A revocable trust is a pretend game. So the Commissioner can put an end to the charade and tax the trustee instead.
Revocable Trust
In a revocable trust the trust assets are held in trust for beneficiaries in name only but are really still controlled by the person who created the trust.
Australian tax law doesn’t like pretend games. So section 102 empowers the Commissioner to tax the trustee instead.
Section 102 ITAA 36
Section 102 of ITAA36 is an anti-avoidance provision that has the effect that the trustee pays tax on the distribution.
s102: Where a person has created a trust …and:
(a) the person has power, whenever exercisable, to revoke or alter the trusts so as to acquire a beneficial interest in the income …; or
(b) income is… applicable for the benefit of a child or children of that person …under the age of 18 years; the Commissioner may assess the trustee to pay income tax…and the trustee shall be liable to pay the tax so assessed.
The income assessed to the trustee is not assessable in the hands of a beneficiary per s102 (3).
Power To Revoke or Alter
It is only when the settlor has the power to revoke or alter the trust so as to acquire a beneficial interest in trust income or income-producing assets that the section can be applied: Truesdale v FCT(1970) 120 CLR 353. The power of revocation must be found in the terms of the settlement.
Nominal Amount Ok
Section 102 should not apply where the settlor of the trust has provided only a nominal amount to establish the trust and is unrelated to the beneficiaries and trustees of the trust.
Tax Payable
Where s 102 applies, the amount of tax payable by the trustee is the amount of the tax shortfall. It is the amount by which the tax actually payable by the person who creates the trust is less than the tax that would have been payable by the settlor if they had received the relevant income specified in s 102(2).
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Last Updated on 23 March 2020
