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Edited version of your private ruling
Authorisation Number: 1012590071077
Ruling
Subject: Taxation treatment of trust income
Question 1
Is the trustee entitled to apply the 50% capital gains tax (CGT) discount to the capital gains arising from the sale of the investment properties?
Answer
Yes.
Question 2
Will the trustee be assessed under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) with respect to the capital gains and other net income arising during the period of administration?
Answer:
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ending 30 June 2014
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You are the trustee for a deceased estate.
The deceased assets included rental properties.
Under the terms of the will, you were to realise the assets and then distribute the money between the beneficiaries.
The rental properties were purchased by the deceased after 19 September 1985 and were owned by them for more than 12 months.
The properties were sold in the 2012-13 and 2013-14 financial years.
The beneficiaries are non-residents of Australia.
No money has been paid to the beneficiaries nor have they given you instructions as to how the money should be dealt with.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 98
Income Tax Assessment Act 1997 Section 99
Income Tax Assessment Act 1997 Section 115-5
Reasons for decision
Summary
The trust is entitled to apply the 50% discount to the capital gain made from the sale of the rental properties. The net income of the trust earned during the administration period is assessed under section 99 of the ITAA 1936.
Detailed reasoning
Entitlement to apply CGT discount
Under section 115-5 of the Income Tax Assessment Act 1997 you make a discount capital gain if the following requirements are satisfied:
· you are an individual, a trust or a complying superannuation entity
· a capital gains tax (CGT) event happens to an asset you own
· the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999
· you acquired the asset at least 12 months before the CGT event, and
· you did not choose to use the indexation method.
Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.
The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year.
In your case, you, as trustee of a deceased estate, have disposed of rental properties which the deceased owned for more than 12 months. As the properties were sold (the CGT event) after 21 September 1999 you are able to discount the capital gain made by 50%.
Taxation of estate income during the administration period
Taxation Ruling IT 2622 is about present entitlement during the stages of administration of deceased estates. Paragraph 17 of IT 2622 states 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 are liable to bear tax on their shares of the net income of the estate for that year to which they are presently entitled under section 97 of the ITAA 1936.
Where no beneficiary is presently entitled to all or part of the net income of the estate the trustee is assessed under section 99 of the ITAA 1936. The trustee will also be assessed, under section 98 of ITAA 1936, where a beneficiary is presently entitled to the net income of the estate but the beneficiary is not a resident of Australia.
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:
Income derived in the period between the beginning of the income year and the day administration was completed. |
Assessed in the hands of the executors or administrators under section 99 of the ITAA 1936. |
Income derived in the period between the day administration was completed and the end of the income year. |
Assessed to the beneficiaries presently entitled to the income in the manner required by section 97 or 98 of the ITAA 1936. |
In your case,
· the net income of the estate earned between the date of the deceased's death and the end of that financial year will be assessed in the hands of the trustee under section 99 of the ITAA 1936 as no beneficiary was presently entitled to that income as at 30 June 2013
· the net income of the estate earned between the beginning of the next financial year and the date the estate was fully administered will be assessed in the hands of the trustee under section 99 of the ITAA 1936 in accordance with IT 2622
· any net income earned by the estate between the date the estate was fully administered and the end of that financial will be assessed in the hands of the trustee under section 98 of the ITAA 1936.