Edited version of private advice

Authorisation Number: 1052157420054

Date of advice: 16 August 2023

Ruling

Subject: Taxation of a deceased estate

Question 1

For the Ruling years, were the beneficiaries of the deceased estate (the Estate) presently entitled to a share of the net income (including capital gains) of the trust estate for the purpose of section 97, 98 or 98A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

For the income years up to and including the year ended 30 June 2023, was the net income of the Estate assessable to the Executors under section 99 of the ITAA 1936?

Answer

Yes.

Question 3

For the 20XX-YY income year, are the Executors of the Estate assessable under Subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA 1997) and section 99 of the ITAA 1936 for an amount in respect of the capital gain made from selling the Commercial Property?

Answer

Yes.

Question 4

If the answer to question 3 is yes, pursuant to Subdivision 115-C of the ITAA 1997, will the Executors be entitled to the benefit of the 50% capital gains tax discount (set out in Subdivisions 115-A and 115-B) in respect of the capital gain from selling the Commercial property?

Answer

Yes.

This ruling applies for the following periods

Income year ended 30 June 20YY

Income year ended 30 June 20YY

Income year ended 30 June 20YY

Income year ended 30 June 20YY

Income year ending 30 June 20YY

The scheme commences on

DD MM 20YY

Relevant facts and circumstances

A passed away with a valid will in place. Probate was granted.

The Executors and Trustee of the Estate named in the Will are B and C (the Executors) of the firm XYZ Lawyers.

A's estate (the Estate) included various property and cash assets in Australia, including a Commercial property acquired by A on DD MMM YYYY.

A also owned property offshore.

Clause 2 of the Will provided for various bequests.

Legal proceedings were commenced in Australia and offshore contesting the Will. After extensive efforts by the Executors to address both the Australian and offshore proceedings, the Executors obtained Court orders allowing them to proceed with administering and winding up the Estate without having to wait for the offshore proceedings to complete.

Deed of Settlement and Release

A Deed of Settlement and Release (the Settlement Deed) has been executed by the relevant Parties.

The Parties to the Settlement Deed agree that the Executors are released from any obligation to call the offshore property and any other assets of A which are situated outside the Commonwealth of Australia into the Estate.

Following execution of the Settlement Deed, the remaining Court proceedings were dismissed. All entitlements are as set out in the Settlement Deed.

The Commercial Property was sold at auction on DD MMM YYYY. Settlement was not completed by 30 June YYYY. The sale resulted in a capital gain.

Since A's death, the Executors in their capacity as Executors of the Estate derived only rental income from the Commercial property and interest on deposits.

The Executors have not made any distributions of income or capital of the Estate to any beneficiary or beneficiaries to date.

The Executors will not resolve to make any beneficiary specifically entitled to the capital gain made from selling the Commercial property.

The Executors intend to make a choice under section 115-230 of the Income Tax Assessment Act 1997, with the effect that the Executors will be specifically entitled to any capital gain made from selling the Commercial property and with the effect that the Executors will be assessed (and liable to pay tax) in respect of the capital gain.

Pursuant to subsection 99A(2) of the ITAA 1936, the Commissioner had previously formed the opinion that it would be unreasonable for section 99A to apply to the Estate for the Ruling years.

Relevant legislative provisions

Income Tax Assessment Act 1936:

section 6(1)

Division 6

subsection 95(1)

section 97

section 98

section 99

section 99A

subsection 99A(2)

Division 6E

Income Tax Assessment Act 1997:

Subdivision 115-C

subsection 102-5(1)

section 115-30

subsections 115 215(3)

section 115-220

section 115-222

subsection 115-222(2)

subsection 115-222(4)

section 115-225

section 115-228

section 115-230

subsection 115-230(2)

subsections 115 230(3)

paragraph 115-230(3)(a)

paragraph 115-230(3)(b)

subsections 115 230(5)

Reasons for decision

Questions 1 - present entitlement of beneficiaries

Summary

The beneficiaries of the deceased estate (Estate)were not presently entitled to income of the Estate during the Ruling years as, in these years, the Estate was not fully administered and the Executors did not make any interim distributions.

Detailed reasoning

Beneficiaries of a trust estate will be assessable under section 97, 98 or 98A of the Income Tax Assessment Act 1936 (ITAA 1936) where they are presently entitled to a share of the income of the trust estate.

Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates (IT 2622) explains the Commissioner's view that beneficiaries cannot be presently entitled to income derived by a deceased estate until administration of the estate is complete, or fully administered (paragraph 9).

A deceased estate will not be fully administered until after:

•         the payment, or provisions for the payment, of funeral expenses, testamentary expenses, death duties, debts, annuities etc. and legacies, and

•         the amount of the residue of the estate can be ascertained (IT 2622, paragraph 11).

However, if during administration of the estate and using their discretionary power, the executors pay income to, or on behalf of, one or more beneficiaries, those beneficiaries will be presently entitled to those amounts (paragraph 14 of IT 2622).

Based on the facts, it is considered that the beneficiaries of the Estate were not presently entitled to income of the Estate (including capital gains) for the Ruling years.

Question 2 - assessability on the net income of the Estate

Summary

The Executors were assessable and liable to pay tax on the net income of the trust estate for the Ruling years under section 99 of the ITAA 1936 as the beneficiaries were not presently entitled to any part of the income of the Estate in those years.

Detailed reasoning

Where no beneficiary is presently entitled to a share of the net income of a trust estate that is a resident trust, including a deceased estate, the trustee is assessable and liable to pay tax on the net income of the trust under section 99 or 99A of the ITAA 1936.

Section 99 of the ITAA 1936 will apply in respect of a deceased estate if, on considering the matters in subsection 99A(3), the Commissioner of Taxation (the Commissioner) is of the opinion that it would be unreasonable for section 99A to apply in respect of the estate in respect of an income year (subsection 99A(2)).

Based on the facts, it is considered that the Executors were assessable and liable to pay tax on the net income of the trust estate for the Ruling years under section 99 of the ITAA 1936.

Question 3 - assessability in respect of the capital gain from the Commercial property

Summary

The Executors are assessable in respect of the capital gain from selling the Commercial property under Subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA 1997) and must increase their section 99 assessable amount by the attributable gain.

Detailed reasoning

Where a deceased estate makes a capital gain in an income year, taxation of the capital gain is determined under Subdivision 115-C of the ITAA 1997.

To avoid double taxation in respect of the capital gain, Division 6E of the ITAA 1936 effectively removes the capital gain from the estate's net income for the purpose of Division 6, so it can be dealt with under Subdivision 115-C of the ITAA 1997.

Under Subdivision 115-C of the ITAA 1997, beneficiaries or the trustee are assessable on their share of the capital gain, which is:

•         any amount of the capital gain to which they are specifically entitled, or

•         if there is an amount of the capital gain to which no beneficiaries or the trustee is specifically entitled, that amount multiplied by the entity's *adjusted Division 6 percentage of the income of the trust estate for the relevant year (subsection 115-227).

Where no beneficiaries are specifically entitled to an amount of the capital gain and no beneficiaries are presently entitled to a share of the income of the trust, the trustee's adjusted Division 6 percentage of the income of the trust estate will be 100%.

Specific entitlement

A beneficiary will be "specifically entitled" to a capital gain of a deceased estate if the following two conditions are met:

•           the beneficiary has received, or is reasonably expected to receive, financial benefits that are 'referable to the capital gain' in the estate.

•           the beneficiary's entitlement to the amount is recorded, in the character of being 'referable to the capital gain', in the accounts or records of the estate.

The trustee of a trust can choose to be 'specifically entitled' to, and assessed on, the whole of a capital gain of the trust under section 115-230 of the ITAA 1997 if the following requirements are satisfied:

•           the trust estate is a 'resident trust' in the income year in which the choice is made (subsection 115-230(2) of the ITAA 1997)

•           a capital gain is taken into account in working out the net capital gain of the trust for an income year (paragraph 115-230(3)(a)); and

•           trust property representing all or part of that capital gain has not been paid to or applied for the benefit of a beneficiary of the trust by the end of two months after the end of the income year (paragraph 115-230(3)(b)).

The deadline for making such a choice is the day two months after the end of the income year in which the capital gains tax (CGT) event happened or otherwise at a time determined by the Commissioner (subsection 115-230(5) of the ITAA 1997).

Assessability of a trustee

In Subdivision 115-C of the ITAA 1997, section 115-222 applies to the trustee of a trust, including executors of a deceased estate. Subsection 115-222(2) applies to the trustee where section 99A of the ITAA 1936 does not apply in relation to the estate in relation to an income year.

For each capital gain of the estate, subsection 115-222(2) requires that the trustee's assessable amount under section 99 of the ITAA 1936 is increased by the amount mentioned in subsection 115-225(1) of the ITAA 1997 (the attributable gain).

The attributable gain is the amount on which a trustee is assessable and is calculated using the following formula:

Table 1: The attributable gain is the amount on which a trustee is assessable and is calculated using the following formula:

Based on the facts, the Executors are assessable in respect of the capital gain from selling the Commercial property and must increase their section 99 assessable amount by the attributable gain.

Question 4 - entitlement to the benefit of the 50% CGT discount

Summary

As section 99 of the ITAA 1936 applies to the Executors in relation to the net income of the Estate in relation to the relevant income year, subsection 115-222(2) of the ITAA 1997 applies and they are not required to gross-up the attributable amount. This has the effect that the Executors retain the benefit of the 50% CGT discount in relation to the capital gain from selling the Commercial property.

Detailed reasoning

A "net capital gain" is worked out using the method statement in subsection 102-5(1) of the ITAA 1997. Step 3 of that method statement allows any amount of a "discount capital gain" that remains after the reductions in steps 1 and 2, to be reduced by the "discount percentage".

Discount capital gains

A capital gain made by the executor of a deceased estate is a "discount capital gain" only if:

•        the executor acquired the asset at least 12 months before the CGT event that caused the gain (section 115-25 of the ITAA 1997), and

•        the cost base of the asset does not include indexation (section 115-20).

For the purpose of working out the period of ownership of the asset, if the CGT asset was a pre-CGT asset (last acquired before 20 September 1985) immediately before the deceased's death, the executor is treated as having acquired it when the deceased died (item 5 of the table in subsection 115-30(1) of the ITAA 1997).

As A acquired the Commercial property on DD MMM YYYY, it was a pre-CGT asset immediately before his death. Consequently, for CGT discount purposes, the Executors are treated as having acquired the Commercial property on the day A died.

As the Executors have held the Commercial property for more than 12 months since the day A died, and as the cost base of the property will not include indexation, the capital gain from the sale will be a discount capital gain.

Subdivision 115-C effect on entitlement

Generally, the discount percentage for a trust is 50%. However, the attribution rules in Subdivision 115-C effect whether the trustee of a trust retains entitlement to the benefit of the 50% discount. This depends on:

•         whether subsection 115-222(2) or (4) of the ITAA 1997 applies to the Executors, which in turn depends on

•         whether section 99 or section 99A of the ITAA 1936 applies in relation to the trust in relation to the income year in which the CGT event happens.

If section 99A of the ITAA 1936 applies in relation to the Estate, subsection 115-222(4) of the ITAA 1997 effectively removes the benefit of the discount percentage.

In respect of the relevant income year, the Executors are assessable and liable to pay tax on the net income of the Estate under section 99 of the ITAA 1936, so subsection 115-222(2) of the ITAA 1997 applies to the Executors in relation to the capital gain from the Commercial property.

As subsection 115-222(2) of the ITAA 1997 applies, the Executors will retain the benefit of the 50% CGT discount in relation to the capital gain from selling the Commercial property as they are not required to gross-up the attributable amount.