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Edited version of your written advice
Authorisation Number: 1012806581824
Ruling
Subject: Deceased Estate
Question 1
Will the trustee be assessed on income and capital gains distributed from a deceased estate during the administration of the estate?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2015.
The scheme commences on:
1 July 2014.
Relevant facts and circumstances
The deceased died on the X Month XXXX.
The property was sold by the executor of the deceased estate.
There was a capital gain on the sale of the property.
The proceeds from the sale were immediately used to repay the property mortgage, and the estate was left with surplus funds.
The deceased has no material other debts apart from some costs of dealing with the estate.
Sufficient funds will be held by the executor to cover for these expenses.
The bulk of the estate representing the cash held will be paid out to the beneficiaries over the remainder of the income year, as it is not required to be held by the executor.
Relevant legislative provisions
Section 97 of the Income Tax Assessment Act 1936
Section 99 of the Income Tax Assessment Act 1936
Subsection 95(1) of the Income Tax Assessment Act 1936
Reasons for decision
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 Income Tax Assessment Act 1936 (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.
Present entitlement is discussed at length in the Federal Court cases FC of T v. Whiting (1943) 68 CLR 199; 7 ATD 179 and Taylor Trust, Trustees of v. FC of T (1970) 119 CLR 444; 70 ATC 4026. The Courts in these cases held that in order for a beneficiary to be presently entitled to trust income, the following two conditions must be satisfied:
The beneficiary must have an indefeasible, absolute vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent. This 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).
The income must be legally available for distribution to the beneficiary. In the case of a deceased estate, the beneficiaries will not be presently entitled to income until it is possible to ascertain the residue with certainty (after provision for debts, legacies, and so on).
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 provides that if during the 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 debts, etc. The executor in this situation might exercise the discretion, to 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 amounts 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 a beneficiary is presently entitled to a capital gain on the disposal of a CGT asset and is not under a legal disability, their share of a capital gain realised on the sale will be assessed to the beneficiary due to the operation of section 115-215 of the Income Tax Assessment Act 1997 and section 97 of the ITAA 1936.
In this case, when the estate distributes the cash to the beneficiaries during the financial year, the beneficiaries will be presently entitled to that income and will be liable for any tax payable on that income. The trustee will not be liable for any tax payable on the income that has been distributed.