Edited version of your written advice

Authorisation Number: 1051307034825

Date of advice: 15 November 2017

Ruling

Subject: Deceased estates

Issue 1

Question 1

From the date of the transfer to two of the beneficiaries, until the date of sale, should the income and expenses continue to be declared in the income tax return of the Estate?

Answer

Yes.

Question 2

From the date of the transfer to Person B and Person C, until the date of sale, should the income and expenses be declared in the income tax returns of Person B and Person C?

Answer

Not applicable – Invalid.

Question 3

From the date of the transfer to Person A and Person B, until the date of sale, should the income and expenses be declared in the income tax returns of all the beneficiaries as one third to Person B, one third to Person C, and one eighth of one third to each of the surviving siblings on the basis Person B and Person C were holding one third of the Property in trust for the eight surviving siblings?

Answer

Not applicable – Invalid.

Question 4

Are the beneficiaries presently entitled to the income of the trust Estate?

Answer

No.

Issue 2

Question 1

Should the capital gain be declared in the income tax return of the Estate?

Answer

Yes.

Question 2

Should the capital gain be declared in the income tax return of the Person B and Person C?

Answer

Not applicable – Invalid.

Question 3

Should the capital gain be declared in the income tax return of all the beneficiaries as one third to Person B, one third to Person C, and one eighth of one third to each of the surviving siblings on the basis Person B and Person C were holding one third of the Property in trust for the eight surviving siblings?

Answer

Not applicable – Invalid.

Question 4

Are the beneficiaries presently entitled to the income of the trust Estate in relation to the capital gain?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015.

Year ended 30 June 2016.

Year ended 30 June 2017.

The scheme commences on:

Late 2011.

Relevant facts and circumstances

The deceased passed away some years ago.

The deceased owned a property acquired after 20 September 1985.

The deceased was survived by a number of family members.

The deceased was pre-deceased by Person A.

Under the deceased’s will, the Property was to be gifted equally to Person A, Person B, and Person C. A further clause under the will directs that in the event that any beneficiary pre-deceased the deceased, the benefit left to the pre-deceased beneficiary should be divided equally between those surviving of the deceased’s immediate family.

The total number of beneficiaries was X.

Person B and Person C are Australian residents while the remaining beneficiaries are not.

The Property was transferred into the names Person B and Person C.

The transfer did not account the Property to be correctly distributed.

The Property was later sold.

There has been an agreement that the distribution of the sale proceeds after tax would be distributed according to the correct portions under the will between all beneficiaries.

The Property has never been the deceased’s main residence, and was rented out both before and after the deceased’s death, until it was sold.

The rent received in relation to the Property was paid into an account in the name of the Estate where is still held.

The solicitors in the matter propose to distribute the monies held in the account according to their understanding of the will.

The Estate has not been fully administered.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6.

Reasons for decision

Legal vs beneficial ownership

When considering the disposal of a Property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset.

Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. In the absence of evidence to the contrary, Property is considered to be owned by the person(s) registered on the title. However, in limited circumstances it is possible for legal ownership to differ from beneficial/equitable ownership for taxation purposes.

Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the Property on trust for the beneficial owner.

To resolve the income tax issues, the Commissioner is required to make a finding on the available evidence about whether the Property was held on trust for the rightful beneficiaries (for the purposes of this private ruling, it is not necessary for the Commissioner to rule whether a constructive trust arose or not).

You have provided evidence of the steps taken by Person B and Person C and treatment of the rental income and the Property by the relevant parties.

The Commissioner accepts that as the Property has not been transferred to the rightful beneficiaries and they are not taxable on the disposal of the Property in their personal capacity or the rental income received in relation to the Property, you should return the rental income/expenses, and capital gain in relation to the Property.

Present entitlement

There is no definition of present entitlement in the Income Tax Assessment Act 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 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 Income tax: present entitlement during the stages of administration of deceased estates 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.

In this case, the beneficiaries are not presently entitled as the second condition has not been satisfied, as it is not possible to ascertain the residue of the Estate with certainty.