Edited version of private advice

Authorisation Number: 1052277704517

Date of advice: 19 July 2024

Ruling

Subject: Assessable income - executor's commission

Question

Is the amount you received from the Estate assessable income pursuant to section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were a cousin, friend and care giver for the deceased (the Deceased).

The Deceased owned a property (the Property).

The Deceased was dependant on you for care through several bouts of illness.

When The Deceased required hospitalisation or attended medical appointments, you were listed as the designated next of kin.

At the beginning of 20XX, the Deceased became too frail to reside at home and was increasingly in need of care.

In early 20XX, the Deceased appointed you as their enduring guardian and power of attorney, when they relocated to a nursing home.

On XX XX 20XX, the Deceased prepared a will (the Will) and named you as Executor. The Deceased explained to you that they would leave you some money, as a thanks for the years of care and support you provided.

The Will detailed the following:

•         You were to be given the sum of $XX,XXX.

•         $X,XXX was allocated towards a beneficiary (Beneficiary A)

•         50% of the rest and residue of the estate was to be distributed to a beneficiary (Beneficiary B)

•         50% of the rest and residue of the estate was to be distributed to a beneficiary (Beneficiary C).

On XX XX 20XX, the Deceased was transferred to hospital, you were informed that they had pneumonia and due to their frailty were unlikely to survive for very long.

On XX XX 20XX, the Deceased passed away.

As executor of the Deceased's estate, you were required to:

•         Arrange the Deceased's funeral.

•         Contact the solicitor to obtain a copy of the Deceased's Will.

•         Engage a solicitor to assist with the legal proceedings of administering the estate, the application or probate and the sale of assets, including the Property.

Between XX 20XX and XX 20XX, you were required to clean and prepare the Property for sale.

On XX XX 20XX, the Supreme Court issued the Grant of Probate.

You engaged a real estate to market the Property for sale.

The Property was sold at auction.

You were disappointed when you read the Will, that the Deceased had left you the sum of $XX,XXX.

You believe that when the Deceased drew up their Last Will and Testament, that the Deceased was affected by Dementia. You are of the belief that the Deceased may not have understood the actual value of their estate and that the Deceased may have considered the $XX,XXX amount to be significant.

Due to the value of the assets held in the Estate being greater than was expected, you indicated to the other beneficiary charities that you may possibly contest the Will due to the fact that you believe the Deceased had a reduced capacity at the time they prepared their last Will.

You elected to enter into negotiations with the beneficiary charities as you did not want to hold up payments to the charities.

On XX XX 20XX, you prepared correspondence (the Letter) and addressed the Beneficiary B and Beneficiary C to detail your entitlement to commission in this estate, as provided for in the Will.

The Letter explains that you were aware the bulk of the estate was to be distributed to charity, and that you believe that the Deceased was not aware of the total value of their assets.

Given the large amount of work you completed in administering the estate, the Letter you wrote requested the commission of X% of the net value of the estate.

Your solicitor sent electronic correspondence to a representative of Beneficiary B and Beneficiary C, and provided the Letter.

Your solicitor emphasised that the Deceased may have not understood the real value of their estate. Your solicitor explained that as recently as 20XX, the Deceased thought they would need a loan against the Property to pay for a nursing home.

The representative from Beneficiary B and Beneficiary C responded:

•         Confirming they were reviewing a request for an Executor Commission

•         Stating they were following a guide issued by The Supreme Court as to what might be allowed should an application be made to Court.

•         Referencing an article published in 20XX in the Australian Bar Review where the suggestion was that a capital commission ordinarily varies between 1% and 2.5%.

•         Noting that any activities undertaken by you prior to the Deceased's death could not be considered when negotiating an Executor Commission.

•         Explaining that generally, 2% was the top end of commission that they would agree too.

On XX XX 20XX, you signed a Deed titled "Deed Whereby Beneficiaries Agree To Pay Executor A Sum In Lieu Of Claim For Commission".

The Deed stated that:

•         The Beneficiaries have agreed to pay to the Executor the sum of $XXX,XXX (the Consideration) being 2.5% of the income and capital realisations of the estate in lieu of the Executor making any claim for commission against the Estate.

•         The Executor will not make any claim whatsoever against the estate for commission for the Executor's pains and trouble in respect of the Executor's administration of the Estate until its completion which will include the final distribution to the beneficiaries.

You received $XXX,XXX for your services in administering the estate of the Deceased.

Relevant legislative provisions

Income Tax Assessment Act section 6-5

Income Tax Assessment Act section 6-10

Income Tax Assessment Act section 15-2

Reasons for decision

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that assessable income of an Australian resident for taxation purposes, includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources.

Ordinary income has generally been held to include three categories:

a)            Income from rendering personal services;

b)            Income from property; and

c)            Income from carrying on a business.

Paragraph 3 of Taxation Ruling IT 2639 Income tax: personal services income explains that 'income from personal services' is income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour.

Other characteristics of income that evolved from case law include receipts that:

a)            are earned;

b)            are expected;

c)            are relied upon; and

d)            have an element of periodicity, recurrence or regularity.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in the assessable income by another provision, are called statutory income and are also included in assessable income.

ATO ID 2014/44 Income: Commission paid to executor of deceased estate outlines the circumstances in which an amount of commission paid to an executor is included in their assessable income under section 6-10 of the ITAA 1997.

Subsection 15-2(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes the value to the taxpayer of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer.

Subsection 15-2 of the ITAA 1997 is the rewritten provision, with equivalent meaning, of the former subsection 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936). The courts have consistently indicated that paragraph 26(e) of the ITAA 1936 is not limited to employment situations and that it can apply to payments for services rendered in the absence of an employer/employee relationship (FC of T v. Cooke and Sherden 80 ATC 4140; (1980) 10 ATR 696, FC of T v. Holmes 95 ATC 4476; (1995) 31 ATR 71; and Smith v. Federal Commissioner of Taxation (1987) 164 CLR 513; 87 ATC 4883; (1987)19 ATR 274).

A payment of commission is a payment of the type covered by subsection 15-2(1) of the ITAA 1997 as it can be said to be a benefit granted in respect of the services rendered by the taxpayer as the executor of the deceased estate.

Accordingly, a commission paid to an executor or trustee of a deceased estate in respect of or for or in relation directly or indirectly to services rendered by them as executor or trustee would be included in the taxpayer's assessable income under section 6-10 of the ITAA 1997 as the commission is assessable income of the taxpayer under subsection 15-2(1) of the ITAA 1997.

Gifts

Personal gifts are prima facie not income. Whether a gift is assessable income depends on the character of the receipt in the hands of the recipient and the test to be applies is an objective, not subjective one (Hayes v FC of T (1956) 11 ATD 68).

Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? Outlines the relevant factors to be considered in determining the character of the receipt, namely:

a)            how, in what capacity, and for what reason the recipient received the gift; and

b)            whether the gift is of the kind which is a common incident of the recipient's calling or occupation; and

c)            whether the gift is made voluntarily; and

d)            whether the gift is solicited; and

e)            if the gift can be traced to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for that service; and

f)            the motive of the donor (but is seldom, if ever decisive); and

g)            whether the recipient relies on the gift for regular maintenance of himself and herself and any dependants.

If the facts surrounding the transaction show that the payment or transfer was made without legal obligation but is nevertheless so related to the recipient's employment, or to services rendered, or to a business carried on that it is, in substance and in reality, not a mere gift but the product of an income-earning capacity, it will be regarded as assessable income of the recipient as reiterated in Taxation Determination TD 2006/22 Income tax: is disaster relief money received from charities, to which local, state or federal government of their agencies have made payments, assessable income of taxpayers carrying on a business?).

Honorariums

As with gifts, the treatment of an honorarium for tax purposes depends on the nature of the payment (ie. whether it has the character of income in the hands of the recipient or not).

An honorarium is defined in the Oxford dictionary as 'a voluntary payment for professional services rendered without the normal fee.'

An honorarium is not generally regarded as assessable income because it normally represents a nominal payment for services and in most instances would not cover the incidental costs incurred in providing the service.

The following factors indicate a 'true honorarium':

a)            the payment is received for personal reasons;

b)            the payment has no connection to the recipient's income-producing activities or services rendered;

c)            the payment is not received as remuneration or as a consequence of employment, services rendered, or any business;

d)            the payment is not relied upon or expected by the recipient for day-to-day living;

e)            the payment is not legally required or expected;

f)            there is no obligation on the part of the payer to make the payment;

g)            the payment is a token amount compared to the services provided or expenses incurred by the recipient'

h)            the form of the receipt, that is, whether it is received as a lump sum or periodically.

Application to your circumstances

In your case, in applying the objective test, it is the Commissioner's view that in the hands of the recipient, the amount paid to you is properly characterised as being a payment in substitution for a formal executor's commission.

You were entitled to make a legal claim for commission however you and the beneficiaries agreed that, in lieu of a claim for commission, they would pay an amount to you. The payment to you was calculated by reference to case law on executor's commission. You administered the estate after the Deceased's passing and received an amount under a Deed of Agreement.

The evidence provided does not support your contentions that the amount you received was paid as a gift or honorarium, given voluntarily by the beneficiaries of the estate as a good will gesture or for personal reasons. You entered into negotiations with the beneficiaries for a payment described as an executor's commission. The payment is not a token amount compared to the services provided or expenses incurred by you. The factual circumstances point to the payment being related to services rendered that, in substance and reality, is not a mere gift or honorarium but rather a payment of income.

The payment made to you is in the nature of an executor's commission rather than a gift or honorarium and is included in your assessable income under section 6-10 of the ITAA 1997 as the commission is assessable income under subsection 15-2(1) of the ITAA 1997.

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