Income Tax Assessment Act 1936

A couple of maybe the state damn duty legislations and land tax legislation define it, but if you look in the Tax Act, like, it's not defined.

What we have to do is work out whether it comes within the ambit of Section 102, capital A, capital G of the Income Tax Assessment Act 1936.

And you'll even see, if you've been looking at the consultation paper and the draft bill for the tax changes proposed to be brought in by the 2026 federal budget with the exemptions for testamentary discretionary trusts, again, there's no actual definition, and we're either trying to learn how to define testamentary discretionary trust or just taking it back to referencing it to Section 102AG.

So even testamentary trust, TT, TDT, testamentary discretionary trust, that is, again, mostly a marketing term.

So look, I, I know next to nothing about the US revocable living trust, but one of the things is that it is revocable, which I believe means they can change aspects of it quite easily.

In Australia, the trust has to be irrevocable.

The reason for that is Section 102 of the Income Tax Assessment Act 1936, and it specifically says that if any part of the income or capital of the trust can go back to the originating settlor of the trust, then it is deemed to be the settlor's income, and your trust is basically void ab initio, so void from the beginning.

So that is why when you read a trust, deep-- mostly a family trust, you'll see the settlor and anyone connected to them is always excluded because you do not want that trust to fall foul of Section 102.

Okay, so I want to explain why I think the difference between the income and capital entitlements is really worthless.

So let's go to the Income Tax Assessment Act 1936, particularly sections 95 and 97.

So you might have a sense or a good sense of what you think is income and capital, right? So like obviously rental income, interest income, dividend income, sale proceeds, like cash sales from selling inventory, right? But when it comes to trust law and tax law, it's not actually that intuitive.

And there's a bit of a disconnect between our ordinary concept of income and what is actually taxed as income under the Income Tax Assessment Act.

distinction between who's an income and capital beneficiary on particular transactions.

So you could very easily give that capital gain to an income beneficiary depending on the way that your trustee is drafted, the definition of income.

Are you using the section 95 net income definition or some other distributable income definition? Is there a power for the trustee to classify receipts or not? So because of this complexity under the tax legislation and the distinction between the accounting income according to ordinary concepts at trust law versus net income income and adjusted net income under Section 95 of the Income Tax Assessment Act 1936.

I think that the distinction in the trust deed is very easy to sidestep and really not very effective at all.