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Edited version of your written advice
Authorisation Number: 1013033536807
Date of advice: 13 June 2016
Ruling
Subject: Capital gains tax
Question
Is the net income for the year ended 30 June 2016 assessable to the Estate?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
The deceased estate has a court appointed administrator.
The administrator has
• sold the properties owned by the deceased
• obtained market valuation for each property as at the time the properties were acquired/inherited by the deceased and at the time the deceased passed away, and
• provided capital gains tax calculations for the gain from the sale of the properties.
The only acts left to be completed by the administrator in relation to the Estate are:
• the lodgement of the tax return for the year ended 30 June 2016, and
• the distribution of the net income to the beneficiaries.
None of the beneficiaries are under a legal disability.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 110
Income Tax Assessment Act 1997 Division 115
Income Tax Assessment Act 1997 Division 118
Reasons for decision
Summary
As the administration of the Estate is complete, the beneficiaries are presently entitled to the Estate's 'net income' and will be taxable on the net income of the estate.
Detailed reasoning
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. The properties have been sold and the net income of the estate if available for distribution. It follows the beneficiaries of the deceased estate will be presently entitled beneficiaries for the year ended 30 June 2016 and must include their share of the net income of the estate in their personal income tax returns.
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