Edited version of your written advice

Authorisation Number: 1012833557261

Ruling

Subject: Income Tax - Deceased Estate - Present Entitlement

Question 1:

Will the executor of the deceased estate be assessed under either section 99 or section 99A of the Income Tax Assessment Act 1936 in respect of income to which the residual beneficiaries are presently entitled?

Answer 1:

No.

This ruling applies for the following period:

Year ended 30 June 20YY.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

The deceased died sometime in 20XX. Their will provided certain specific bequests. A clause in their will dealt with their residuary estate as follows:

"11. I GIVE AND DEVISE all the rest of my real and personal estate ("my Residuary Estate") to my trustees upon trust to divide the same equally between the following organisations:

• various organisations

AND I DECLARE that the receipt of the secretary, treasurer, or other authorised officer of each such organisation shall be a good discharge to my Trustees.

If at my death any of the organisations referred to in this clause has ceased to exist or has amalgamated with another charity or has changed its name the legacy in favour of that organisation shall not fail buy my Trustees shall pay it to the charitable organisation that my Trustees consider most nearly fulfils the objects that I intend to benefit."

Probate was granted to the deceased's executors sometime in 20XX.

The deceased's estate (Estate) held a portfolio of listed shares. The executors of the Estate made a decision to liquidate certain assets of the Estate in order to make distributions in accordance with the clause of the deceased's will making bequests to certain organisations.

Sometime in the year ended 30 June 20YY the Estate sold a number of shares. As a result of the Estate selling those shares CGT event A1 was triggered. (This has been confirmed in a prior private binding ruling issued to the Estate). Net capital gains have been made as a result of the sale of the shares.

In the year ended 30 June 20YY distributions from the proceeds of the sale of the shares were made to the residual beneficiaries.

Sometime in the year ended 30 June 20YY the Estate wrote to each of the residuary beneficiaries confirming the nature of the distributions made to that date and the status of the administration of the Estate.

The Estate continues to hold some cash and listed shares pending the outcome of this private ruling request. Save for any tax liability that the Estate may have, all liabilities of the estate have been met and so the assets of the Estate are held for the benefit of the residuary beneficiaries.

As at the date of this private ruling application the Estate is not fully administered. At the time that interim distributions were made to the residual beneficiaries those beneficiaries were presently entitled to the income actually paid to them.

For the purposes of this private binding ruling the following organisations will be referred to as the 'residual beneficiaries':

• The various organisations.

The following documents are to be read with and form part of the scheme for the purposes of this private binding ruling:

• Copy of a sample letter sent to the organisations regarding the interim cash distributions made to organisation.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-10

Reasons for decision

Question 1

Summary

The executor of the Estate will not be assessed under either section 99 or section 99A of the Income Tax Assessment Act 1936 in respect of income to which the residual beneficiaries are presently entitled.

Detailed reasoning

The principles set out in Taxation Ruling IT 2622 Income Tax: Present Entitlement during the States of Administration of Deceased Estates (IT2622) have been applied.

In the administration and winding up of a deceased estate, the executor may need to dispose of some or all of the assets of the Estate. You as executor of the Estate have disposed of shares (liquidated them) in order to carry out the deceased wishes as per their will. You have paid amounts to the residual beneficiaries during the year ended 30 June 20YY as a direct result of the sale of those shares.

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).

Capital gains and capital losses made by the Estate are aggregated to determine whether the estate has made a net capital gain or net capital loss for the year ((sections 102-5 and 102-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). A net capital gain is included in the Estate's net income (section 95 of the 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.

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled.

Present entitlement

There is no definition of present entitlement 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 in length in 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 following is a summary of the main principles emerging from these cases.

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, absolutely 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, etc.).

Taxation Ruling IT 2622 provides the Commissioner's view on present entitlement during the stages of administration of deceased estates. In a deceased estate, whether a beneficiary is presently entitled to a share of the trust income depends on:

• The stage reached in the administration of the deceased estate;

• The terms of the deceased's will or codicil, trust laws and principles enunciated and orders made by the Courts;

• Whether any discretionary payments have been made to the beneficiary/beneficiaries by the Executor or trustee.

Whilst you have stated that the Estate is not fully administered, (this is or involves a question of fact) it seems you may only hold that view because of any possible tax liability for the Estate. It may be that the Estate is in fact fully administered.

Regarding whether or not full administration of the Estate has happened, the ATO view contained at paragraph 72 of TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) states the following:

Deceased estates

72. A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased's debts and liabilities have been paid, see Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692.

Importantly it is the deceased's debts and liabilities that have to be paid, not those of the Estate in order to reach full administration.

In any case for you it does not matter whether or not the Estate has reached the point of full administration or is at the intermediate stage. This is because beneficiaries are presently entitled to any amounts that are actually paid to them by the executor. If the Estate has not been fully administered it does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to them or on their behalf (paragraph 14 of Taxation Ruling IT 2622).

In your case you have distributed the capital gains made from the disposal of the shares to the residual beneficiaries. Therefore you are not liable to be assessed on this income under section 99 or section 99A of the ITAA 1936.

The Commissioner agrees with your contention that any capital gains made on the disposal of the shares are assessable to the residual beneficiaries in accordance with subsection 97(1) of the ITAA 1936.