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Edited version of your written advice
Authorisation Number: 1051187815357
Date of advice: 7 February 2017
Ruling
Subject: Present entitlement to Deceased Estate income
Question
Are any of the beneficiaries presently entitled to the income of the deceased estate in the year ended 30 June 20YY?
Answer
No.
This ruling applies for the following period
Year ended 30 June 20YY
The scheme commences on
1 July 20XX
Relevant facts and circumstances
You have provided a copy of the Will.
The Will was contested by one of the beneficiaries and you have provided a copy of the Deed of Settlement and Release.
Under the Deed of Settlement and Release the Defendant had to pay the Settlement Sum from the assets of the Estate.
No income of the estate has been paid to or applied for the benefit of any of the beneficiaries during the 20XX/YY income year.
Assets of the estate had to be sold to meet the requirements of the Deed of Settlement and Release. This did not occur until the 20YY/ZZ income year.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 95.
Income Tax Assessment Act 1936 Subsection 95(1).
Income Tax Assessment Act 1936 Section 97.
Income Tax Assessment Act 1936 Section 98.
Income Tax Assessment Act 1936 Section 99.
Reasons for decision
Assessability of Income of a Deceased Estate
Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) requires the ascertainment of the "net income" of the trust estate as defined in subsection 95(1) of the ITAA 1936. Effectively, the "net income" of a trust estate is defined in subsection 95(1) as the total assessable income of the trust derived during the income year, calculated as if the trustee were a resident taxpayer, less the allowable deductions. A capital gain is also included in the net income of a trust. The net income of the trust is then assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.
Taxation Ruling IT 2622 illustrates the stages of administration of the estate of a deceased person as follows:
● Date of Death
● Period of Administration
● Stages of Administration
1. Burial of deceased
2. Executor appointed
3. Probate applied for and granted by court.
4. Assets vest in executor who pays debts and testamentary expenses
● Initial stage - net income applied to reduce debts
● Intermediate stage - part income not required to pay debts may be paid to beneficiaries
● Final stage - debts paid or provided for in full and net income is available for distribution
● Administration of estate is complete
IT 2622 states that until a deceased estate has been fully administered by payment or provision for the payment of the deceased estate related expenses, beneficiaries are not presently entitled to income.
Paragraph 15 of IT 2622 states where residue of the estate has been ascertained and the estate has been fully administered, residuary beneficiaries enjoy present entitlement to income derived by the estate.
Paragraph 16 of IT 2622 states that the administration of a trust estate does not have to reach the stage where the estate is wound up for beneficiaries to enjoy present entitlement to the income of the estate. Once the executor has provided for all debts incurred by the deceased before his or her death and for debts incurred in administering the estate and provided for distribution of specific assets or legacies, it will be possible to ascertain the residue with certainty, even though the executor may not have actually made all the transfers necessary to satisfy these demands on the estate.
During the intermediate stages 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 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.
In your case, there has been a legal challenge to the Will. A Deed of Settlement and Release has been entered into late in the 20XX/YY income year and the payment to effect this agreement had to be made within three months. Assets of the estate had to be sold in order to meet part of this payment. These assets were not sold until the 20YY/ZZ income year. The residue of the estate could not be determined before this point in time.
The Will gave the Executor/Trustee the discretionary power to pay or apply amounts of capital or income for the benefit of beneficiaries. You have stated that no income of the estate has been paid to or applied for the benefit of any of the beneficiaries during the 20XX/YY income year.
Accordingly, in accordance with IT 2622, the net trust income of the deceased estate from the date of death to the end of the 20XX/YY income year would be assessable to the trustee as there are no beneficiaries who are presently entitled to the income of the estate at this point of time.
Because this is the second return due for the deceased estate section 99 of the ITAA 1936 rates of tax would apply to the trustee (individual tax rates).