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Ruling
Subject: Deceased estate
Question and answers
1. Does the payment you received from the deceased estate form part of your assessable income?
No.
2. Does the rental income derived in the deceased estate form part of your assessable income in the year ended 30 June 2012?
No.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
A Will created an investment fund and life use of a property for the deceased's relative, X. Upon X's death these items would become part of the residue of the estate.
Probate was granted.
A Deed of Family Arrangement was drawn up to change the Will so that two parties would share equally in the residue of the estate when the property was sold.
The Deed of Family Arrangement allows for the distribution of the cash component of the Testatrix's residuary estate.
The life tenant passed away.
The property is listed for sale but has continued to be rented out by the trustee. It is controlled by the trustees of the deceased estate as it has to be sold before a distribution can be made to the beneficiaries, under the terms of the Deed of Family Arrangement.
A representative from the legal firm that are executors for the deceased estate has stated that they consider the beneficiaries are not presently entitled to the rental income and that they will be lodging a 2011-12 trust income tax return showing that the rental income is assessable to the trustee.
You received a payment from the trustees. The account details provided by the trustee, describes the amount as 'a one half share of residuary cash presently available for distribution'.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 6 of Part III
Reasons for decision
The Commissioner sets out his views on present entitlement during the stages of administration of deceased estates in Taxation Ruling IT 2622.
In a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 depends on:
· The stage is reached in the administration of the deceased estate
· The terms of the deceased's will or codicil, trust law and principles enunciated and orders made by the Courts.
· Whether any discretionary payments have been made to the beneficiary by the executor or trustee.
In this case the estate has been dealt with in two stages because of some of the assets being left on trust for X for their lifetime. Upon X's death these assets became part of the residue of the original deceased estate. The other assets were dealt with by the executor and there was an initial distribution of capital to the beneficiaries.
When X passed away there was the second stage to this deceased estate, as what was X's property for their lifetime became the residue of this deceased estate. Expenses such as X's funeral expenses and any outstanding liabilities had to be met out of this estate. A new period of administration has started. Under the Deed of Family Arrangement the estate can not be fully administered until the property has been sold. The trustees can distribute the cash component of the residuary.
The trustee has stated that they are not going to treat the beneficiaries as presently entitled to any of the income and that the trustee will be assessable on the rental income. The trustee has to meet any liabilities in relation to the rental property and arising from X.
At paragraph 13 of IT 2622:
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 for any such investment. Both corpus and income are the property of the executors or administrators.
The amount that has been distributed is a one half share of the residuary cash that was presently available at that time. It is a payment out of corpus and not a payment of income. This was allowed for in the Deed of Family Arrangement.
During the intermediate stage of administration of a deceased estate the executor can exercise their discretion to pay some income to beneficiaries and the beneficiaries in this situation would be presently entitled to income actually paid to them. The trustee has stated that they will be lodging a return and that the trustee is assessable on the income. The amount paid out is not income that the beneficiaries are presently entitled to. They have not exercised any discretion.
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