Edited version of your written advice

Authorisation Number: 1013122520120

Date of advice: 28 November 2016

Ruling

Subject: Trust - Deceased estate

Question 1

Was a fund (the Fund) that was to be set up for X in accordance with the Will of the late Y actually established?

Answer

No.

Question 2

Are the trustees of the Estate of the late Y (the Estate) required to lodge any trust tax returns for the Fund?

Answer

Not Applicable. See question 1.

Question 3

Should the Estate include all the income for the years in question when working out its net income?

Answer

Yes.

Question 4

Will the trustees of the Estate be assessed on the income that has not been or is not distributed to any beneficiary?

Answer

Yes.

Question 5

Will the beneficiary Z be assessed on income that is distributed to them?

Answer

Yes.

Question 6

Will the transfer of the shares and investments to Z result in a capital gains tax (CGT) liability for the Estate?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX.

Year ended 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on

1 August 20WW.

Relevant facts and circumstances

Y passed away a few years ago.

The Will was granted probate a few years after Y's death.

Y had children X and Z at the date of their death.

The children were not minors at the date of death of the deceased.

The Will of the deceased relevantly provided that:

● on the death of the deceased, Z was entitled to a 50% share of the net residue of the deceased estate but should Z die before the deceased Z's 50% share of the net residue of the deceased estate will be divided in equal parts between Z's children if there is more than one child

● on the death of the deceased, the Trustees shall hold X's 50% share of the net residue of the deceased estate upon trust (the Fund) by reason of a personal issue

● the Fund will terminate when one of the following events occurs:

● X demonstrates to the Trustees an opinion from a qualified professional that they no longer suffer from the personal issue, or

● upon X's death, and

● upon X's death, the Trustees shall hold the balance of the funds, if any, for Z, but if Z dies before the deceased, the balance of the funds will be divided in equal parts between the children of Z if there is more than one child (Clause 5.3)

● the income and capital of the Fund are to be used primarily for the maintenance, education, benefit and advancement in life or well-being of X in such a way as the Trustees see fit.

The Estate held funds in a bank, shares and an investment portfolio.

X commenced legal action to have the Fund collapsed providing them absolute payment of the trust capital.

The legal action had not been concluded when X passed away.

No income was distributed to X by the Estate before X passed away.

No income was distributed during the 2014-15 and 2015-16 financial years.

Tax returns have been lodged for the Estate for the 2014-15 and 2015-16 financial years with all income of the Estate self-assessed to the trustee under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) on the basis that no beneficiary was presently entitled to the income.

The trustees intend to transfer the residual of the Estate assets, such as the shares and investment portfolio, to Z once the Estate has been fully administered.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 subsection 97(1)

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 subsection 128-15(2)

Income Tax Assessment Act 1997 subsection 128-15(3)

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 section 128-20

Reasons for decision

Summary

While the Will of the deceased directed the trustees of the Estate to set up the Fund and hold X's interest on trust no separate stand-alone trust was ever created or established. All of the assets of the Estate, including those to be held on trust for X in the Fund, were held on trust within the Estate.

As such, no trust tax returns are required to be lodged for the Fund.

And, accordingly, all of the income derived from the assets in the Estate should be included when working out the net income of the Estate.

As no income was distributed to any beneficiary during the 2014-15 and 2015-16 financial years the trustees of the Estate are assessable on all the income of the Estate in those years.

If the trustees distribute any income to Z during the 2016-17 financial year they will be presently entitled to that income and should include that income in their individual tax return. Any income not distributed will be assessable to the trustees.

Any capital gain or loss made by the Estate on the transfer of the shares and investments to Z will be disregarded under subsection 128-15(3) of the ITAA 1997. Accordingly, no CGT liability will arise for the Estate from the transfer.

Detailed reasoning

Deceased estates

Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates considers the income tax liabilities of executors or administrators and of beneficiaries under the estates of deceased persons during the stages of administration of deceased estates.

The responsibilities of an executor are similar to, though legally separate and distinct from, those of a testamentary trustee. The estate represents a legal entity or relationship quite separate from the testamentary trust. In practice it is only in rare cases that two different persons assume the roles of executor and testamentary trustee and, for income tax purposes, the estate and the testamentary trust are treated as one and the same. In fact, the term "trustee" is defined in subsection 6(1) of the ITAA 1936 to include persons acting as executors or administrators (paragraph 5 of IT 2622).

Taxation of trusts - who is assessed?

Division 6 of the ITAA 1936 requires the ascertainment of the net income of the trust estate as defined in subsection 95(1) and sets out the basic taxation treatment of the net income of trust estates. Generally:

● it has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate

● it has the result of assessing the trustee directly on any residual net income, and

● as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non-residents and those under a legal disability.

Sections 97, 98, 99 and 99A of the ITAA 1936 contain the rules to determine who and how much will be assessed on the net income of a trust estate. Broadly these provisions operate as follows:

● section 97 assesses the beneficiary where that beneficiary is:

● presently entitled to a share of the income of the trust estate, and

● not under a legal disability

● section 98 assesses the trustee on a beneficiary's share of net income where that beneficiary is one or more of:

● presently entitled to a share of the income but under a legal disability

● deemed to presently entitled under subsection 95A(2), or

● a non-resident at the end of the income year, and

● section 99 or 99A assess the trustee where there is an amount of net income which is not assessed to a beneficiary.

Generally, trustees of resident deceased estates are assessed under section 99 of the ITAA 1936 where the income is derived in the year of death of the deceased, or in any one of the following two years, and they pay tax at the rates applicable to resident individuals.

Capital gains tax

Division 128 of the ITAA 1997 sets out what happens when a person dies and a CGT asset they owned just before dying devolves to their legal personal representative (LPR) (such as a trustee) or passes to a beneficiary of their estate.

Any capital gain or capital loss resulting from a CGT event in relation to an asset owned by the deceased person immediately prior to the time of death is disregarded (section 128-10 of the ITAA 1997).

If a CGT asset owned by the deceased immediately prior to their death devolves to their LPR or passes to a beneficiary of their estate, the LPR or the beneficiary (as the case may be) is deemed to have acquired the asset on the date of death of the deceased owner (subsection 128-15(2) of the ITAA 1997)

Any capital gain or capital loss made by the LPR when the asset passes to a beneficiary is also disregarded (subsection 128-15(3) of the ITAA 1997).

Application to the Estate's circumstances

While the Will of the deceased directed the trustees of the Estate to set up the Fund and hold X's interest on trust no separate stand-alone trust was ever created or established. All of the assets of the Estate, including those to be held on trust for X in the Fund, were held on trust within the Estate.

As such, no trust tax returns are required to be lodged for the Fund.

And, accordingly, all of the income derived from the assets in the Estate should be included when working out the net income of the Estate.

As no income was distributed to any beneficiary during the 2014-15 and 2015-16 financial years the trustees of the Estate are assessable on all the income of the Estate in those years. The trustees are assessed under section 99 of the ITAA 1936 and pay tax at resident individual rates.

If the trustees distribute any income to Z during the 2016-17 financial year they will be presently entitled to that income and they will be assessed under section 97 of the ITAA 1936. Any income not distributed will be assessable to the trustees under section 99 of the ITAA 1936.

Any capital gain or loss made by the Estate on the transfer of the shares and investments to Z will be disregarded under subsection 128-15(3) of the ITAA 1997. Accordingly, no CGT liability will arise for the Estate.