, which falls under Division 128, CGT Event E5 would not apply to you in respect of the assets in the trust on Person P's date of death.

Question 2

Will section 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the distributions made by the testamentary trust to you in the ruling years?

Yes.

Summary

Section 99B of the ITAA 1997 applies when amounts of foreign trust property are paid to you or applied for your benefit, and you are a beneficiary of the trust. Trust assets can include cash, land, shares and other assets. The amount or value of the trust property is included in your assessable income in the income year that you receive it.

Detailed reasoning

Paragraph 99B(2)(a) of the ITAA 1936, reduces an amount to be included in the beneficiary's assessable income, as prescribed by subsection 99B(1), by so much of that amount as represents the corpus of the trust estate (but not to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer).

Question 3

Will the exception in section 99B(2)(a) of the ITAA 1936 apply to the distributions made to you from the testamentary trust that represented the corpus of the testamentary trust?

Answer

Yes.

Summary

The exception in section 99B(2)(a) will apply to the distributions made to you from corpus.

Detailed reasoning

The application of section 99B(2)(a) of the Income Tax Assessment Act (ITAA) to distributions from a testamentary trust can be complex and depends on specific circumstances. Generally, section 99B(2)(a) provides an exception for certain amounts that are not included in the assessable income of a beneficiary.

For the exception to apply, the distribution must represent the corpus (capital) of the testamentary trust, which typically includes the original assets of the trust and any capital gains that have been retained in the trust.

Specifically, this exception applies to amounts that represent the corpus (capital) of the trust, which has not been previously taxed.

In the context of a testamentary trust, if the transfer of trust assets to the beneficiary represents the corpus of the trust, and this corpus has not been previously taxed, the exception in section 99B(2)(a) may apply.

According to section 99B(2)(a), amounts included in the assessable income of a beneficiary do not include amounts that represent the corpus of the trust estate, except to the extent that the corpus is attributable to amounts that would have been included in the assessable income of a resident taxpayer if derived by them.

If the corpus of the trust includes amounts that would have been included in the assessable income of an Australian resident taxpayer if derived by them, then the exception in section 99B(2)(a) of the ITAA 1936 does not apply to those amounts.

In this case, even if the distribution is from the corpus, it will be included in the beneficiary's assessable income to the extent that it includes such amounts.

If the corpus includes accumulated income or capital gains that would have been taxable if derived by an Australian resident, those amounts will be subject to tax when distributed to the beneficiary.

Alternatively, if the distribution from the testamentary trust is purely from the corpus (the principal or original assets of the trust) and not from income generated by those assets, it won't be included in a beneficiary's assessable income.

Question 4

At the time of the transfer of the legal title to the (remaining) trust assets of the testamentary trust to you, will CGT event E5 occur, such as to give rise to a capital gains tax liability to you?

Answer

No.

Summary

From the information you provided it is not clear that you will be absolutely entitled to the relevant assets of the estate on transfer of legal title. However, since the trust is a testamentary trust, which falls under Division 128, CGT Event E5 would not apply to you in respect of the assets in the trust if you are, or became, absolutely entitled at the time of transfer.

Detailed reasoning

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with CGT consequences that arise from a deceased estate.

Any capital gain or loss made by a trustee of a deceased estate (or LPR) is disregarded under section 128-15 of the ITAA 1997 if an asset of the estate 'passes' to a beneficiary in accordance with section 128-20.

The trustee of a testamentary trust is treated in the same manner as the trustee of a deceased estate or LPR for the purposes of applying Division 128 of the ITAA 1997 (PS LA 2003/12).

The trustee will be treated for the purposes of subsection 128-15(3) as a LPR at the time when an in-specie distribution of the property to the beneficiary, you, as provided for in the deceased's will, occurs.

Application to your situation

The trustee will be treated for the purposes of subsection 128-15(3) as a LPR at the time when an in-specie distribution of the property to the beneficiary, you, as provided for in the deceased's will, occurs.

Therefore section 128-15 applies to disregard any capital gain or loss made.

In respect of absolute entitlement, it is extremely difficult, if not impossible, to meet this standard, given the case of Oswal v. Commissioner of Taxation [2013] FCA 745 where Edmond J found that the phrase 'absolutely entitled to a CGT asset of a trust... as against the trustee' requires a beneficiary to have a vested, indefeasible, and absolute entitlement to a trust asset and to be entitled to require the trustee to deal with the asset as the beneficiary directs.

In Oswal, the trustee's statutory right of sale of trust property meant that the beneficiaries' interests 'while absolute were defeasible'. Edmond J also held that the trustee's right of indemnity was an impediment to absolute entitlement as against the trustee. In your case, the trustee's powers in clause 14 and 18, and the right to indemnity in clause 21 (and likely some of the other provisions in clauses 15-26), would make any interest K had in the assets of the trust defeasible in the sense explained by Edmond J.

In your case

Although you are the only living beneficiary to "the Special Fund" there are other beneficiaries to the residual estate under the trust. Upon Person As death the trustees held "the Special Fund" on trust for you. The trustees have power, authority and discretion under the will to buy and sell property, etc., for as long as the trustees think it fit, they have a right to write off depreciation against income, recoup losses against capital, in relation to assets that form part of the residuary. The trustees can engage other persons to transact business or do other acts in relation to the trusts, they can make loans to advance the children and grandchildren at their absolute discretion.

It doesn't make a practical difference in your case because if you are not absolutely entitled, the transfer of any CGT assets will just be a different event, still disregarded by Division 128. If you had been absolutely entitled it is not a CGT event E5 because it does not apply to this type of trust.