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Edited version of your written advice
Authorisation Number: 1012673526497
Ruling
Subject: Present entitlement of the beneficiaries
Question and answer
Were the beneficiaries of the Estate presently entitled to the income of the Estate?
No.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You are the executor of the Estate (the Estate).
You believed that the Estate was not fully administered at the end of the relevant income year and the beneficiaries were therefore not presently entitled to the income of the Estate.
You believed that the Estate was not fully administered because of the following:
• You had not satisfied all specific bequests under the Will including the distribution of the main asset.
• You felt that there was significant uncertainty regarding the distribution of the main asset and there was the possibility of a legal challenge. As any legal costs would be borne by the Estate, it was not possible to determine this potential liability.
• The Estate continued to incur fees for advisers and solicitors associated with the distribution of the main asset. Therefore, not all legal debts of the Estate had been satisfied.
You lodged the income tax return for the Estate on the basis that the beneficiaries were not presently entitled with the net income being retained in the Estate.
Relevant legislative provisions
Income Tax Assessment Act 1936 - Division 6
Reasons for decision
On the death of an individual, the property of the deceased passes to his or her estate, legal control over which is exercised by an executor or administrator.
A fiduciary obligation is assumed by the executor or administrator, on the death the individual, in favour of the beneficiaries of the estate. At that time, beneficiaries of the estate have no interest in the assets of the estate, although they do have a beneficial right to see that the estate is properly administered.
Following ascertainment of the 'net income' of the estate, the net income is assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the estate or is under a legal disability.
The issue of present entitlement in relation to deceased estates is discussed in Taxation Ruling IT 2622 Income Tax: Present Entitlement During The Stages Of Administration Of Deceased Estates (IT 2622).
IT 2622 notes that case law has established that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered (FCT v Whiting (1943) 68 CLR 199; 7 ATD 179).
Further, paragraph 9 of IT 2622 explains that:
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.
In your situation, the Estate was not fully administered at the end of the relevant income year.
Therefore, the beneficiaries of the Estate were not presently entitled to the income of the Estate.