Edited version of your written advice

Authorisation Number: 1051353639661

Date of advice: 29 March 2018

Ruling

Subject: Income Tax - Deceased Estate -Trust Income - Present entitlement.

Question

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

Answer

No

This ruling applies for the following periods

Income year ending 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

The deceased died sometime in 2016.

Prior to their death, the deceased was residing in a nursing home.

The last Will of the deceased provided certain specified bequests.

Clause 5 of the Will dealt with the residuary estate as follows:

“ 5) I GIVE AND BEQUEATH the rest and residue of my real and personal estate not hereby or otherwise disposed of (“my residuary estate”) to my Trustees UPON TRUST to convert into money all such parts thereof as shall not consist of money and after payment of all my debts, funeral expenses and all duties payable upon or in consequence of my death, to divide the net proceeds of my residuary estate into fifty (50) equal parts and to stand possessed thereof upon the following trusts:

● Various individuals and organisations

AND I DECLARE that the receipt of the principal executive officer, treasurer or other proper officer of the respective organisations referred to in sub clauses b) to k) inclusive shall be a sufficient discharge to my Trustees.”

Probate was granted to the deceased’s executors sometime in 2016.

The deceased’s estate (the Estate) held a substantial portfolio of listed shares, as well as publicly listed property trusts and a managed investment portfolio.

The executors of the Estate made a decision to liquidate all of the assets of the Estate (other than the personal effects of the deceased) in order to make distributions in accordance with clause 5 of the deceased’s Will.

After the grant of probate, during the year ended 30 June 2017, the estate sold/liquidated all of its non-cash assets.

During the year ended 30 June 2017, all assets of the Estate, to the extent that they were not already held in cash, and excluding the personal effects of the deceased, had been sold/liquidated and called in. A net capital gain was made.

During the year ended 30 June 2017, the executors drew cheques to pay invoices for work undertaken in relation to the sale/liquidation of assets by the Estate and an invoice owing by the deceased. Cheques for these invoices were posted.

Also during the same year, the executors determined to make an interim distribution to the residual beneficiaries from the Estate regarding the proceeds of the sale of shares and other assets.

Cheques were drawn in favour of the named residual beneficiaries.

Sometime in the year ended 30 June 2017, letters were sent notifying the relevant residual beneficiary of their current specified entitlement. A cheque in payment of the same was enclosed in the letters. Each letter also noted that a further distribution may occur once the tax assessment had been received and paid.

The Estate continues to hold some cash on account of tax, pending the outcome of this application for a private ruling.

The Estate has not been fully administered, however, this is only due to the need to account for any tax liability that the Estate may have and for legal and accounting costs relating to administration of the Estate.

Other than a potential tax liability and legal and accounting costs relating to administration of the Estate, all liabilities of the Estate have been met and the retained assets are, other than the aforesaid, held for the benefit of the residuary beneficiaries.

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 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Section 102-5

Reasons for decision

Summary

The executors 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 a substantial amount of shares (liquidated them) in order to carry out the deceased wishes as per clause 5 of the will. You have paid amounts to the residual beneficiaries during the year ended 30 June 2017 as a direct result of the sale of those non-cash assets.

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

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 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 in order to reach full administration, not those of the Estate.

In your case, 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 non-cash assets 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.