Disclaimer
This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Authorisation Number: 1051629152508

Date of advice: 08 April 2020

Ruling

Subject: Deceased estate

Question 1

Will an estate be considered to be fully administered, such that the beneficiaries will have the right to demand payment of any part of the estate, when all of its assets and liabilities have been ascertained and payment or provision for payment of its liabilities has been made?

Answer

Yes

Question 2

Can the trustee of the deceased estate choose to be assessed on the capital gain on behalf of the beneficiaries, even if the beneficiaries are presently entitled?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The deceased passed away. Probate was granted.

No other funds have been brought from outside the deceased estate into the estate or into the trust. The trust has not borrowed or lent any money. No special rights or privileges have been conferred or attached to the assets of the deceased estate.

The deceased made bequests to specific beneficiaries totalling $X, with the residual of the estate to be divided amongst others equally or in the event they did not survive the deceased then to others in their place.

$X of this was paid out with the remaining $X being in relation to another beneficiary.

The will included a clause in relation to one of the beneficiaries. This specific bequest was paid out by the executors.

The final tax return for the deceased taxpayer was lodged and assessed.

The executors consider that the estate was fully administered when the final tax return of the deceased taxpayer was assessed. This is when all of the final assets and liabilities of the estate were determined with any certainty and provision for payment of the liabilities was made. Until this time the residue could not be ascertained and so there was no present entitlement prior to this date; in line with High Court in FC of T v Whiting (1943) 68 CLR 199 (Whiting's Case).

The income received by the trust was mainly capital gains from disposal of the assets of the estate and some interest (all received prior to the final assessment of the deceased had issued).

An outstanding tax debt for another of the deceased taxpayer's income tax assessments was discovered by the executors and paid.

The main residence of the deceased was sold with contracts signed and then settlement occurred.

Distributions have been made to the general beneficiaries. All of the distributions of the estate have been made from the assets of the estate and the proceeds of the sale of the main residence as instructed by the executors.

The deceased estate included a property which was the deceased's main residence at the time of death as well as some investments.

All of the assets of the estate were realised during the income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 115-222

Income Tax Assessment Act 1936 Section 115-230

Reasons for decision

Question 1

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 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.

Taxation Ruling IT 2622 provides that 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. If a beneficiary is under a legal disability the relevant share of the net income of the estate would be assessed in the manner required by section 98 of the Act.

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 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.

It has also been the longstanding practice of this Office, however, to accept an apportionment in the income year in which the estate is fully administered. Where the executors and beneficiaries are able to demonstrate, through the striking of accounts at the completion of administration, the actual amounts of income derived in the periods before and after the day on which the estate was fully administered, an apportionment may be made as follows:

Income derived in the period between the beginning of the income year and the day administration was completed.

Assessed in the hands of the executors or administrators under section 99 of the Act.

Income derived in the period between the day administration was completed and the end of the income year.

Assessed to the beneficiaries presently entitled to the income in the manner required by section 97 or 98 of the Act.

There must be evidence of the income derived during these periods and apportionment of the net income of the trust estate in this manner must be requested by the taxpayers concerned, i.e., the executor or administrator and the beneficiaries. This Office would not accept an apportionment of the income derived by the estate for the whole income year concerned into the two periods merely on a time basis.

In your case, the Executors would have been in a position to ascertain, with a degree of certainty the residue of the estate in the income year. You advised that the final debt of the estate was ascertained from the final Notice of Assessment for the deceased. At that point the executors would be in a position to ascertain the residue of the estate and the beneficiaries would then be presently entitled to their share of net income of the estate.

Question 2

The trustee is able to make a choice to be assessed on the capital gain on behalf of the beneficiaries, even if the beneficiaries are presently entitled, as long as capital gains have not been distributed on the assets of the estate.

Section 115-230 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a resident trustee to choose to be assessed on capital gains where no trust property representing the capital gain has been paid or applied for the benefit of the beneficiary of a trust. If the trustee makes a choice, then the following occurs:

In your case, the income of the estate, being the capital gains made on disposal of the estate assets, have not been distributed to the beneficiaries therefore the trustee is able to make the choice to be assessed on the capital gains on behalf of the beneficiaries.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).