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Edited version of your written advice
Authorisation Number: 1012920711528
Date of advice: 2 December 2015
Ruling
Subject: Trusts and Present Entitlement
Question
Where the Deceased estate is not fully administered but an interim payment is made to the beneficiaries before 30 June 20YY, will the executor as Trustee under s99 be assessable?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 20YY.
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The deceased passed away in 20XX.
The Will provided certain specific bequests and probate was granted.
The remaining assets in the Estate consist of term deposits and 100% ownership in a Pty Ltd company.
It is expected that before the 30 June 20YY the executor will have made a provision for the final call up of Assets of the estate, including the wind-up of a Company which will pay a fully franked dividend to the Estate.
At the date of the private ruling application the Estate has not been fully administered.
An intended interim payment will be made to the residual beneficiaries in early 20YY.
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
Reasons for decision
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.
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.
Paragraph 14 of Taxation Ruling IT 2622 states:
14. During the intermediate stage of administration of a deceased estate (as described in paragraph 6 above), 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 debts, 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 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.
As stated above 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.