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Ruling

Subject: Deceased Estate

Questions

Do the resident individual beneficiaries of the Estate have a vested and indefeasible interest in the income of the trust, but are not presently entitled to that income meaning that the trustee is assessed under section 99 of the Income Tax Assessment Act ITAA 1936 (ITAA 1936) for the period 1 July 20XX to 19 June 20YY

Answer:

Yes

Will the flood levy apply to the Estate?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The Deceased passed away.

The executors obtained Grant of Probate.

In accordance with the terms of the Will, the beneficiaries are to receive the residue of the Estate when all funeral and testamentary expenses and probate and estate duties have been paid by the Trustee.

The administration of the Estate was completed part way through the financial year.

The beneficiaries of the Estate are resident adults not under any legal disability.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Reasons for decision

Flood Levy

To assist affected communities recover from the 2010-11 natural disasters, the government introduced a Temporary flood and cyclone reconstruction levy (flood levy) that applies to taxable income for the 2011-12 year only.

The flood levy applies to individuals, but generally not to trusts. However, those trusts where the trustee is taxed on certain trust income as if it was income of an individual will have to pay the levy. Trusts liable to pay the flood levy include those where resident individual beneficiaries have a vested and indefeasible interest in the income of the trust but are not presently entitled to that income. In those cases assessments are issued to the trustee under section 98 of the ITAA 1936.

Section 99 of the ITAA 1936 applies to assess a trustee of a deceased estate on income to which no beneficiary is presently entitled or income which is retained or accumulated by the trustee. The flood levy does not apply to those assessments.

Present entitlement during the stages of administration of a deceased estate

Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries. During the initial stage of the administration no beneficiary is presently entitled to the income derived.

The leading Australian case on present entitlement under a trust arising during the course of administration of an estate is the decision of the High Court of Australia in F.C. of T. v. Whiting (1943) 68 CLR 199; 7 ATD 179. The Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered.

In their joint judgment, Latham C J and Williams J stated (CLR at 216; ATD at 184), that numerous authorities had established that:

".... until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries."

And later their Honours added (CLR at 216; ATD at 184):

"The only part of an estate which can be made available to satisfy the claims of the beneficiaries is that part which remains after the funeral and testamentary expenses, death duties and debts have been paid or provided for, if necessary out of the whole estate, including any income earned by the estate during the period of realization."

The "net income of the trust estate" and whether any beneficiary is presently entitled to a share of income of the estate are normally determined on the last day of the financial year. As Chief Justice Barwick said in Union Fidelity Trustee Co. of Australia v. F.C. of T. (1969) 119 CLR 177 at 182; 69 ATC 4084 at 4087; 1 ATR 200 at 202:

However, according to IT 2622 it has also been the longstanding practice of the Tax Office to accept an apportionment in the income year in which the estate is fully administered. Where the executors and beneficiaries are able to demonstrate, through the striking of accounts at the completion of administration, the actual amounts of income derived in the periods before and after the day on which the estate was fully administered, an apportionment may be made as follows:

In this instance, the beneficiaries of the Estate are resident, adult beneficiaries and are not under any legal disability. In accordance with the terms of the Will, the beneficiaries are to receive the residue of the Estate when all funeral and testamentary expenses and probate and estate duties have been paid by the Trustee. As there was no income derived after the time administration was completed, all of the income is assessable to the trustee under section 99 of the ITAA 1936 and no flood levy is payable.