Edited version of your written advice

Authorisation Number: 1012724753991

Ruling

Subject: Deceased estate income

Question

Are the dividends received by the deceased estate included in your income tax return for the relevant income year?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased passed away and left you all of their shares.

Probate was granted in 20XX.

The executor authorised distribution of most of the estate and signed the share transfer forms.

Dividends were paid to the estate.

The will was not challenged.

All debts and testamentary expenses had been paid for or provided for when probate was granted.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95(1).

Income Tax Assessment Act 1936 Section 97.

Income Tax Assessment Act 1936 Section 99.

Income Tax Assessment Act 1936 Section 99A.

Reasons for decision

Summary

As administration of the estate is considered to be complete when probate was granted, you are presently entitled to the dividends received after that date.

Detailed reasoning

The provisions that relate to the taxation of trust income are contained in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Where a resident beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate, section 97 of the ITAA 1936 operates to include in the assessable income of the beneficiary, their share of the net income of the trust. This income must be included as assessable income, by the beneficiary, in the year of income in which it was received or entitled to be received.

Where no beneficiary is presently entitled, sections 99 and 99A of the ITAA 1936 will apply to assess the trustee on the net income of the trust.

Net income is defined in subsection 95(1) of the ITAA 1936 as the total assessable income of the trust derived during the income year, calculated as if the trustee were a resident taxpayer, less allowable deductions. Where an asset is sold by the trust any capital gain is included in the net income of the trust.

The term 'present entitlement' is not defined in the ITAA 1936. It is therefore necessary to rely on the meaning which has been given to the term by the Courts.

The leading case on present entitlement under a trust arising during the administration of an estate is the decision of the High Court in FC of T v Whiting (1943) 68 CLR 199 (Whiting's Case). The High Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the trust estate until the estate has been fully administered.

In Whiting's Case the High Court found that in order for a beneficiary to be 'presently entitled' to the income of a trust estate, the beneficiary must be able to demand immediate payment of such income from the trustee.

The High Court decided that the beneficiaries of a deceased estate have no right to demand payment of any part of the estate until such time as the estate has been fully administered. An estate will be fully administered when all of the assets and liabilities have been ascertained and payment or provision for payment of liabilities has been made. Until such time, the residue cannot be ascertained and there is no present entitlement to income.

Taxation Ruling IT 2622 provides the Commissioner's view on present entitlement during the stages of administration of deceased estates.

Paragraph 14 of IT 2622 states:

During the intermediate stage of administration of a deceased estate (as described in paragraph 6), 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 debt, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amount actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.

Further, paragraph 16 of IT 2622 states that:

The administration of the estate does not have to reach the stage where the estate is wound up for beneficiaries to enjoy present entitlement to the income of the estate. Once the executor has provided for all debts incurred by the deceased before his or her death and for debts incurred in administering the estate (e.g. funeral expenses) and provided for distributions of specific assets or legacies, it will be possible to ascertain the residue with certainty, even though the executor may not have actually made all the transfers necessary to satisfy these demands on the estate.

In this case, probate was granted in 20XX. All debts and testamentary expenses have been paid or provided for. Therefore in accordance with paragraph 16 of IT 2622, the estate is considered to be fully administered at this time.

As the estate is considered to be fully administered, in accordance with the principles of Whiting's Case, the beneficiaries of the estate are considered to be presently entitled to a share of the net income of the trust estate.

Therefore, you are a beneficiary who is presently entitled to the dividends earned during the year ending 30 June 20XX. Consequently, the dividend income should be included in your assessable income for the year ending 30 June 20XX.