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Edited version of private ruling
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Ruling
Subject: Deceased estate
Question and Answer
Are you as trustee of the trust liable to pay tax on the proceeds from the sale of a property from a deceased estate?
No
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
The deceased passed away after 20 September 1985.
Due to the personal wishes of the deceased, their will stipulated that the sale of a property (the property) was to be postponed at the discretion of the trustees.
The property was sold.
An Order from a Court states that the liability for capital gain tax will be a liability of the estate.
The beneficiaries have been paid amounts from the trust net income. The beneficiaries are not under any legal disability.
You have provided copies of the following documents which form part of your ruling request:
- Contract for sale of the property
- Court Order
- Will of the deceased
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 95A(2).
Income Tax Assessment Act 1936 Section 97.
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Section 104-10.
Reasons for decision
Testamentary trust
Taxation Ruling IT 2622 considers the income tax liabilities of executors and beneficiaries under the estates of deceased persons during the stages of administration of deceased estates. As highlighted in paragraph 4 of this ruling, a will may direct an executor to establish a testamentary trust in which income of the estate is to be applied in favour of certain beneficiaries for their lives and distribution of the capital of the estate is deferred for some time in the future. Where this deferred distribution is designated, a second fiduciary obligation arises, that of a testamentary trustee.
A testamentary trust is a trust created as a result of a will, that is, where a person specifies in a will that estate property is to be held in trust, for the beneficiary or beneficiaries of a will.
In this case, the will specified that the property in question was to be kept for as long as the trustees thought fit. The property was used as per the wish of the deceased.
Therefore, it is considered that a testamentary trust existed in relation to the property while it was used for this purpose.
The liability to taxation on the net income of a trust depends on whether the beneficiaries are presently entitled to the income.
Present entitlement
Beneficiaries are presently entitled to the income of a trust if they have an indefeasible, absolutely vested interest in the income. In other words, the beneficiaries have a claim or interest in the income that cannot be defeated by another person. They must also be able to demand immediate payment of the income. This means that beneficiaries can be presently entitled even though they may not have actually received an income distribution. A beneficiary is said to be presently entitled to the trust income where a distribution is made in their favour or the income is applied for their benefit.
In this case, under the terms of the will, the beneficiaries were entitled to a distribution once the property had been sold. A capital gain was made on sale.
Liability to tax
Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that an Australian resident beneficiary who is presently entitled to a share of the income of a trust estate is assessed on their share of the trust estates net income.
In this case, as the beneficiaries were under no legal disability, they were presently entitled to their distribution when the property was sold.
Therefore the beneficiaries are assessed on the capital gain on sale under section 97 of the ITAA 1936.
As the beneficiaries are assessed on this income, it follows that the trustee is not liable for tax in relation to the capital gain on sale of the property.