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Ruling

Subject: Deceased estate

Questions and Answers:

1. Will the capital gains tax (CGT) be paid by the estate?

No.

2. Is the CGT to be paid by the respective beneficiaries in their respective individual tax returns?

Yes.

3. Will delaying payment of the distribution to the next financial year result in the estate paying the CGT in the current income year when the shares are sold?

No.

4. For the deceased estate, do you use a trust tax return?

Yes.

5. Can the proceeds of the estate be distributed before the relevant financial year, i.e., before the trust tax return is completed and lodged?

Yes.

6. Is a trust tax return to be completed and lodged each financial year, up to and including the financial year where all the assets of the estate have been distributed and/or all deriving of trust income has ceased?

Yes.

7. As executor, do you complete the deceased's tax return from 1 July 20XX to the date of death?

Yes.

This ruling applies for the following periods

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on

1 July 2012

Relevant facts and circumstances

Your relative, the deceased, passed away during the relevant financial year. Your relative's deceased estate has no debts, derives rental income and includes a shares portfolio. You are now in a position to determine the quantum of the distributable surplus of the estate. You propose to sell the shares prior to the end of the relevant financial year.

The estate has multiple equal beneficiaries, none of which are under legal disability. One beneficiary believes the tax payable on the income of the estate, including the income from capital gains, should be paid by the estate. Due to their high marginal tax rate, this would result in less tax payable for this one beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

Reasons for decision

CGT

Section 97 of the Income Tax Assessment Act 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate.

The net income of the trust eased estate and whether any beneficiary is presently entitled is determined on the last day of each income year (30 June). This means that, on the last day of the income year, a beneficiary who is presently entitled will be assessed on their share of the net income for the whole of the income year.

Taxation Ruling IT 2622 is about present entitlement during the stages of administration of deceased estates. It explains beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. However, it also explains where the administration of a deceased estate is completed during the course of an income year, the beneficiaries (who are not under any legal disability) will be presently entitled during that income year and should bear tax on their shares of the net income of the trust estate for that income year.

Taxation Ruling IT 2622 defines when a deceased estate has been fully administered, as follows:

"....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…."

For simplicity, Taxation Ruling IT 2622 illustrates the period of administration of the estate of a deceased person as follows:

DATE OF DEATH

STAGES OF ADMINISTRATION

(i) Burial of deceased.

(ii) Executor appointed by will or administrator appointed by Court.

(iii) Probate applied for and granted by Court.

(iv) Assets vest in executor who pays debts and testamentary expenses:

  Initial stage - net income of estate is applied to reduce debts, etc.

  Intermediate stage - part of the net income of estate that is not required to pay debts, etc., may be paid to beneficiaries.

  Final stage - debts, etc., are paid or provided for in full and net income of estate is available for distribution.

ADMINISTRATION OF ESTATE IS COMPLETE

In your case, the administration of your deceased estate is currently ready for completion, i.e., complete. Also, you plan to sell the shares prior the end of the relevant financial year. It follows the beneficiaries of your deceased estate will be presently entitled beneficiaries for the end of the relevant financial and must include their share of the net income of the estate in their personal income tax return. As the beneficiaries are presently entitled at the end of the relevant financial year to any trust income earned during the whole income year, delaying payment of the distribution to the next financial year will not result in the estate paying the CGT for the end of the relevant financial year.

Trust returns

Paragraph 14 of Taxation Ruling IT 2622 explains during the intermediate stage of administration of a deceased estate (as described above), 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 their discretion, pay some of the income to, or on behalf of, the beneficiaries (for which they will become presently entitled).

As proceeds of an estate can be distributed before the completion of an estate's administration, it follows the non-completion of a tax return after the completion of administration will not prevent proceeds of the estate from being distributed.

The Tax Office publication 'Trust tax return instructions 2012' is provided to help you complete the 'Trust tax return 2012' (NAT 0660). The instructions include that a deceased estate is a type of trust that must use the trust tax return.

The Tax Office publication 'Managing the tax affairs of someone who has died' also states you will need a copy of a trust tax return and the accompanying trust tax return instructions. It states special instructions for executors of deceased estates are contained therein.

The Tax Office publication 'Managing the tax affairs of someone who has died' states a trust tax return may need to be lodged for each income year until the deceased estate has distributed all of its assets and income to the beneficiaries and is no longer deriving income.

The Tax Office publication 'Trust tax return instructions 2012' states when lodging the final return, to:

Print X in appropriate box.

If the trustee does not expect to lodge further tax returns, provide a statement on a separate sheet of paper headed 'Final trust tax return' showing:

§ the reason further tax returns will not be lodged, and

§ the manner of disposal of any assets of the trust if not disclosed elsewhere on the tax return.

Attach the statement to the tax return and print X in the Yes box at Have you attached any 'other attachments'? at the top of page 1 of the tax return.

Date of death returns

The Tax Office publication 'Managing the tax affairs of someone who has died' states the taxation responsibilities of an executor include:

§ lodging prior-year tax returns on behalf of the deceased person;

§ lodging a 'date of death' (final) personal tax return on behalf of the deceased person.

It states the final tax return should include all assessable income derived by the deceased person and all the tax-deductible expenses incurred up to the date of death.

It states when preparing the final tax return for the deceased person, you need to:

§ print the words 'DECEASED ESTATE' on the top of page one of the tax return

§ print 'X' in the 'NO' box at the question 'Will you need to lodge an Australian tax return in the future?'

§ The executor or administrator of the estate must sign the tax return on behalf of the deceased person.

It further states income derived after the date of death, and any deductible expenses incurred after the date of death, are included in the deceased estate's trust return.