Edited version of private advice

Authorisation Number: 1051928575336

Date of advice: 1 December 2021

Ruling

Subject: Deceased estate and present entitlement of beneficiaries

Question

Are the beneficiaries presently entitled to the income of the trust prior to the full administration of the deceased estate?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commences on:

xx/xx/xxxx

Relevant facts and circumstances

•         The deceased passed away on xx/xx/xxxx.

•         The deceased left a Will. The Will named their relative as main beneficiary and the residual of their estate to be divided equally between x charitable entities.

•         Funeral expenses were paid prior to Probate

•         Probate was granted on xx/xx/xxxx

•         Many of the assets of the deceased estate have been sold by the trustee during the period of administration.

•         Full administration of the deceased estate has not been completed as at the date of this ruling.

•         Interim distributions were made to the x charitable beneficiaries after probate but before full administration of the estate.

•         The deceased estate has been generating income since probate.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99

Reasons for decision

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 entitlementduring 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 is 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 of the Income Tax Assessment Act 1936 (ITAA 1936).

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.

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.

In this case the estate has not been fully administered. As the beneficiaries have no present entitlement in this case, the Trustee becomes liable for tax on the income earned in the Estate.