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Subject: Administration of a deceased estate

Question 1

Will the Commissioner exercise his discretion under section 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to apply the tax rates under section 99 of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your spouse passed away a number of years ago.

You were appointed executor and you are the sole beneficiary of your spouse's estate.

You have not yet wound up the estate.

You are seeking a ruling from the ATO on the tax rate applicable should the trust remain operating past three income years from the date of death.

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 99A(2),

Income Tax Assessment Act 1936, subsection 99(2),

Income Tax Rates Act 1986, subsection 12(6),

Income Tax Rates Act 1986, paragraph 14(1)(a)-(c),

Income Tax Rates Act 1986, subsection 14(2),

Income Tax Rates Act 1986, clause 1(b) of Part 1 of Schedule 10 and

Income Tax Rates Act 1986, clause 2(b) of Part 1 of Schedule 10.

Reasons for decision

When a trust estate has income to which no beneficiary is presently entitled, tax is assessed to the trustee at a special rate of tax, pursuant to section 99A of the ITAA 1936. The applicable rate of tax is 45% under Part 1 of Schedule 12 of the Income Tax Rates Act 1986 (ITRA 1986).

Section 99A of the ITAA 1936 applies to all trust estates unless the trust estate is of a kind referred to in subsection 99A(2) of the ITAA 1936 and the Commissioner is of the opinion that it would be unreasonable for that section to apply. Section 99A does not apply in relation to a trust estate in relation to a year of income, being a trust estate:

a) that resulted from:

i. A will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil; or

ii. An intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of a persons who die intestate;

b) That consists of the he property of a person who has become bankrupt, being property that has vested in The Official Receiver in Bankruptcy, or in a registered trustee, under the Bankruptcy Act 1966;

c) That is administered under Part XI of the Bankruptcy Act 1966; or

d) That consists of property of a kind referred to in paragraph 102AG(2)(c)

As the trust was formed out of your spouse's will, income tax will be assessed to you, the trustee, at individual rates. Pursuant to subsection 99(2) of the ITAA 1936, where no part of the net income of a resident trust estate:

§ That is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

§ In respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

§ That represents income tot which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

The trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.

Subsection 12(6) and Schedule 10 of the ITRA 1986 specify the rates of tax payable by a trustee under section 99 of the ITAA 1936.

Part 1 of Schedule 10 of the ITRA 1986 identifies two different tax treatments depending on when the deceased estate was wound up relative to the date of death.

Clause 1(b) of Part 1 of Schedule 10 of the ITRA 1986 provides that a trustee who is liable to be assessed and to pay tax:

§ under section 99 of the Assessment Act in respect of the net income or part of the net income of a resident trust estate, being the net income or part of the net income of the estate of a deceased person who died less than 3 years before the end of the year of income;

the rate of tax in respect of that share of the net income or that net income or that part of that net income is the rate that would be payable under Part I of Schedule 7 if one individual were liable to be assessed and to pay tax on that income as his or her taxable income.

Hence where a person dies less than three years before the end of the year of income, the trustee is assessable at resident individual tax rates which include the tax free threshold of $6,000.

Where a trustee has not wound up the deceased estate within three financial years from the date of death, clause 2(b) of Part 1 of Schedule 10 to the ITRA 1986 operate to remove most of the tax free threshold.

Paragraph 14(1)(a)-(c) of the ITRA 1986 states that where a trustee of a trust estate is liable to be assessed under section 99 of the ITAA 1936, and the deceased person died not less than 3 years before the end of the year of income, then no tax is payable by the trustee under subsection 12(2) of the ITRA 1986 if the net income of the trust estate does not exceed $416.

If income of the trust estate is greater than $416, but less than $594, the amount of tax payable by the trustee in accordance with subsection 14(2) of the ITRA 1986 is 50% of the amount by which that net income exceeds $416.

The tax rates assessable to the trustee can be summarised below if the trust remains operating past three income years from the date of death: