Edited version of private ruling

Authorisation Number: 1011599768096

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Ruling

Subject: Capital gains tax (CGT) - Deceased estate - Shares

1. Does the recent discovery of the shares and dividends prevent the Estate from being considered 'fully administered' in about 2005?

No.

2. Are the dividends assessable in the income years that they were paid by the company?

Yes.

3. Were the residual beneficiaries 'presently entitled' to the dividends during the 2005-06 to 2009-10 income years?

Yes.

4. Will the Estate be assessable under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the dividends during the 2005-06 to 2009-10 income years?

No.

5. Will the Estate make any capital gains due to the sale of some of the shares?

No.

6. Can the Estate claim a deduction for the expenses incurred to the extent they relate to the derivation of the dividend income and the preparation of Estate income tax returns?

Yes.

7. Can the Estate claim a deduction for the expenses incurred to the extent they relate to the transfer of the shares to you, their sale or to their transfer to the beneficiaries?

No.

This ruling applies for the following period<s>:

2005-06 income year

2006-07 income year

2007-08 income year

2008-09 income year

2009-10 income year

2010-11 income year

The scheme commences on:

1 July 2004

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased died in 2004. Probate was granted shortly afterward.

A tax return for the 2004-05 income year was lodged at the end of the financial year.

Initial distributions of the bulk of the estate were made to the six residual beneficiaries early in the 2005-06 income year.

An amended tax return for the estate was lodged some time about the same time.

Final distributions to the residual beneficiaries were made in the succeeding three months.

Matters since the death of the deceased

In 2010, you were advised by a firm that the Estate still held shares in a publicly listed company. In addition, some dividends had been declared and issued on these shares between 2004 and 2010. Those dividends had been posted to the last known residential address of the deceased.

As a result of the death of the deceased, those dividends were either returned to the company unclaimed or the uncashed cheques were treated as stale by it.

The dividends declared and paid by the company between 2004 and 2010 were either transferred to the State Treasury or held by the company.

All details of the assets of the deceased were supplied to the Executors by their accountants. The shares and dividends now known to exist were not included in those details.

The shares and dividends now known to exist were therefore not included in the list of assets of the Estate, were not listed with the probate documents lodged and were therefore not sold or transferred to the residual beneficiaries in 2005 and 2006.

At all times during the course of the original administration of the Estate (between 2004 and 2006) the Executors had no indication or knowledge that these shares existed and likewise had no knowledge of the issued but unclaimed dividends.

Facts now known

The spouse of the deceased passed away some 15 years ago.

Their Estate was entitled to a one-third share of the residue of another Estate at the distribution date. As a result, this Estate inherited shares in the company.

On the death of the deceased's spouse, these shares were inherited by the deceased.

Current position of the Estate

All dividends previously issued between 2004 and 2010 have been collected. In relation to the shares, instructions have been received from all six residual beneficiaries requesting transfer to them of their respective proportion of the shares.

The Estate holds invoices for payment in respect of various commissions and other outgoings incurred during the collection of the dividends and shares and the administration of the Estate. Payment of these costs may possibly require some shares to be sold in order to pay the outstanding costs.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 44

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 8-1

Income Tax Assessment Act 1997 Section 104-215.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The recent discovery of the shares and dividends does not prevent the Estate from being considered 'fully administered' in about 2005.

Detailed reasoning

The administration of a deceased estate involves the performance of a number of duties and culminates with the ascertainment of the net residue of the estate.

One of the duties of Executor is to call in the deceased's assets. You believed you had done this in 2005 which allowed you to distribute the net assets in favour of the beneficiaries.

The recent discovery of the shares does not alter or negate the acts that you performed in 2004 and 2005. We accept that the Estate was fully administered in 2005 when you originally completed your administration tasks.

Question 2

Summary

The dividends are assessable in the year that they were paid by the company.

Detailed reasoning

Subsection 44(1) of the ITAA 1936 states that your assessable income as a resident shareholder of a company includes dividends paid to you by that company out of profits derived by it from any source.

The dividends are assessable in the year that they are paid to you - that is the date that the cheque was posted to you by the company, not the date it was received, banked or cleared.

As a result, you are required to lodge an income tax return for the Estate in respect of the 2006-07 to 2010-11 income years to declare the dividend income that you have earned.

An amendment is not necessary in relation to the 2005-06 income year as there will not be any change to your income tax liability for that year and your private ruling request qualifies as an appropriate notification of the omission.

Question 3

Summary

The residual beneficiaries were 'presently entitled' to the dividends during the 2005-06 to 2009-10 income years.

Detailed reasoning

The deceased's Will provides the residual beneficiaries with equal shares in the remainder of his real and personal property after the pecuniary legacies had been paid - that is, once administration of the Estate had been completed.

For the reasons given above, this happened in 2005.

The residual beneficiaries are presently entitled to all of the income of the Estate earned after 2005, including the dividends.

Question 4

Summary

The Estate will not be assessable under either section 99 or section 99A of the ITAA 1936 in respect of the dividends during the 2005-06 to 2009-10 income years.

Detailed reasoning

Sections 99 and 99A of the ITAA 1936 apply where some part of the net income of the Estate is not:

· included in the assessable income of beneficiaries under section 97 of the ITAA 1936

· assessed to the trustee on behalf of a beneficiary under section 98 of the ITAA 1936, or

· foreign source income that a non-resident beneficiary is presently entitled to.

The residual beneficiaries are presently entitled to the dividends for the reasons given above.

Therefore, there is no net income to which section 99 or section 99A of the ITAA 1936 can apply.

Question 5

Summary

The Estate will not make any capital gains due to the sale of some of the shares.

Detailed reasoning

The capital gains provisions treat an absolutely entitled beneficiary as the owner of CGT assets as against the trustee. It is then the beneficiary and not the trustee who makes any capital gain or capital loss when a CGT event happens to the asset.

Similarly, assets owned by the deceased when they died 'pass' to a beneficiary once the beneficiary becomes absolutely entitled to them.

A beneficiary can be absolutely entitled to trust assets in situations where the trust has other beneficiaries if:

· the assets are fungible - that is easily divisible, such as shares in a publicly listed company

· the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them, and

· there is a clear understanding on the part of all relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

We accept that the will provides each beneficiary with an entitlement to one-sixth of the shares that are currently held by the Estate. Consequently, they are, between them, absolutely entitled to all of these shares and are considered to be their owners for capital gains purposes.

Therefore, the shares are not assets owned by the Estate for capital gains purposes, so you will not be the one who makes any capital gain or loss due to their sale.

Question 6

Summary

The Estate can claim a deduction for the expenses incurred to the extent they relate to the derivation of the dividend income and the preparation of the Estate income tax returns.

Detailed reasoning

The Estate can claim a deduction for the expenses that you have incurred to the extent they relate to the derivation of the dividend income because:

· they were incurred in earning assessable income

· they are not private of domestic in nature, and

· they are not capital in nature.

The expenses that you incur in relation to the preparation of the Estate income tax returns are made deductible by section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Both of these categories of deductions are to be claimed in the year that they are incurred.

Question 7

Summary

The Estate cannot claim a deduction for the expenses incurred to the extent they relate to the transfer of the shares to you, their sale or their transfer to the beneficiaries.

Detailed reasoning

The expenses that relate to the transfer of the shares to you, their sale or their transfer to the beneficiaries are capital in nature and would be taken into account when working out whether or not a capital gain is being made from them.

They would not be deductible under section 8-1 of the ITAA 1997 for either of these reasons.