Edited version of private advice

Authorisation Number: 1052056779885

Date of advice: 11 November 2022

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion to tax the income of The Estate under Section 99 of the ITAA 1936 rather than Section 99A of the ITAA 1936 for the financial years ending 30 June 20XX, 20XX, 20XX and 20XX?

Answer

Yes.

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

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased died in 20XX.

All assets were acquired by The Estate.

The Will named the deceased's relative, Person A, and their partner, Person B, as joint executors.

Person A underwent a marital separation from Person B at the time of the deceased's death. The separation then became permanent shortly after.

Person A was suffering from a medical condition for a decade which then became acute. They currently receive government payments.

As a result of the combination of the separation and medical condition, Person A was unable to compile the necessary paperwork for The Estate.

During 20XX Person A approached a professional firm for assistance in preparing the required documents that would enable probate to be granted. However, COVID interrupted this process.

The deceased did not keep paperwork and records in a manner that would enable assets and liabilities of The Estate to be readily recognised, however these were eventually identified.

A Statement of Assets and Liabilities was issued by the Supreme Court several years following the passing of the deceased, delaying probate until 20XX.

It took several months to obtain a Tax File Number for the deceased and The Estate. The individual Income Tax Return for the 20XX financial year and The Estate Returns for the 20XX and the 20XX financial years were then lodged.

The assets and income of the deceased estate can be regarded as being of the ordinary and traditional kind.

No other funds or assets outside the deceased estate have been brought into The Estate or the Trust.

The Trust did not borrow or lend money during any financial years.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 99A(2)(a)(i) and (ii)

Income Tax Assessment Act 1936 Section 99A(3)

Income Tax Assessment Act 1936 Section 102AG(2)(c)

Reasons for decision

Sections 99 and 99A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A.

Section 99A of the ITAA 1936 applies in relation to all trusts unless:

• the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii);or
• the trust is bankrupt estate; paragraphs 99A(2)(b) and (c); or
• the trust is a trust that consists of property referred to in paragraph 102AG(2)(c); and
• the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances.

Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply.

Relevantly, subsection 99A(2) of the ITAA 1936 states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A to apply.

Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) means the highest rate of income tax does not apply to a trust estate resulting from a will, codicil, etc. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will.

If no part of the net income is distributed to beneficiaries, and section 99A of the ITAA 1936 is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936.

In forming an opinion pursuant to section 99A(2) of the ITAA 1936 whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) to have regard to certain matters, including:

• the manner and price at which the trust acquired its assets
• whether any special rights or privileges are attached to, or conferred on or in relation to, the trust property, and
• such other matters as the Commissioner thinks fit.

These matters relate to the source of the trust capital, including whether any loans have been made to the trust.

The source(s) of the trust's income are also considered, as are any benefits conferred upon the trust, and any rights and privileges conferred on or attached to property held by the trust.

In determining the weight to be given to the matters described in subsection 99A(3), Windeyer J has stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that:

The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate.... That purpose I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose.

In these circumstances, the trust is a deceased estate satisfying the eligibility for the Commissioner's discretion. The assets come directly from the assets of the deceased (the income of the Estate is only derived from assets held or deemed to belong to the Estate as at the date of death of the deceased) and there is a definable relationship ordinarily of blood or marriage between the deceased person and the beneficiaries. There are no other suggestions that the manner in which the trust was created was for any reason other than the ordinary and traditional kind.

Therefore, it would be reasonable for the Commissioner to apply his discretion, in these circumstances, to allow section 99 of the ITAA 1936 to apply.

After consideration of the relevant factors, the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to that trust estate in relation to the relevant years of income.

Accordingly, section 99 of the ITAA 1936 will apply.

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