Tuesday, November 2, 2021

When 2 become 1 - and then** some

Last week’s post considered the amalgamation of 2 testamentary trusts ‘post death’ and a Tax Office ruling.

Following that previous ruling there have been more detailed private binding rulings issued by the Tax Office, including Authorisation Number 1013038270642.

The ruling particularly focuses on arguably the leading decision in relation to testamentary trusts and excepted trust income, namely - In Re Trustee of the Estate of the Late AW Furse; A/C Jessica N Delaney and A/C Skye Nea Delaney) v the Commissioner of Taxation [1990] FCA 470 (Furse), which has featured in previous posts.

The ruling confirms that, in a sentence, Furse is authority for the conclusion that provided a testamentary trust meets the requirements of subsection 102AG(2) of the Tax Act (which sets out the requirements to access the concessional taxation regime), income from the trust will be excepted trust income regardless of what other factors are present.

In the ruling here, although one testamentary trust was intending to transfer assets to another, it was confirmed that there were no non-arm’s length dealings in relation to the derivation of trust income. This meant that the anti-avoidance provisions in subsection 102AG(3) would not apply.

In particular, subsection 102AG(3) limits access to the excepted trust income regime where the parties -
‘were not dealing with each other at arm's length in relation to the derivation, or in relation to the act or transaction, (such that) the excepted trust income is only so much (if any) of that income as would have been derived if they had been dealing with each other at arm's length in relation to the derivation, or in relation to the act or transaction.’
The further anti-avoidance provision under subsection 102AG(4) that operates to exclude assessable income derived by a trustee under or as a result of an agreement that was entered into or carried out by a person for the purpose of securing excepted trust income was also held to be irrelevant.

Although all income received from the ‘merged’ testamentary trust would be treated as excepted trust income, the Tax Office confirmed that there was no agreement entered into for the purpose of securing that assessable income as excepted trust income.

Rather it was agreed that the true purpose was to reduce administration and yearly compliance costs.

Furthermore it was noted that if the taxpayer did not enter into the arrangement of merging the two trusts, the trust income from both trusts would be excepted trust income in any event.

In other words, there was no additional tax benefit resulting from the merger, the only substantive benefit was the saving of administration and compliance costs.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the J Mascis (of Dinosaur Jnr fame) song ‘And then’. Listen hear (sic):