Edited version of your private ruling

Authorisation Number: 1012497997189

Ruling

Subject: Assessability of income derived in a deceased estate

Question 1

Is the trustee of a deceased estate liable to pay tax on trust income derived from money set aside under a will?

Answer:

Yes.

Question 2

Will section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) apply where the trustee is to pay tax on trust income derived from money set aside under a will?

Answer:

Yes.

Question 3

Is the trustee of a deceased estate liable to pay tax on residual trust income where the beneficiaries are presently entitled to the income?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are a trustee of a deceased estate.

You are seeking clarification of the tax treatment of the income on various amounts in the trust.

Under the terms of the will:

· the residence of the deceased is to be held in trust for a child of the deceased, to reside in.

· an amount of money of the estate is to be set aside in trust and invested by the trustee, with any income derived from the investment to be used for paying local authority rates at the property where the child resides.

· the surplus income from the investment will be reinvested.

· in the case of the child's death the money invested and the proceeds from the sale of the residence is to be divided equally between the surviving beneficiaries.

· the residual amount of the estate is to be distributed to the survivors of the beneficiaries.

The deceased estate has been fully administered and the residual value of the estate (after allowing for the amount to be set aside) was a certain amount at that time. That amount has been retained in the trust and not distributed to the beneficiaries because the beneficiaries have considered the child's financial position and realise the amount set aside will not be sufficient to cover the upkeep and maintenance of the property. The beneficiaries have decided to retain the rest and residue of the estate in the trust and the income earned will be used to help maintain the property as and when expenses arise.

It has been agreed between the beneficiaries that a beneficiary's share of the residual capital of the estate and of the income earned from that residual capital can be accessed by any of the beneficiaries upon request.

The child is not under a legal disability i.e. a bankrupt, a minor or legally mentally incapacitated.

The child is an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97.

Income Tax Assessment Act 1936 Section 98.

Income Tax Assessment Act 1936 Section 99.

Income Tax Assessment Act 1936 Section 99A.

Income Tax Assessment Act 1936 Section 101.

Income Tax Assessment Act 1936 Subsection 99A(2).

Income Tax Assessment Act 1936 Subsection 99A(3)

Reasons for decision

Summary

The trustee will be assessable on the income derived from the investment of the amount set aside in the trust, as no beneficiary is entitled to this income. Because the trust is a deceased estate section 99A of the ITAA 1936 will not apply. Therefore section 99 of the ITAA 1936 will apply.

Section 97 of the ITAA 1936 will apply to the income derived from the investment of the residual amount, as the beneficiaries are presently entitled to this income.

Detailed reasoning

Whether or not you are assessable on the net income of the trust in your capacity as the trustee depends on:

(a) whether the beneficiary is 'presently entitled' to the net income of the trust;

(b) whether the beneficiary is under a 'legal disability'; and

(c) whether the beneficiary is a 'non resident' of Australia for taxation purposes.

If the beneficiary is presently entitled to the net income of the trust, the trustee is not assessable on that income unless the beneficiary is under a legal disability, or is a non resident of Australia for taxation purposes.

The liability to taxation on the net income of a trust is determined under the following sections of the ITAA 1936:

· section 97 applies where a beneficiary is presently entitled to a share of the net income and is not under a legal disability;

· section 98 applies where a beneficiary is presently entitled but is under a legal disability; and

· sections 99A and 99 apply where there is no beneficiary presently entitled to all or some of the net income of a trust estate.

As the concepts of present entitlement and legal disability are critical in determining taxation liability, these terms will be considered before determining the sections under which the net income of the trust will be assessed.

Present Entitlement 

There is no definition of the term 'presently entitled' in the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997). It is therefore necessary to establish the meaning which has been given to the term by the courts. The principal cases on the concept of present entitlement are the High Court decisions in Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199 and Taylor v. Federal Commissioner of Taxation (1970) 119 CLR 444. The principles in Taylor's case are also dealt with in Income Tax Ruling IT 319.

The main principles emerging from the two cases are that:

1) the income must be legally available for distribution to the beneficiary. Therefore if a beneficiary can demand payment then he or she is presently entitled to the distribution;

2) the beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent which means that the beneficiary must have the right to demand immediate payment (or would have had the right to demand payment had they not been under a legal disability). An interest is said to be defeasible where it can be brought to an end and indefeasible where it cannot.

A contingent interest also occurs where a beneficiary is not entitled to their interest in the trust income when the terms of the trust provides that the trust income should go to another person if the beneficiary dies, the beneficiary's rights are therefore contingent and thus defeasible.

Legal Disability

A beneficiary will be under a legal disability if they are not legally competent to give the trustee an immediate valid discharge in respect of a distribution of trust property. In other words, the person does not have the power to legally transfer property and cannot give a valid discharge for monies paid to them.

Generally, a person is under a legal disability if they are an infant at general law, bankrupt or insane.

Section 97 of the ITAA 1936

Where a resident beneficiary is presently entitled to the income of a deceased estate and not under a legal disability, the beneficiary will declare the distribution of trust income in their individual tax return.

Tax will be calculated at the beneficiary's individual tax rates and the trustee is not required to pay the tax.

Section 98 of the ITAA 1936

Where a beneficiary is presently entitled but is under a legal disability, the trustee will be liable to pay the tax on the beneficiary's behalf. If the beneficiary receives other income and is required to lodge an individual tax return, they must declare the distribution from the trust in that return. However, to ensure that double taxation does not occur, the beneficiary can claim a credit for the tax paid by the trustee; (section 100(2) of the ITAA 1936).

Sections 99 and 99A of the ITAA 1936

Sections 99 and 99A of the ITAA 1936 assess the trustee on income to which no beneficiary is presently entitled. Where section 99A does not apply then section 99 will apply.

Section 99A of ITAA 1936 requires the trustee to be taxed at the highest marginal tax rate of the relevant income year on all income to which no beneficiary is presently entitled.

Where the trustee of a resident trust, not being a deceased estate in the first three years of administration, is assessed under section 99 of the ITAA 1936, the rates of tax which are levied are set out in the table below (for the 2013-14 income year).

* Income between $594 and $37,000 is taxed at a flat rate of 19%.

Section 99A of the ITAA 1936 applies to all trust estates where no beneficiary is presently entitled to the income unless the trust estate is of a kind referred to in subsection 99A(2) and the Commissioner is of the opinion that it would be unreasonable for section 99A to apply.

Subsection 99A(2) of the ITAA 1936 states that section 99A will not apply in relation to a trust estate in relation to a year of income, being a trust estate:

(a) that resulted from a will, … if the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.

The circumstances the Commissioner should have regard to when forming an opinion as to whether it is reasonable for section 99A of the ITAA 1936 to apply are specified in subsection 99A(3) and include the manner and price the trust acquired the assets, whether special rights or privileges are attached or conferred in relation to property and such other matters as the Commissioner thinks fit.

Generally deceased estates are trusts where assets come directly from the assets of the deceased person and the Commissioner will exercise his discretion to assess this income under section 99 of the ITAA 1936 unless there is tax avoidance involved.

Trust income derived from money set aside in respect of a will

In your case:

· in accordance with the terms of the will, the amount will be set aside in trust and invested with the income being paid towards the maintenance of the property.

· any surplus income from the invested amount will be reinvested

· in the case of the child's death the re-invested trust income and capital will be distributed to the surviving beneficiaries.

As no beneficiary is presently entitled to this income, the trustee will be assessed on this in their capacity as trustee.

Will section 99 of the ITAA 1936 apply?

As mentioned above, section 99A of the ITAA 1936 is considered initially when there is no beneficiary presently entitled to the trust income.

However if a trust is as a result of a will and in the Commissioner's opinion it would not be reasonable to apply section 99A of the ITAA 1936 then section 99 will apply.

In your case the trust income earned from the amount set aside is as a result of a will, and in the opinion of the Commissioner it would be unreasonable for section 99A of the ITAA 1936 to apply. Therefore section 99 will apply when assessing this income to the trustee.

Trust income derived from the residual amount

In your case the beneficiaries have arranged the residual amount to remain in the trust and the income derived to be applied to the maintenance of the property when needed.

However the beneficiaries can legally demand the income derived and capital in the trust to be distributed in their own right. Therefore the beneficiaries have an indefeasible, absolutely vested and beneficial interest in the trust income and accordingly they are presently entitled to the income.

As a result, section 97 of the ITAA 1936 will apply to this part of the income of the trust and the beneficiaries will need to declare the income derived from the trust in their individual income tax returns. This is so even if the income is not actually paid to the beneficiaries.