Taxation Determination

TD 97/15

Income tax: capital gains: does section 160ZM of the Income Tax Assessment Act 1936 apply to a non-assessable payment made by a trustee to a beneficiary of a discretionary trust?

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FOI status:

May be releasedFOI number: I 1015400

1. No. Section 160ZM applies if a trustee of a trust pays an amount to a taxpayer that is not assessable income of the taxpayer in respect of an interest or unit in the trust, other than as proceeds of disposal of the interest or unit. Section 160ZM does not apply to a non-assessable payment made by a trustee of a discretionary trust to a member of the class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee ('a discretionary beneficiary'). This is because:

(i)

a discretionary beneficiary does not hold an 'interest ... in the trust' of the nature or character referred to in subsection 160ZM(1); and

(ii)

any payment made to a discretionary beneficiary is not an amount paid to the discretionary beneficiary 'in respect of' the interest that the discretionary beneficiary holds in the trust (namely, a right of due administration of the trust, including a right to have his or her interest protected by a court of equity, and a right to be considered by the trustee as a potential recipient of trust income or corpus).

2. The word 'interest' has different meanings depending on the context in which it is used. In subsection 160ZM(1), the expression used is 'interest ... in the trust'. It is not 'interest in the income of the trust', 'interest in the corpus of the trust' or 'interest in the property of the trust'. In its context in subsection 160ZM(1), the interest in the trust that is contemplated is one in which a taxpayer can invest, one that is capable of being acquired and disposed of, one the precise extent of which is quantifiable and one in which the rights attaching to it are defined with particularity in the terms of the deed of settlement. Subsection 160ZM(1) excludes a payment in respect of the disposal of the interest, and thus, envisages that the relevant interest is one that is capable of being disposed of. It is also one that is capable of having a cost base, indexed cost base or reduced cost base because subsection 160ZM(2) is predicated on there being a reduction (or step down) in the relevant cost base and subsection 160ZM(3) is predicated on there being an excess over the indexed cost base of the interest. In its context in section 160ZM, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. An example of an 'interest ... in the trust' in subsection 160ZM(1) is the interest that a beneficiary holds in a fixed trust.

3. The interest that a discretionary beneficiary has in a discretionary trust (to have the trust estate properly administered and to be considered by the trustee in exercising a power of appointment to distribute income or corpus of the trust) is of a different nature from the type of interest in a trust referred to in subsection 160ZM(1). A discretionary beneficiary's interest is not one in which a person can invest, nor one that is capable of being acquired and disposed of, nor one in which the rights attaching to it (for example, rights to vote, to distributions of income, to redemption or assignment or to entitlement to corpus distributions on winding up) are defined with particularity in the terms of the discretionary trust deed. It is not a precisely quantifiable interest because it depends on which beneficiaries the trustee favours in exercising its discretion, on the quantum of income or corpus to be distributed in exercise of the discretion or on both. The interest of a discretionary beneficiary is not, therefore, sufficient to constitute an 'interest ... in the trust' for the purposes of subsection 160ZM(1).

Technical notes:

1. This Taxation Determination does not address the question whether a non-assessable payment made by a trustee to a discretionary beneficiary comes within any other provision of Part IIIA. Other provisions in Part IIIA may apply to the discretionary beneficiary depending on whether the payment is a distribution of income of the trust or whether it is a distribution of corpus of the trust.

2. It is not necessary to consider in this Taxation Determination whether the interest that a member of a class of beneficiaries has in a discretionary trust is an 'asset' as defined in Part IIIA or what, if any, implications arise under the general provisions of Part IIIA if the member disposes of that interest.

3. This Taxation Determination does not address the question whether a taker in default (or a default beneficiary) in a discretionary trust has an interest in the trust in terms of subsection 160ZM(1).

Commissioner of Taxation
25 June 1997

Previously released as Draft TD 95/D23

References

ATO references:
NO NAT 95/9530-9
BO CGT Cell (CGDET113) UMGCGTTD 96-23

Subject References:
assets
CGT asset
beneficiary
default beneficiary
discretionary beneficiary
discretionary trust
disposal
taker in default
trust
units
unit trust

Legislative References:
ITAA 160M(6)
ITAA 160ZM
ITAA 160ZM(1)
ITAA 160ZM(2)
ITAA 160ZM(3)
ITAA 160ZX(2)(b)
ITAA 160ZYA
ITAA 160ZYB