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Ruling

Subject: Lodgment of income tax returns by a trustee of a deceased estate during the period of administration of the deceased estate.

Question 1

Following the death of an individual, is the resulting deceased estate required to apply for a tax file number, even if the taxable income derived during the tax year in which the estate is being administered is below the applicable income tax thresholds either under the general individual rates or the rates set out under ITAA 1936 sec 99 and there is no income to which beneficiaries are presently entitled?

Advice/Answers

If the administration of the deceased estate is completed in the same income year as the date of death, you do not need to lodge a trust tax return for the deceased estate if:

· no beneficiary is presently entitled to any of the income of the deceased estate, and

· the taxable income of the estate is below the tax-free threshold of $6,000 (for the 2009 income year).

As there is no requirement to lodge an income tax return, there is no necessity to obtain a tax file number.

Question 2

Depending on the answer to question 1, is the deceased estate, during the period of administration, required to lodge a Form T income tax return (using code "D" under "Type of trust") at the end of the tax year (or once administration of the estate is finalised) even if the taxable income derived during the period in question is below the applicable income tax thresholds either under the general individual rates or the rates set out under ITAA 1936 sec 99 and there is no income to which beneficiaries are presently entitled?

Advice/Answers

If the administration of the deceased estate is completed in the same income year as the date of death, you do not need to lodge a trust tax return for the deceased estate if:

· no beneficiary is presently entitled to any of the income of the deceased estate, and

· the taxable income of the estate is below the tax-free threshold of $6,000 (for the 2009 income year).

Question 3

Would the answers to questions 1 and 2 be different if there were presently entitled resident beneficiaries who received a distribution from the deceased estate during the tax year?

Advice/Answers

If the beneficiary is presently entitled, and not under a legal disability, they are liable for income tax. If an income distribution is made to an adult resident beneficiary, it is the responsibility of that person to declare the amount in their personal tax return and pay income tax on it at their marginal tax rate. Consequently an income tax return is required to be lodged for the deceased estate and hence a Tax File Number should also be obtained.

This ruling applies for the following period

Income year ending 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

The trustee acts as the sole executor for a deceased estate. A TFN for this estate has not been applied for.

The deceased passed away during the income year and probate was granted before the end of the income year. Administration of the deceased estate was finalised before the end of the financial year. During the period of administration, being the tax year, no person was presently entitled to the income derived within the estate.

The deceased was retired and was not required to lodge an individual income tax return for many years due to the level of income being derived being below the tax free threshold. At the time of her death, the only assets which fell into her estate were her main residence (which she resided in until she died), 2 bank accounts and personal assets.

An analysis has been carried out by the trustee which shows that in the income year, the taxable income derived within the estate up to its finalisation is below the thresholds pertaining to resident individuals.

Relevant legislative provisions

Income Tax Assessment Act 1936, section 99

Income Tax Assessment Act 1936, section 99A

Income Tax Assessment Act 1936, section 202

Income Tax Assessment Act 1936, paragraph 97(1)(a)

Income Tax Rates Act 1986, Part 1, Schedule 7

Reasons for decision

Issue 1

Question 1

Summary

If the administration of the deceased estate is completed in the same income year as the date of death, you do not need to lodge a trust tax return for the deceased estate if:

· no beneficiary is presently entitled to any of the income of the deceased estate, and

· the taxable income of the estate is below the tax-free threshold of $6,000 (for the 2009 income year).

As there is no requirement to lodge an income tax return, there is no necessity to obtain a tax file number.

Detailed reasoning

Generally if no beneficiary of a trust estate is presently entitled to the net income of the estate, the trustee is assessed under section 99A of the Income Tax Assessment Act 1936 ('ITAA 1936') and are liable to pay tax on the net income of the trust estate at the rate declared by Parliament for the purposes of section 99A of the ITAA 1936. This rate is generally the maximum rate of personal tax.

In a limited number of scenarios the Commissioner has a discretion to tax the income of the trust estate to the trustee under section 99 of the ITAA 1936 if the Commissioner is of the opinion that it would be unreasonable for section 99A to apply.

Where the Commissioner declares section 99A of the ITAA 1936 to have no application, the trustee is taxed as if the net income of the trust estate were the income of a resident individual.

Subsection 99(2) of the ITAA 1936 states;

Where there is no part of the net income of a resident trust estate:

· that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

· in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

· that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

· the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.

The Commissioner will generally exercise the discretion to assess a deceased estate under section 99 of the ITAA 1936 where the estate is of the "ordinary and traditional" kind and where the deceased has died less than three years before the end of the relevant income year. A deceased estate of the "ordinary and traditional" kind would be an estate where the assets would be those of the deceased person's, for example, a house or income producing property.

Part 1 to Schedule 7 of the Income Tax Rates Act 1986 prescribes that the applicable rates of income tax in the 2009 income year for a resident individual provide for a tax free threshold of $6,000.

You have advised that the net income from the deceased estate in its first and final year of administration is under the tax free threshold of $6,000.

As the administration of the estate has been completed within its first year and the net income is below the tax free threshold (hence no tax is payable by the trustee) there is no requirement to lodge an income tax return for the deceased estate.

As you have no requirement to lodge an income tax return, there is no necessity to obtain a Tax File Number (TFN). A TFN is not compulsory. Section 202 of the ITAA 1936 explains the purpose of the TFN including under subsection 202(a);

to increase the effectiveness and efficiency of the matching of information contained in reports given to the Commissioner under this Act or the regulations with information disclosed in income tax returns by taxpayers;

Consequently as the TFN is not compulsory and you have no obligation to lodge an income tax return, there is no requirement to obtain a TFN.

Question 2

Summary

If the administration of the deceased estate is completed in the same income year as the date of death, you do not need to lodge a trust tax return for the deceased estate if:

· no beneficiary is presently entitled to any of the income of the deceased estate, and

· the taxable income of the estate is below the tax-free threshold of $6,000 (for the 2009 income year).

Detailed reasoning

Generally if no beneficiary of a trust estate is presently entitled to the net income of the estate, the trustee is assessed under section 99A of the ITAA 1936 and are liable to pay tax on the net income of the trust estate at the rate declared by Parliament for the purposes of section 99A of the ITAA 1936. This rate is generally the maximum rate of personal tax.

In a limited number of scenarios the Commissioner has a discretion to tax the income of the trust estate to the trustee under section 99 of the ITAA 1936 if the Commissioner is of the opinion that it would be unreasonable for section 99A to apply.

Where the Commissioner declares section 99A of the ITAA 1936 to have no application, the trustee is taxed as if the net income of the trust estate were the income of a resident individual.

Subsection 99(2) of the ITAA 1936 states;

Where there is no part of the net income of a resident trust estate:

· that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

· in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

· that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

· the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.

The Commissioner will generally exercise the discretion to assess a deceased estate under section 99 of the ITAA 1936 where the estate is of the "ordinary and traditional" kind and where the deceased has died less than three years before the end of the relevant income year. A deceased estate of the "ordinary and traditional" kind would be an estate where the assets would be those of the deceased person's, for example, a house or income producing property.

Part 1 to Schedule 7 of the Income Tax Rates Act 1986 prescribes that the applicable rates of income tax in the 2009 income year for a resident individual provide for a tax free threshold of $6,000.

You have advised that the net income from the deceased estate in its first and final year of administration is under the tax free threshold of $6,000.

As the administration of the estate has been completed within its first year and the net income is below the tax free threshold (hence no tax is payable by the trustee) there is no requirement to lodge an income tax return for the deceased estate.

Question 3

Summary

If the beneficiary is presently entitled, and not under a legal disability, they are liable for income tax. If an income distribution is made to an adult resident beneficiary, it is the responsibility of that person to declare the amount in their personal tax return and pay income tax on it at their marginal tax rate. Consequently an income tax return is required to be lodged for the deceased estate and hence a Tax File Number is required to be obtained.

Detailed reasoning

Beneficiaries are presently entitled to the income of a deceased estate if they have an indefeasible, absolutely vested interest in the income. In other words, the beneficiaries have a claim or interest in the income that cannot be defeated by another person. They must also be able to demand immediate payment of the income. This means that beneficiaries can be presently entitled even though they may not have actually received an income distribution.

Generally, beneficiaries are not presently entitled to the income of a deceased estate during the administration of the estate. This is because the debtors of the deceased person and any persons contesting the will may be able to defeat the beneficiaries' right to the income. This means that during this period, the income belongs to the deceased estate and not the beneficiaries.

However, as administration progresses, it may become clear that part of the net income of the deceased estate will not be required to either pay or provide for debts. You may exercise your discretion and pay some of the income to the beneficiaries. The beneficiaries in this situation will be presently entitled to the income actually paid to them or actually paid to someone else on their behalf.

Taxation Ruling IT 2622 "Income Tax: Present entitlement during the stages of administration of deceased estates" provides guidance on this;

9. Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries. During the initial stage of the administration no beneficiary is presently entitled to the income derived.

10. The leading Australian case on present entitlement under a trust arising during the course of administration of an estate is the decision of the High Court of Australia in F.C. of T. v. Whiting (1943) 68 CLR 199; 7 ATD 179. The Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered.

11. In their joint judgment, Latham C J and Williams J stated (CLR at 216; ATD at 184), that numerous authorities had established that:

".... until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries."

12. And later their Honours added (CLR at 216; ATD at 184):

"The only part of an estate which can be made available to satisfy the claims of the beneficiaries is that part which remains after the funeral and testamentary expenses, death duties and debts have been paid or provided for, if necessary out of the whole estate, including any income earned by the estate during the period of realization."

13. Until the estate of a testator has been fully administered and the net residue ascertained, a residuary beneficiary has no proprietary interest in any specific investment forming part of the estate or in the income from any such investment. Both corpus and income are the property of the executors or administrators: Lord Sudeley v. Attorney-General [1897] A.C. 11; Dr Barnardo's Homes National Incorporated Association v. Commissioners for Special Purposes [1921] 2 A.C. 1. See also Pajels v. MacDonald (1936) 54 CLR 519 at 526; Corbett v. I.R.C. (1937) 4 All E.R. 700 at 707 and C.S.D. (Qld) v. Livingston (1964) 112 CLR 12.

14. During the intermediate stage of administration of a deceased estate (as described in paragraph 6 above), the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.

Where it has been ascertained that the beneficiary is presently entitled to a share of the net income of the deceased estate, and is under no legal disability, paragraph 97(1)(a) of the ITAA 1936 advises the following;

Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

As the beneficiary is required to report the distribution as assessable income in their income tax return an income tax return for the deceased estate is required to be lodged declaring the net income and identifying the distributions made.

As you have a requirement to lodge an income tax return, it is recommended that a Tax File Number (TFN) be obtained. A TFN is not compulsory. Section 202 of the ITAA 1936 explains the purpose of the TFN including under subsection 202(a);

to increase the effectiveness and efficiency of the matching of information contained in reports given to the Commissioner under this Act or the regulations with information disclosed in income tax returns by taxpayers;

You are not required by law to obtain a TFN. However, failure to provide a TFN on a form or return required by the Commissioner may result in a delay in the processing of the form or return.

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