Edited version of private ruling

Authorisation Number: 1011710214382

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Ruling

Subject: Deceased estate and Commissioner's discretion

Question and answer:

Will the Commissioner exercise his discretion under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and assess the trustees of the deceased estate under section 99 of the ITAA 1936?

Yes.

This ruling applies for the following periods:

Income year ending 30 June 2011

Income year ending 30 June 2012

Income year ending 30 June 2013

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

The Testator died in 1992.

Probate was granted in 1993.

The Estate was administered, and in accordance with the Will, the residuary estate has been held in trust to pay the net annual income to the Income Beneficiary during their life with the capital being held for the Capital Beneficiaries on the death of the Income Beneficiary.

The residue of the estate which is held in trust for the Income Beneficiary for their life includes shares, some of which were held before death and some acquired by the trustees post-death.

The trustees have recently resolved to adjust the trust assets by sale of part of the share portfolio.

Shares will be sold in the income years ending 30 June 2011, 30 June 2012 and 30 June 2013.

If the Income Beneficiary is liable for any capital gain arising from the sales they will be unable to pay the tax and have any income remaining. Therefore, the trustees will elect under section 155-230 of the Income Tax Assessment Act 1997 (ITAA 1997) to be assessed on any capital gain arising from the sales rather than the Income Beneficiary.

The trustees seek the Commissioner's discretion for section 99A of the ITAA 1936 not to apply, in which case the trustees will be assessed under section 99 of the ITAA 1936.

The trustees believe it would be unreasonable for section 99A of the ITAA 1936 to apply as the circumstances are normal arrangements being made for the proper investment of trust funds for the benefit of income and capital beneficiaries.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 115-230

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Reasons for decision

Assessing capital gains of resident testamentary trusts

Section 115-230 of the ITAA 1997 allows the trustee of a testamentary trust to choose to be assessed on the share of the trust net income attributable to capital gains if a beneficiary who would otherwise be assessed under section 97 of the ITAA 1936 on that share of the net income does not have a vested and indefeasible interest in trust property representing that share, nor has had such property paid or applied for its benefit.

The trustee must choose to be assessed no later than the deadline in subsection 115-230(5) of the ITAA 1997. That deadline is the day two months after the last day of the relevant income year or such later day as the Commissioner allows.

Where the trustee makes this choice, the trustee is assessed under section 99A of the ITAA 1936 or, at the Commissioner's discretion, section 99 of the ITAA 1936.

Commissioner's discretion to assess trustee under section 99 of the ITAA 1936

Under subsection 99A(2) of the ITAA 1936, where the trust estate resulted from a will and the Commissioner is of the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply, the Commissioner has the discretion to assess the trustee under section 99 of the ITAA 1936.

The effect of subsection 99A(3A) of the ITAA 1936 when read with paragraph 99A(3)(a) of the ITAA 1936, is that in forming an opinion for the purposes of subsection 99A(2) of the ITAA 1936 in the case of a deceased estate, the Commissioner is required to have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by, or lent to, the deceased person, income was derived by the deceased person, benefits were conferred on the deceased person or special rights or privileges were conferred on, or attached to, property of the deceased person, whether or not the rights or privileges were exercised.

Application to your circumstances

Based on the information you have provided in your application, the Commissioner will exercise his discretion and assess the trustees under section 99 of the ITAA 1936.

Further information

Please note that under Part I of Schedule 10 of the Income Tax Rates Act 1986, where a trustee of a deceased estate is liable to pay tax under section 99 of the ITAA 1936, the tax-free threshold (currently $6,000) is only available where the deceased person in question died less than three years before the end of the income year. This is regardless of whether the Commissioner has exercised his discretion to assess the trustee under section 99 of the ITAA 1936.

The Commissioner does not have any discretion to allow the trustee of a deceased estate to apply the tax-free threshold.