Present Entitlement

15.8. The meaning of present entitlement has been the subject of a number of judicial decisions. In general, a beneficiary is presently entitled to trust income when he can claim immediate payment from the trustee. Where there is a right to income of a deceased estate, there cannot be a present entitlement until the administration of the estate has proceeded to the point where the personal representative becomes a trustee. This occurs when the personal representative has completed the performance of his executorial duties of getting in the assets, paying or providing for the debts, funeral and testamentary expenses and legacies and then holds the remainder of the property in the estate in trust for one or more of the beneficiaries. There are unresolved questions as to the manner of taxation when the personal representative becomes a trustee in the course of a tax year of income. Assuming the trust accounting year and

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the tax accounting year correspond, the question whether the net income of the trust estate prior to the personal representative becoming a trustee is to be taxed as income of the trust or as income of the life tenant may be thought to depend on the appropriateness of a trust account being taken on the change in status of the personal representative. There is no guidance in the Act or the judicial authorities. The matter is further complicated by the fact that the personal representative may complete his executorial duties in relation to one part of the estate but have further duties to perform in relation to another part. A similar problem arises where a contingent interest in a trust becomes a vested interest during a year of income. The Commissioner's present practice, it is understood, is to assess the beneficiary on the income for the whole of the year of income during which the executor's administration is completed or the interest vests unless the trustee can show, by taking accounts when he completes his duties as executor or when the interest vests, that the income should be divided between the trust and the beneficiary. In the Committee's view, the Act should be changed to follow this practice; however, the requirements as to accounts should be sufficiently flexible to allow for the situation where the administration is completed in relation to part of the estate but not in relation to the balance.

15.9. There are unresolved issues when the trust accounting period, which may for example, end on each anniversary of the death of the testator or the making of the settlement, differs from the tax year of income. Where the trust estate carries on a business, clearly there can be no present entitlement of a person with a right to income until the time for taking the accounts of the business, and it is the person who then has the right to income who will be presently entitled. As the law is now framed, if there is no beneficiary presently entitled to trust income of any period to which net income of the trust estate relates, the relevant net income is taxed as income of the trust. In the Committee's view, there should be provisions requiring that the trust accounting period be treated as a substituted tax accounting period; it might be necessary also to require that the tax payable be adjusted to prevent a trust accounting period that differs from the normal tax accounting period being used as a method of deferring tax.

15.10. The point was made in paragraph 15.5 that an actual receipt of money or a benefit from the trust by a person with a right to income should be treated as a receipt of an amount to which the beneficiary is presently entitled. Another situation also calls for comment. A trustee may have a discretion to pay or apply income for the benefit of a beneficiary. Where he acts in exercise of such a discretion, section 101 provides that the beneficiary is deemed to be presently entitled to the amount so paid or applied. In the result the amount will go to determine the allocation of net income of the trust estate to be taxed to that beneficiary. The trustee's exercise of his discretion may be made at some time after the taking of the trust accounts for a year and will be treated by him as having been made from the trust income of that year. As the law stands, it is not clear whether the effect is to deem the beneficiary presently entitled to a share of the income of the year in question. Clearly in the interests of finality of assessment it is necessary to control the tax consequences that can flow from the trustee's exercise of his discretion. The Committee recommends that where the discretion is exercised within three months of the end of the trust accounting period and the trustee appropriates income of that period for the payment, the beneficiary should be deemed to be presently entitled to the amount of the income of the period thus paid or applied for his benefit. If the exercise and the appropriation are made more than three months from the end of the trust accounting period, the Commissioner should be given a discretion to treat the amount paid or applied in the same way.

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15.11. Where the trustee, in exercising a discretion of the kind just considered, appropriates income of a still earlier period, there are no tax consequences. The net income of the trust estate in that earlier period will already have been taxed either to the beneficiaries or to the trust.

15.12. The meaning of the phrase employed in section 101, ‘pay or apply … for the benefit of … beneficiaries’, is a matter of some doubt. Similar words used in a trust instrument or a statute giving a discretion to the trustee have been invested with a very wide meaning. The Committee recommends later in this chapter that where income is accumulated in a trust estate, any part of the corresponding net income of the estate that is not taxed to any beneficiary should bear tax at the maximum marginal rate. Section 101 will therefore, even more than now, offer a prospect of escaping tax at a high rate where an effective application for the benefit of a beneficiary on a lower rate is made. If the words of section 101 are given the wide meaning they have been given in other contexts, a resettlement of trust income on trusts under which the beneficiary has only a contingent entitlement to capital and income will serve to take the part of the net income of the trust estate that is resettled out of reach of the maximum marginal rate. In the Committee's view a resettlement of trust income should only be allowed to operate in this way if the terms of the resettlement give the beneficiary an absolute right to the corpus and to the income from it. If any wider meaning is to be attached to the words in section 101, the prospect arises that a beneficiary in the original trust may have a present liability for tax in respect of money to which he has no present entitlement and to which he has no vested right.

15.13. The notion of present entitlement to a share of the income of a trust estate does not depend on the source of moneys in fact used by the trustee in satisfying the rights of a beneficiary. In general, a person receiving an annuity from a trust is taxed on the amount he actually receives, whatever the source of the moneys used by the trustee. Where, however, the annuity is charged on income of the trust it should to this extent be taxed under the provisions of Division 6. Assume, for example, that the terms of a trust instrument provide for payment of an annuity of a set amount out of income, with a direction to the trustee to resort to corpus if the income is insufficient. If the income proves sufficient, the amount of the annuity should be treated as a share of the income of the trust and taxed under the provision of Division 6. If the annuity is only in part covered by the income, it should to the extent covered be treated as a share of the income of the trust and the balance not covered by income should be taxed as income under the general provisions of the Act.