Edited version of private ruling

Authorisation Number: 1011656822559

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Ruling

Subject: Tax offsets - Medical expenses

Is the trustee of the deceased estate entitled to a medical expenses tax offset?

Yes.

The scheme commences on:

1 July 2009

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 passed away on in 2009. The deceased's spouse passed away in 2010.

The deceased was paying for all expenses relating to the care of the spouse. This included a high level of care in a nursing home.

The deceased's Will specified that the estate was to continue to maintain the highest standard of care for the spouse for the remainder of the spouse's life. The estate therefore incurred nursing home charges until the deceased's spouse died.

The nursing home was an approved age care facility under the Aged Care Act 1997.

The spouse was an approved care recipient who was assessed as requiring level two care.

The deceased had an outstanding bill for the spouse's care at the date of death. The estate received bills after the deceased's date of death.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 159P(1)

Income Tax Assessment Act 1936 Subsection 159P(3)

Income Tax Assessment Act 1936 Subsection 159P(3A)

Income Tax Assessment Act 1936 Subsection 159P(3B)

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.

Medical expenses

A medical expenses tax offset is available to a taxpayer under section 159P of the Income Tax Assessment Act 1936 (ITAA 1936), where the taxpayer pays medical expenses for themselves or for a dependant who is an Australian resident. The medical expense tax offset is only available if the amount of medical expenses (reduced by any entitlement to reimbursement from a health fund or government authority) exceeds $1,500. The tax offset is 20% of the amount by which the net medical expenses exceed $1,500.

To qualify for the tax offset, the medical expenses must be paid by the taxpayer in respect of the taxpayer or dependent.

Under subsection 159P(3B) of the ITAA 1936, where the trustee of a deceased estate pays medical expenses in respect of a liability incurred by the deceased person during their lifetime, a medical expenses tax offset may be claimed in the trustee assessment for the deceased's income up to the date of death.

Generally, you incur an outgoing at the time you owe a present money debt that you cannot escape.

Under subsection 159P(3) of the ITAA 1936, medical expenses, net of reimbursements, paid by a trustee out of trust income on behalf of a resident beneficiary may be eligible for the medical expenses tax offset where the trustee is liable to be assessed. Alternatively, where the beneficiary is liable, the tax offset will be reflected in the beneficiary's assessment.

Medical expenses include payments made to a public or private hospital in respect of an illness or operation.

An aged care facility or nursing home will be regarded as a hospital for the purposes of subsection 159P(4) of the ITAA 1936 if it is approved under the Aged Care Act 1997 (ACA) (Taxation Ruling IT 261).

The payment to the aged care facility must be in respect of an illness or operation. The payment, if made on or after 1 October 1997, will be accepted as being in respect of an illness if the taxpayer is an 'approved care recipient' under the ACA 1997. An 'approved care recipient' is a person who has been assessed as requiring care at levels 1 to 7 (Taxation Ruling TR 93/14).

Your case

You have made payments after 1 October 1997 to an aged care facility with respect to an individual with a life interest in the deceased estate for level two aged care. The payments made by the trustee were out of the trust income. The aged care facility is an approved aged care provider under the ACA 1997. The individual with a life interest was an 'approved care recipient' and required care at level two. Therefore, the payments are medical expenses for the purposes of calculating the medical expenses tax offset under section 159P of the ITAA 1936.

You have stated that the deceased had outstanding bills for deceased's spouse's care at deceased's date of death. These expenses are eligible for the medical expenses offset in the assessment for the deceased's income up to the date of death under subsection 159P(3B) of the ITAA 1936.

You have stated that the estate continued to incur medical expenses in respect of the deceased's wife after his date of death. The expenses incurred by the trustee are eligible medical expenses for the purposes of the medical expenses tax offset under subsection 159P(3) of the ITAA 1936.

Presently Entitled

In a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate for the purposes of Division 6 of Part III of the ITAA 1936 depends on:

(a) The stage reached in the administration of the deceased estate.

(b) The terms of the deceased's will or codicil, trust law and principles enunciated and orders made by the Courts.

(c) Whether any discretionary payments have been made to the beneficiary by the executor or trustee.

Division 6 requires the ascertainment of the "net income" of the trust estate as defined in subsection 95(1) of the ITAA 1936. The net income of the trust is then assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.

Taxation Ruling IT 2622 discusses present entitlement during the stages of administration of deceased estates.

During the intermediate stage of administration of a deceased estate, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.

As such, the beneficiary of the trust, receiving the nursing home care, was presently entitled to the income that was paid to her, or on behalf of her, before the administration of the estate was finalised for the purposes of Division 6 of Part III of the ITAA 1936. Further, the beneficiary was entitled to the medical expenses tax offset for the nursing home medical expenses.

In order to claim the medical expenses offset it will be necessary for a tax return to be prepared for the beneficiary.