Edited version of private advice

Authorisation Number: 1052059147423

Date of advice: 29 November 2022

Ruling

Subject: Deceased estate - fixed trust - non-resident beneficiary

Issue 1

Question 1

Is the estate of the deceased a fixed trustfor the purposes of section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Can the non-resident beneficiaries disregard a capital gain made from the sale of Property A in accordance with subsection 855-40(2) of the ITAA 1997?

Answer

Yes

Question 3

Is the trustee of the estate of the deceased liable to pay tax in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection 855-40(2) of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 20YY

The scheme commences on:

In the year ended 30 June 20YY

Relevant facts and circumstances

1.            The deceased died in 20YY outside of Australia.

2.            The deceased was never an Australian resident for tax purposes.

3.            The deceased and X acquired a property, Property A outside of Australia decades ago.

4.            At all times Property A was held for long-term income producing purposes.

5.            Following the death of X in 19YY, the X's interest in Property A passed to the deceased.

6.            You have provided with your application a copy of the last will of the deceased DD MM YYYY.

7.            The deceased's will (the Will) appointed 2 relatives as joint executors and trustees, R1 and R2.

8.            You have provided a copy of the grant of probate issued by the relevant Court in the relevant Country dated DD MM YYYY.

9.            Probate was granted to R1 as one of the executors named in the Will with R2, the other executor named in the Will having renounced Probate and execution of the Will.

10.         The deceased's Will specified that certain items of personal property were to be given to the people whose names were marked on those items.

11.         The money in the deceased's bank accounts and all of the deceased's rights, interest and share in Property A was bequeathed to four relatives, R1 and R2 (the executors and trustees named in the will), and R3 and R4.

12.         The residual property of the estate was bequeathed to R1.

13.         R1 has been an Australian resident for tax purposes since 20YY (prior to the death of the deceased).

14.         R4 has been an Australian for tax purposes since 20YY (after probate granted).

15.         The estate of the deceased included sufficient available funds to meet all necessary funeral and testamentary expenses.

16.         R1 died on DD MM YYYY, after probate had been granted but prior to the finalisation of the estate.

17.         R4 became the executor of the deceased's estate following R1's death.

18.         R1, R2, R3 and R4 were initially unable to agree on whether to retain or sell Property A however it was ultimately sold for $X by contract dated DD MM YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F section 272-5(1)

Income Tax Assessment Act 1936 Schedule 2F section 272-65

Income Tax Assessment Act 1997 section 855-40

Income Tax Assessment Act 1997 subsection 855-40(2)

Income Tax Assessment Act 1997 subsection 855-40(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Issue 1

Question 1

Summary

As the interests of the beneficiaries in the income and capital of the estate are vested and indefeasible then fixed entitlements exist in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. The estate is therefore a fixed trust in accordance with section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Fixed trust definition

The term 'fixed trust' is defined in both the Income Tax Assessment Act 1997 (ITAA 1997) and the Income tax Assessment Act 1936 (ITAA 1936).

The ITAA 1936 states at section 272-65 of Schedule 2F that "A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust."

Similarly, section 995-1 of the ITAA 1997 provides that "a trust is a fixed trust if entities have *fixed entitlements to all of the income and capital of the trust."

Section 995-1 also defines a 'fixed entitlement' to include that:

(a)          an entity has a fixed entitlement to a share of the income or capital of a ...trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936; and

(b)          ...

Section 272-5 of Schedule 2F of the ITAA 1936 defines a fixed entitlement to share of income or capital as:

272-5 Fixed entitlement to share of income or capital of a trust

(1)          If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

That is, a beneficiary must have a vested and indefeasible interest in a share of income or capital under the trust instrument for it to qualify as a fixed entitlement and for the trust to be considered to be a fixed trust.

Vested and indefeasible

The term 'vested and indefeasible' is not defined in the taxation legislation. However, its ordinary meaning is provided by the general law, which is reflected in paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 which states in discussing what constitutes a fixed entitlement to income or capital of a trust:

What is a vested interest?

13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring.

13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be 'vested in interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest.

13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until some time in the future.

When is a vested interest indefeasible?

13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

13.8 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

Vested and indefeasible interests and deceased estates

ATO Interpretative Decision ATO ID 2006/279 Income Tax: Trust losses - fixed entitlement - beneficiaries of a deceased estate (ATO ID 2006/279) discusses circumstances in which the residuary beneficiaries of an estate have fixed entitlements to all of the income and capital of the estate for the purposes of determining whether the trust constituted by the estate is a fixed trust. In ATO ID 2006/279 a bequest was made to an individual and subsequently satisfied, with the residue of the estate equally divided between a class of persons. ATO ID 2006/279 explains that the residuary beneficiaries have a vested interest in the income and capital of the estate as they each have a present right to future enjoyment of their equal share in the income and capital. Their interest is indefeasible as there is no condition in the trust instrument, the Will, by which any of the residuary beneficiaries could lose their interest in the estate. The previously satisfied bequest does not affect the determination of whether the trust constituted by the estate is a fixed trust.

Your circumstances

Under the terms of the Will, each of the deceased's beneficiaries R1, R2, R3, R4 have a vested and indefeasible right to an equal share in the available money in the deceased's bank accounts as well as an equal share in Property A. There is no condition in the Will by which any of the beneficiaries could lose their interest in the estate and they all have a fixed entitlement to a share of the income and capital of the estate, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. Therefore, as the beneficiaries have fixed entitlements to all of the income and capital of the estate, the trust constituted by the estate is a fixed trust under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997. The specific items of personal property given to people marked on the property and the fact that one of the beneficiaries is entitled to the residual real and personal property of the estate does not affect the determination of the trust constituted by the estate as a fixed trust.

Question 2

Summary

As the estate of the deceased is a fixed trust, the non-resident beneficiaries of the estate can disregard a capital gain made from the sale of Property A in accordance with subsection 855-40(2) of the ITA 1997.

Detailed reasoning

Section 855-40

Section 855-40 of the ITAA 1997 disregards a capital gain that a foreign resident beneficiary of a fixed trust is taken to have as a result of a CGT event happening to a CGT asset of that trust if, at the time of the event, the CGT asset was not taxable Australian property of the trust.

Section 885-40 states:

Capital gains and losses of foreign residents through fixed trusts

(1)          The purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership though a *fixed trust, by foreign residents of *CGT assets that not *taxable Australian property.

(2)          A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:

(a)          you are a foreign resident when you make the gain; and

(b)          the gain is attributable to a *CGT event happening to a *CGT asset of a trust (the CGT event trust) that is:

(i)            the *fixed trust; or

(ii)           another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust; and

(c)          either:

(i)            the asset is not *taxable Australian property for the CGT event trust at the time of the CGT event; or

(ii)           the asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied.

Relevantly, subsection 855-40(2) of the ITAA 1997 provides that a capital gain a non-resident beneficiary makes in respect of their interest in a fixed trust is disregarded if:

•                     the beneficiary is a foreign resident at the time they make the gain; and

•                     the gain is attributable to a CGT event happening to a CGT asset of the trust (the CGT event trust) that is the fixed trust; and

•                     the asset is not taxable Australian property for the CGT event trust at the time of the CGT event. (Section 995-1 of the ITAA instructs that 'taxable Australian property' has the meaning given by section 855-15).

As concluded in question 1 above, the estate of the deceased is a fixed trust. The other relevant conditions in subsection 855-40(2) of the ITAA are satisfied as the non-resident beneficiaries are foreign residents at the time they made the capital gain, the gain is attributable to a CGT event happening to a CGT asset of the trust (Property A) and the asset is not taxable Australian property for the purposes of Division 855 of the ITAA 1997. Therefore, the non-resident beneficiaries disregard a capital gain made from the sale of Property A in accordance with subsection 855-40(2) of the ITAA 1997.

Question 3

Summary

As subsection 855-40(2) applies to disregard the capital gain for the non-resident beneficiaries, the estate of the deceased is not liable to pay tax in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection 855-40(2) of the ITAA 1997?

Detailed reasoning

Subsection 855-40(3) of the ITAA 1997 provides that a trustee is not liable to pay tax in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection 855-40(2) of the ITAA 1997.

Subsection 855-40(3) of the ITAA 1997 states:

(3)          You are not liable to pay tax as a trustee of a *fixed trust in respect of an amount to the extent that the amount gives rise to a *capital gain that is disregarded for a beneficiary under section (2).

As concluded in question 2 above, the non-resident beneficiaries can disregard the capital gain they make in respect of the sale of Property A as the trust is a fixed trust and all the relevant conditions in subsection 855-40(2) are satisfied. Therefore, to the extent that the amount relates to the capital gain that is disregarded by the non-resident beneficiary under subsection 855-40(2) of the ITAA 1997, the trustee of the estate of the deceased is not liable to pay tax in respect of that amount pursuant to subsection 855-40(3).