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Edited version of your written advice
Authorisation Number: 1012801610846
Ruling
Subject: deceased estate
Question
Is the trustee liable to pay income tax on the net income of the deceased estate in the year the administration is finalised?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
All the assets of the deceased estate have been sold and distributions made to the beneficiaries before the end of the 2015 income year.
The estate has been fully administered apart from the completion of the 2015 income tax return.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 6.
Reasons for decision
Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates discusses tax issues in relation to a deceased estate and deals with the issue of who is presently entitled to the income of the deceased estate during the stages of administration.
Paragraph 7 of IT 2622 states that in a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) depends on:
• The stage reached in the administration of the deceased estate.
• The terms of the deceased's will or codicil, trust law and principles enunciated and orders made by the Courts.
• Whether any discretionary payments have been made to the beneficiary by the executor or trustee.
Where a resident beneficiary of a trust estate who is not under any 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.
As outlined in paragraph 14 of IT 2622, during the intermediate stage of administration of a deceased estate, 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. 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.
Where the administration of a deceased estate is completed during the course of an income year, it is the longstanding practice of the Australian Taxation Office to assess beneficiaries on their share of the net income from the estate for that year to which they are presently entitled (paragraph 17 of IT 2622).
It is a principle established by the courts that the net income of a trust estate is determined on the last day of the financial year (Union Fidelity Trustee Co. of Australia v FCT (1969) 119 CLR 177; 69 ATC 4084; 1 ATR 200; FCT v Galland 86 ATC 4885; (1986) 18 ATR 33).
For income tax purposes, whether any beneficiary is presently entitled to a share of the income of the trust estate is also determined on the last day of the financial year (paragraph 19 of IT 2622).
This means that, on the last day of the income year, provided a beneficiary has become presently entitled to a share of the income of the trust estate on or before that day, the beneficiary is assessable on that share of the net income of the trust estate calculated in accordance with section 95 of the ITAA 1936. The calculation required by section 95 includes in the 'net income of the trust estate' the assessable income derived by the trust estate for the whole of the income year concerned.
In this case, the trust's net income in the 2014-15 financial year included ordinary income and statutory income from the sale of assets.
The estate was fully administered during the 2014-15 financial year.
The residual beneficiaries are Australian residents. Each of these beneficiaries became presently entitled and received their share of the net income of the trust estate before 30 June 2015. It is acknowledged that the beneficiaries are not under a legal disability.
Therefore based on the principles outlined in IT 2622, the trustee is not liable to pay income tax on the net income of the trust in the 2014-15 financial year.