Edited version of private ruling

Authorisation Number: 1011583229797

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Ruling

Subject: Capital gains tax (CGT) - deceased estate - life interest - main residence exemption - interest income - present entitlement

Will you be assessed under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) on your share of the income earnt by the trust estate prior to your death?

Yes.

This ruling applies for the following period

Year ended 30 June 2009.

The scheme commenced on

Prior to 20 September 1985.

Relevant facts and circumstances

Prior to 20 September 1985 the deceased inherited a home (the property) from their parent.

The property was the main residence of the deceased and their spouse.

A few years later the deceased prepared their last Will and testament.

Quite a few years later the deceased passed away.

As at the deceased's date of death you estimate the value of the property to be a certain amount and this is subject to confirmation by valuation.

The deceased's Will provided the following:

· that the deceased's main residence be held in trust to permit you to have the free use and occupation and enjoyment of the property during your lifetime (a life interest in the property)

· that you were to receive the net annual income from the deceased's estate during your lifetime, and

· that upon your death, the deceased's surviving children were to receive between them equally the net income of the deceased's estate.

A testamentary trust was created by the deceased's Will to enable:

· a life tenancy to be granted to yourself, and

· the bequest of income of the estate firstly to you during your lifetime, and

· then secondly to any surviving children (residual beneficiaries) after your passing.

A few years ago, you moved out of the property (your main residence) to live in a nursing home due to ill health.

You made the choice to continue to treat the property as your main residence whilst you lived in the nursing home, (absence choice).

The property sat vacant from the time you moved out until it was sold.

The property was sold for a certain amount less costs, settlement occurred 30 days after the contract of sale.

The proceeds from the sale of the property were invested in the name of the estate of the deceased for a certain period (term deposit) maturing in a later financial year.

After the property was sold and prior to the term deposit maturing you passed away.

Bank interest earned by the estate of the deceased falls into three categories:

· interest income earnt prior to your date of death for the income year ended 30 June 2010

· interest income earnt after your date of death for the income year ended 30 June 2010, and

· interest income earnt after your date of death for the income year ended 30 June 2011.

All of the bank interest earned by the estate has accumulated in the bank account of the estate.

You were entitled (as per the Will of the deceased) to the bank interest earnt by the estate prior to your death, however you suffered from dementia and did not request payment to yourself. You were not under a legal disability.

When required the trustee's of the estate of the deceased withdrew monies from the trust bank account/s to pay any expenses that related to the property, rather than amounts being paid by you.

To date, no interest income of the estate has been paid to the surviving children (beneficiaries).

The surviving children are not under a legal disability.

The executor of your estate awaits the answer to this private ruling request before any distributions of interest income are determined.

You have provided a copy of the deceased's Will of a certain date, this document forms part of and is to be read with these facts.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 116-30(1)

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision

Summary

You will be assessed under section 97 of the ITAA 1936 on your share of the trust estate income.

Detailed reasoning

A beneficiary who is not under a legal disability and who is presently entitled to income of a trust estate will include in their assessable income their share of the net income of the trust estate (section 97 of the ITAA 1936).

Present entitlement

Taxation Ruling IT 2622 deals with the issue of present entitlement during the stages of administration of deceased estates. It states at paragraph 7 that whether a beneficiary is presently entitled to a share of the trust income depends on:

· the stage reached in the administration of the estate, including whether probate has been granted

· the terms of the will and any orders made by the courts, and

· whether the trustee is able to make any discretionary payments to the beneficiaries.

Paragraph 16 of IT 2622 states that the administration of the estate does not have to reach the stage where the estate is wound up for the beneficiaries to enjoy present entitlement to the income of the estate. If the executors have provided for all debts incurred by the deceased, and funeral and other administrative expenses, it may be possible to ascertain the residue with certainty.

When probate has been granted, the Will has been officially proved, and the executors have the authority to deal with the estate, including calling up the deceased's assets and liabilities and pay debts, funeral and testamentary expenses.

After these matters have been attended to, the executor distributes the property of the deceased to the beneficiaries of the estate (this may be through the establishment of a testamentary trust so that future income and life interests can be provided for).

In this case, probate was granted many years ago for the deceased estate. The Will clearly states the entitlements of each beneficiary.

The deceased's Will made it clear that any income earned by the estate during your lifetime would be your income. Therefore, the interest income earned by the deceased estate prior to your date of death will be assessable to you.

Note

Any capital gain made by the trustees of the estate on the sale of the property is disregarded in full, therefore your share of trust assessable income will not include any capital gain. ((The status of the dwelling as your main residence (including your choice to continue to treat the dwelling as your main residence after you moved into the nursing home) during the whole of the trustee's ownership period)) was one of the requirements that enabled the trustee of the estate to fully disregard any capital gain (section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 118-145 of the ITAA 1997)).