Edited version of your written advice

Authorisation Number: 1012985699341

Date of advice: 22 March 2016

Ruling

Subject: Deceased Estate

Question 1

Is the rental income assessable to the deceased estate?

Answer

Yes.

Question 2

If the rental income is assessable to the beneficiary, which years should they lodge returns for?

Answer

Not applicable

Question 3

If the rental income is assessable to the deceased estate, should returns be lodged for the relevant years?

Answer

Yes.

Question 4

Can the beneficiary be treated as presently entitled to the net income of the trust?

Answer

No

Question 5

Can the Commissioner extend the two year period to cover the period prior to granting Probate?

Answer

No.

Question 6

Is the cost base the market value of the asset as at the date of the death of the owner of the property?

Answer

Yes.

Question 7

Is the capital gain assessable to the beneficiary or the deceased estate?

Answer

The capital gain is assessable to the deceased estate

Question 8

If the capital gain is assessable to the deceased estate can the beneficiary be treated as being presently entitled to this income?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased purchased their main principle place of residence in 19XX.

They resided in this property until their death in 19XX.

Their will bequeathed the whole of their estate to their relative.

The will was not complex, nor did it grant occupancy rights. The will was not challenged.

The will nominated their relative as the executor and sole beneficiary.

The property was rented out from 19XX to 20XX to unrelated persons.

The relative's spouse declared the rental income in their personal tax return from 19XX until their death in 20XX.

The relative received the rental income after their spouse died. They have not lodged a personal income tax return since 20XX as their total income from rent and bank interest was below the threshold for the senior persons' tax offset.

The relative applied for Probate which was granted in 20XX.

The property was sold in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195.

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income tax Assessment Act 1936 Section 97

Reasons for decision

Question 1, Question 2 and Question 3

As the rental income was derived in an income year before the administration of the deceased estate was complete, it is income of the executor or administrator of the estate. It is not income of yourself as a beneficiary as you were not presently entitled to the income.

Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates discusses tax issues in relation to a deceased estate and deals with the issue of who is presently entitled to the income of the deceased estate during the stages of administration.

Paragraph 9 of IT 2622 states: 

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.

In your case, the property remained an asset of the deceased estate until it was sold by the executor. Therefore, as the property was not sold or transferred to the beneficiary before 20XX, the beneficiary was not presently entitled to the property or the associated rental income derived from the property. It follows that the rental income does not form part of the assessable income of the beneficiary.

As the property was an asset of the deceased estate at the time of rental, any rental income derived is assessable to the deceased estate. Any associated allowable expenses incurred in relation to the receipt of the rental income are also deductible to the deceased estate.

Question 4

The Commissioner will grant a lodgment exemption for the years ended 30 June 19XX, and 30 June 19XX to 30 June 20XX because the particular circumstances of the case.

The deceased estate is required to lodge income tax returns for the years ended 30 June 20XX, 30 June 20XX, 30 June 20XX, 30 June 20XX and 30 June 20XX.

Question 5

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) allows an individual to disregard a capital gain or capital loss made from a Capital Gains Tax event (i.e. sale of the property) that happens in relation to a dwelling where:

The ownership of the dwelling passed to you as the beneficiary of a deceased person's estate,

The deceased person died after 20 August 1996,

The deceased acquired the dwelling after 19 September 1985, and

The dwelling was the deceased person's main residence just before death.

You fit into the above requirements. Therefore, you may be eligible to disregard the capital gains tax if:

• you dispose of your interest in the dwelling within two years of the deceased's death, or

• the dwelling is your main residence from the date of death until the time your ownership ends.

The two year, time period, to dispose of the property expired in 26 November 1993. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the time period.

The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

• the ownership of a dwelling or a will is challenged,

• the complexity of a deceased estate delays the completion of administration of the estate,

• a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (eg the taxpayer or a family member has a severe illness or injury), or

• settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.

In determining whether or not to grant an extension the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it.

In this case, the property was has been used to produce assessable income since the deceased passed away. The property was rented out from 19XX until 20XX to unrelated persons. Probate was granted in 20XX and the property was sold in 20XX, XX years after the deceased passed away.

Having considered the relevant facts, the Commissioner will not apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit.

Question 6

Division 128 of the Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what happens if a capital gains tax (CGT) asset passed to you as a beneficiary of a deceased estate.

Where a CGT asset passes to a beneficiary in a deceased estate, the beneficiary is taken to have acquired the asset on the date of the deceased's death (section 128-15 of the ITAA 1997).

Section 128-20 of the ITAA 1997 explains that a CGT asset passes to a beneficiary of a deceased estate if the beneficiary becomes the asset's owner because it is appropriated to the beneficiary by the deceased's legal personal representative (LPR), such as the executor of the estate, in satisfaction of some interest or share in the deceased estate.

As such, under Division 128 of the ITAA 1997, the whole of the property passed to you as beneficiary of the deceased's estate and, for capital gains tax purposes, you are taken to have acquired the whole of the CGT asset on 26 November 1991.

Subsection 128-15(4) of the ITAA 1997 provides a table which sets out modifications to the first element of the cost base and reduced cost base of a CGT asset in the hands of a beneficiary of a deceased estate.

Item 3 of the table provides that the first element of the cost base and reduced cost base of a property that:

• was the main residence of the deceased just before death, and

• was not being used for the purpose of producing assessable income at that time,

is the market value of the property on the date of the deceased's death.

You advised the property was the deceased's main residence at the date of their death, and was not being used for the purpose of producing assessable income at that time. As such, the first element of the cost base and reduced cost base of the property in your hands is the market value of the property on 26 November 1991.

Question 7 and Question 8

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 was not completed in the income year in which the property was sold.

Accordingly, it is the deceased estate that is the relevant taxpayer and will be required to account for any capital gain that arose as a result of the disposal of the property.

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