Edited version of private advice

Authorisation Number: 1052088171091

NOTICE

The decision in this ruling is under review. We will annotate this ruling with any further decisions that are made on the issues.

Date of advice: 22 February 2023

Ruling

Subject: Trust administration

Question 1

Does the taxable component of the death benefit form part of the net income of the estate in the 20XX income year?

Answer

Yes

Question 2

Are the capital gains from the disposal of shares in the 20XX income year required to be included in the net income of the estate?

Answer

No

Question 4

Does the Commissioner consider that it is unreasonable to assess the trustee under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) in the 20XX income year?

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 commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in 20XX.

The deceased was an Australian resident for tax purposes.

Probate of the deceased's Will was granted to the deceased's child in 20XX.

The deceased's child is not an Australian resident for tax purposes.

Control and management of the deceased estate is outside of Australia.

There has not been any loans of money or property made to the estate.

There has not been any special right of privilege conferred on or to the property of the trust estate.

A superannuation death benefit was paid to the estate on in 20XX (death benefit).

There were no death benefit dependants for tax purposes.

The death benefit consisted of the following:

1.    A tax component

2.    A tax-free component

At the time of death, the deceased owned the following Real Australian Property:

1.    Property 1

2.    Property 2

3.    Property 3

4.    Property 4

5.    Property 5

At the time of death, the deceased owned the shares.

The deceased's shares were disposed during the 20XX income year.

In 20XX, under the Will, a cash bequest was paid to a beneficiary, a resident of Australia for tax purposes.

In 20XX, under the Will, a cash bequest was paid to a beneficiary, a resident of Australia for tax purposes.

In 20XX, under the Will, cash bequests were paid to separate tax exempt or deductable gift recipients.

Under the Will, a number of testamentary trusts were created for the children of the deceased.

The proceeds from the sale of the shares and other cash funds including the death benefit were used to pay liabilities of the deceased, estate administration costs and the cash bequests. The balance was distributed to one of the testamentary trusts.

In 20XX, Property 1 was transferred to a child's testamentary trust.

In 20XX, Property 2 was transferred to a child's testamentary trust.

In 20XX, Property 3 was transferred to a child's testamentary trust.

In 20XX, Property 4 was transferred to two of the children's testamentary trusts, in equal proportions.

In 20XX, Property 5 was disposed at auction.

The capital gain from the disposal of Property 5 was included in the net income of the estate in the 20XX financial year.

Relevant legislative provisions

Section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997)

Subsection 101A(3) of the Income Tax Assessment Act 1936 (ITAA 1936)

Section 855-10 (ITAA 1936)

Subsection 99B(1) (ITAA 1936)

Paragraph 99B(2)(a) (ITAA 1936)

Section 112-20 (ITAA 1997)

Section 99A (ITAA 1936)

Subsection 99A(2) (ITAA 1936)

Section 99 (ITAA 1936)

Division 11A (ITAA 1936)

Reasons for decisions

Question 1

Does the taxable component of the death benefit form part of the net income of the estate in the 20XX income year?

Answer

Yes

Reasoning

Under section 302-10 of the ITAA 1997, the taxation treatment of superannuation death benefits paid to a trustee of a deceased estate is determined by how the benefit would be taxed if paid directly to the person or persons otherwise intended to benefit from the estate.

The benefit is also treated as if it was income to which no beneficiary was entitled. So, any tax payable is paid by the Trustee of the estate and does not form part of that death benefits dependant's assessable income (subsection 302-10(2) of the ITAA 1997).

This means that where a death benefits dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be exempt from tax as if it were paid to a death benefits dependant of the deceased. It will not be taxable income of either the estate or the death benefits dependant.

Where a person, who is not a death benefits dependant, is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased (subsection 302-10(3) of the ITAA 1997).

According to the submitted facts, there were no death benefit dependents in this case. The Superannuation fund paid the superannuation death benefits to the Trustee of the deceased estate. As such, the taxable component of the death benefit forms part of the net income of the estate in the 20XX income year, the year it was received.

Question 2

Are the capital gains from the disposal of shares in the 20XX income year required to be included in the net income of the estate?

Answer

No

Reasoning

For Australian tax purposes, the Commissioner treats a legal personal representative such as an executor of a Will as a trustee and will treat the deceased estate as a trust estate.

Where the sole trustee is a foreign resident and the trust is controlled and managed outside of Australia, the trust is not a resident trust estate for Australian taxation purposes.

Section 855-10 of the ITAA 1997 provides that a trustee of a foreign trust may disregard a capital gain or loss if it relates to a CGT asset that is not 'Taxable Australian Property'.

In this case, you are a foreign resident, you manage the trust outside of Australia, and the estate is not a resident trust estate. Additionally, the shares do not satisfy the definition of Taxable Australian Property. As such, the trustee does not include the capital gains or losses from the sale of the shares in the trust's net income under subsection 95(1) ITAA 1936.

Question 4

Does the Commissioner consider that it is unreasonable to assess the trustee under section 99Aof the ITAA 1936 in the 20XX income year?

Answer

Yes

Reasoning

Sections 99 and 99A of the 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 applies in relation to all trusts unless:

•         the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii)

•         the trust is a bankrupt estate; paragraphs 99A(2)(b) and (c)

•         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. The relevant part of subsection 99A(2) 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 trust estates 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 is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual.

In forming an opinion pursuant to section 99A(2) 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. It specifies the matters to be considered to include:

•         The manner and price at which the trust acquired it assets;

•         Whether any special rights or privileges are attached to or conferred on in relation to the trust property; and

•         Such other matters as the Commissioner thinks fit

These matters look at 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 has been created through a Will satisfying the eligibility for the Commissioner's discretion. The trust was created out of the Will of the deceased. It was a trust whose assets come directly from the assets of the deceased. 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 to allow section 99 of the ITAA 1936 to apply and the trustee to be taxed at ordinary marginal rates.

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