Trustee Determines Distributable Income of Trust

In a recent decision, the Full Federal Court has found that beneficiaries were not presently entitled to income of a trust for the current year due to the existence of prior year losses.

The taxpayers were beneficiaries of a family trust which carried on a business. In the 1997 and 1998 income tax years, the trust claimed deductions for contributions made under an employee benefit trust arrangement.

The Commissioner disallowed these deductions and amended the taxpayers’ assessments arguing that the deductions represented distributable income of the trust on which the beneficiaries should be assessed.

The Court, in allowing the taxpayers’ appeal, held that losses incurred in one year must, in the absence of any further direction given by the trust deed, be made up out of profits of subsequent years and not out of capital, such that no profits are distributable until all past losses are recouped.

As the trust had a negative distributable income on that basis, there could be no present entitlement to any income of the trust. The Court thus found that the income of the trust was properly assessable to the trustee.

The Commissioner has sought leave to appeal to the High Court.

CGT — Life and Remainder Interests

The Tax Office recently released TR 2006/14, which deals with the tax consequences of creating life and remainder interests in property.

Broadly, a life interest is a right to use an asset or enjoy the income from an asset during a person’s lifetime.  The asset passes to the holder of the remainder interest on the death of the life tenant.

The ruling deals with the potential tax implications of:

the creation of life interests under a will;

the death of a life tenant;

the granting of life interests between taxpayers; and

the disclaimer of a life interest.

The ruling outlines the Tax Office’s position on a range of aspects, which will now provide greater clarity in this area that taxpayers often find complex.

Tip: Effective estate planning will require individuals to carefully consider the issues discussed in the ruling around life and remainder interests.

Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

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