Whether family trust distribution
tax payable on trust distributions
Q. We have a discretionary trust that has
only 2 beneficiaries. They are an individual and a well-known
public Australian university. Distributions to the university have
to be used for scholarships for undergraduate students. On the
death of the individual beneficiary, all distributions will be
made to the university. The trust has made a family trust
election. Is family trust distribution tax payable in respect of
the distributions to the university?
A. Section 271-15 in Schedule 2F to the ITAA 1936
provides that family trust distribution tax is payable if, at any
time while a family trust election is in force (including a time
before it was made), the trust confers a present entitlement to,
or distributes, income or capital of the trust, upon or to a
person who is not the individual specified in the family trust
election nor a member of that individual’s family group. The
question, therefore, is whether the university is a member of the
relevant individual’s family group. (Note that since the term
‘person’ is defined in section 6(1) of the ITAA 1936 to include a
company and a ‘company’ is defined in section 995-1 of the ITAA 1997
to include a ‘body corporate’, the university is a
‘person’.)
The ‘family group’ includes certain
tax-exempt entities specified in various provisions of the ITAA
1997 (including sections 50-5, 50-10 and 50-20) or certain entities
mentioned in the table in section 30-15 of the ITAA 1997 to which a
tax-deductible gift may be given: see section 272-90(6), (7) in Schedule 2F.
If the university qualifies as one of those bodies, it will be
part of the family group and family trust distribution tax will
not be payable in respect of any distributions to the university.
One of the types of exempt entity listed in section
50-5 is a public educational institution, which ‘has a physical
presence in Australia and, to that extent, incurs its expenditure
and pursues its objectives principally in Australia’: see section
50-55. If the university in this case is a ‘public educational
institution’, it will be tax-exempt under section 50-5 and therefore
part of the relevant ‘family group’ for the purposes of the
family trust rules in Schedule 2F.
What is a ‘public educational
institution’ in terms of section 50-5? The term is not defined in the
ITAA 1997 (or the ITAA 1936) and there is very little
jurisprudence on the meaning of the term. However, it is
inconceivable that an Australian university open to all students
(who satisfy the entrance requirements) is not a public
educational institution. This is supported by Windeyer J’s
observation in Incorporated Council of Law Reporting (Queensland)
v FCT (1971) 2 ATR 515 (at 523) that a ‘public educational
institution is generally understood to be an establishment, in
which instruction is given in some branch of knowledge or in some
art or science, the pupils being drawn from the public generally
or from some substantial and significant section of the public’.
In conclusion, as the university is a public
educational institution that is exempt from income tax under section
50-5 of the ITAA 1997, it is taken to be part of the relevant
family group by virtue of section 272-90(7) in Schedule 2F and therefore
distributions from the trust to the university are not subject to
family distribution tax.
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