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Edited version of your written advice
Authorisation Number: 1051435476519
Date of advice: 9 October 2018
Ruling
Subject: Present entitlement during administration of a deceased estate.
Question 1
For the year ended 30 June 2018, are the beneficiaries considered to be presently entitled to their share of the net income of the trust estate under section 97 of Income Tax Assessment Act 1936 (ITAA 1936)?
Answer 1
No
Question 2
For the year ended 30 June 2018, will the trustee be liable to pay tax on the net income of the trust estate under section 99 of the ITAA 1936?
Answer 2
Yes
This ruling applies for the following period:
Financial year ending 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
X died in 20XX.
Probate of the will of X was granted by the X Court.
A Deed of Settlement (‘Deed’) was entered into as a result of mediation to clarify the terms of X’s will.
Under the Deed Y was appointed administrator of the estate.
Income tax returns have been lodged for the 20XX, 20XX and 20XX financial years.
The Trustee has been assessed on the basis that no beneficiary was presently entitled to the net income of the Estate.
A property was sold in the 20XX financial year.
Another property was sold by auction in 20XX.
The Estate had the following loans owing to it:
● Trust A - $X (repaid by 30 June 20XX)
● Trust A - $X (repaid by 30 June 20XX)
● Company B (in liquidation) - $X (unpaid)
In the 20XX financial year an in-specie distribution of shares and cash was made to the beneficiaries, which were repayments of loans.
Company B is currently under liquidation and no money will be paid on the loan until that process is finalised upon the liquidator receiving a clearance certificate from the ATO.
The Estate is still investigating potential litigation regarding some items that will need to be administered under the Estate.
None of the beneficiaries are under a legal disability.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 99
Income Tax Assessment Act 1936 section 97
Reasons for decision
Beneficiaries cannot be presently entitled to the income of the estate while it is being administered. Until an estate has been fully administered and the net residue ascertained, a beneficiary has no propriety interest in any specific part of the estate or the income of the estate.
However beneficiaries will be presently entitled to the income of the estate to the extent it was paid to them or on their behalf. The Trustee is liable to pay tax on any amount that a beneficiary has not been made specifically entitled.
Detailed reasoning
The taxation of income earned in a deceased estate trust will depend on whether the beneficiaries have present entitlement to the income of the trust. The beneficiaries’ present entitlement hinges on two factors. Namely, whether the Trustee has made them specifically entitled to some of the income or if the deceased estate had been fully administered and the residue has been calculated.
Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates sets out in paragraph 9 that:
Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators … no beneficiary are presently entitled to the income derived.
This means that during the administration of the estate the beneficiary does not have a presumption of present entitlement and where no beneficiary is presently entitled to the income of a trust, the trustee is made liable for the tax payable under section 99 ITAA 36.
However during the intermediate administration of a deceased estate, the administrator may make a determination that part of the net income of the trust will not be required to pay for debts. Some of the income may be paid to or for the benefit of the beneficiaries and then the beneficiaries would be presently entitled to the income to the extent of the amounts paid to them only: IT 2622, paragraph 14.
When the residue of the estate has been ascertained and the estate has been fully administered, residuary beneficiaries will then enjoy present entitlement to the income derived by the estate: IT 2622, paragraph 15.
In this case the estate has not been fully administered and the residue has not been able to be calculated. This is due to the outstanding issues of the repayment of the loan by Company B still being outstanding and the potential litigation action against the estate.
As the estate has not been fully administered, the beneficiaries have no present entitlement to the income of the estate, except to the amounts that have been distributed to them or for their benefit.
As the beneficiaries have no present entitlement in this case, the Trustee becomes liable for the income earned in the trust that has not been distributed to beneficiaries.