1012965078382 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012965078382

Date of advice: 12 February 2016

Ruling

Subject: Capital Gains Tax - Deceased Estate

Question 1

If the administration is finalised in the same financial year as the properties are sold, are the beneficiaries presently entitled to the income from the estate?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your relative purchased a property in 19XX.

Your relative passed away in 20XX.

You and another family member were appointed co-executors/personal representatives of the Estate.

Probate was granted in 20XX.

The property was transferred to you and another family member as Legal Personal representatives of the deceased in 20XX.

There has been a subdivision of the property to two parts: a house with a block of land plus a separate rateable block of land with its own title.

The development work completed for the house and subdivision work has been invoiced to the Estate.

The bank account for all transactions is in the name of the Estate

The invoices from your accountant in relation to the work for the title on the new land has been issued to "Personal representatives of the Estate".

No distributions have been made to either beneficiary from the estate.

Settlements on both properties have been scheduled prior to 30 June 20XX.

You are expecting to complete the administration of the Estate prior to 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97

Reasons for decision

Taxation Ruling IT 2622 states where the administration of a deceased estate is completed during the course of an income year, the longstanding practice of this Office is to raise assessments on the basis that beneficiaries who are not under any legal disability should bear tax, under section 97 of the Act, on their shares of the net income of the estate for that year to which they are presently entitled.

The term 'present entitlement' is not defined in the ITAA 1936. It is therefore necessary to rely on the meaning which has been given to the term by the Courts.

The leading case on present entitlement under a trust arising during the administration of an estate is the decision of the High Court in FC of T v Whiting (1943) 68 CLR 199 (Whiting's Case). The High Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the trust estate until the estate has been fully administered.

In Whiting's Case the High Court found that in order for a beneficiary to be 'presently entitled' to the income of a trust estate, the beneficiary must be able to demand immediate payment of such income from the trustee.

The High Court decided that the beneficiaries of a deceased estate have no right to demand payment of any part of the estate until such time as the estate has been fully administered. An estate will be fully administered when all of the assets and liabilities have been ascertained and payment or provision for payment of liabilities has been made. Until such time, the residue cannot be ascertained and there is no present entitlement to income.

Section 97 of the Income Tax Assessment Act 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate.

The net income of the trust eased estate and whether any beneficiary is presently entitled is determined on the last day of each income year (30 June). This means that, on the last day of the income year, a beneficiary who is presently entitled will be assessed on their share of the net income for the whole of the income year.

Taxation Ruling IT 2622 is about present entitlement during the stages of administration of deceased estates. It explains beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. However, it also explains where the administration of a deceased estate is completed during the course of an income year, the beneficiaries (who are not under any legal disability) will be presently entitled during that income year and should bear tax on their shares of the net income of the trust estate for that income year.

Taxation Ruling IT 2622 defines when a deceased estate has been fully administered, as follows:

"....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…."

For simplicity, Taxation Ruling IT 2622 illustrates the period of administration of the estate of a deceased person as follows:

DATE OF DEATH

STAGES OF ADMINISTRATION

(i) Burial of deceased.

(ii) Executor appointed by will or administrator appointed by Court.

(iii) Probate applied for and granted by Court.

(iv) Assets vest in executor who pays debts and testamentary expenses:

• Initial stage - net income of estate is applied to reduce debts, etc.

• Intermediate stage - part of the net income of estate that is not required to pay debts, etc., may be paid to beneficiaries.

• Final stage - debts, etc., are paid or provided for in full and net income of estate is available for distribution.

ADMINISTRATION OF ESTATE IS COMPLETE

In your case, the administration of the deceased estate is currently ready for completion, i.e., complete. Also, you plan to sell the properties prior to 30 June 20XX. It follows the beneficiaries of the deceased estate will be presently entitled beneficiaries for the year ended 30 June 20XX and must include their share of the net income of the estate in their personal income tax returns.

As the beneficiaries are presently entitled at 30 June 20XX to any income earned during the whole income year, delaying payment of the distribution to the next financial year will not result in the estate paying the CGT for the year ending 30 June 20XX.

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