Edited version of private advice

Authorisation Number: 1052198813695

Date of advice: 1 December 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise the discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the trustee of the Estate on income that no beneficiary is presently entitled to under section 99 of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person X (the Deceased) passed away in an overseas country, being domiciled in that country and having resided at a property located in that country (the Property) prior to their passing away.

The Deceased's Will named the Public Trustee of a specified state in Australia (the Public Trustee) as the sole executor of the deceased estate (the Estate), with the Deceased's spouse (Person A) named as the sole beneficiary of the Estate if they survived the Deceased for a period of thirty days, and if they did not then the Trustee would hold on trust for equal division among the Deceased's children who survived them, and if any of the Deceased's children had predeceased the Deceased, then their children would take an equal share that their parent would otherwise have taken.

Some months after the Deceased passed away, Person A became a tax resident of Australia.

The Public Trustee renounced its position as the executor of the Estate.

The granting of probate was delayed due to the Deceased not keeping paperwork or records up to date while alive in relation to their assets and liabilities they held prior to their passing which resulted in the assets of the Deceased not being readily identified, with the exception of the Property. Additionally, there were different legal requirements for assets located in several countries which delayed probate.

A Schedule of Assets of the Deceased was prepared which included the following:

•         Stocks, shares, warrants and unit trusts held solely by the Deceased and jointly with Person A; and

•         the Property.

Letters of administration were granted to Person A in a court located in the country the Deceased had passed away.

Some months later, the letters of administration appointing Person A as the administrator (the Trustee) of the Estate to administer the Will was endorsed by a court in Australia as the Public Trustee had renounced all its right and title to probate and execution of the Will.

Travel restrictions imposed because of the COVID-19 pandemic had impacted the Trustee's ability to travel to other countries to attend personally to matters relating to the Estate.

Trust tax returns for the Estate were not lodged for the first three income years following the Deceased's passing due to the Trustee having to identify and attempt to bring to account all of the Estate's assets and income so that it can be distributed, and trust returns can be lodged for each income year.

Financial statements have not been finalised for the Estate for the income years covered by the ruling period.

At this point it has not been identified:

•         That any property has been acquired by or intentionally lent to the Estate, or any property was acquired by the Deceased prior to their passing for any purposes other than the enjoyment of the Deceased during their lifetime; or

•         That there are any special rights or privileges attached to any property of the Estate.

Additional assets to those included in the Schedule of Assets of the Deceased (as outlined above) have been identified in numerous countries which include:

•         Cash, solely in the Deceased's name and also jointly held by the Deceased and Person A

•         Shares and investments of the Deceased

•         Property owned by the Deceased; and

•         Property and cash in relation to a Company.

The Trustee has sought advice in each jurisdiction to identify and then seek probate over the assets in each jurisdiction, which is still ongoing. A dispute had arisen in relation to assets located in one country.

The Estate's assets have come directly from the Deceased's personal holdings and have not been contrived to derive income at a concessional rate.

The administration of the Estate has not occurred within three years of the Deceased passing away.

It is anticipated that the Estate will be fully administered during the ruling period.

Assumptions

For the purposes of this ruling, the following assumptions have been made:

•         No property has been, or will be, acquired by or intentionally lent to the Estate.

•         No property was acquired by the Deceased prior to their passing for any purposes other than the enjoyment of the Deceased during their lifetime; and

•         There are no special rights or privileges attached to any property of the Estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 subsection 99A(3)

Reasons for decision

Commissioner's discretion under subsection 99A(2) of the ITAA 1936 in relation to deceased estates

Section 99A of the ITAA 1936 applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to subsection 99A(2) of the ITAA 1936, forms the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply in relation to the deceased estate in relation to the particular year of income.

In exercising the discretion, the Commissioner will have reference to the text of the legislation itself, the intent or purpose of the legislation and relevant case law as they apply to the facts and circumstances of a particular case for the purpose of forming the required opinion under subsection 99A(2) of the ITAA 1936.

The types of trust estate in respect of which the Commissioner's discretion may be exercised are listed in paragraphs 99A(2)(a) to (d) of the ITAA 1936 and include a trust estate that resulted from a will (paragraph 99A(2)(a) of the ITAA 1936).

In forming the opinion for the purposes of subsection 99A(2) of the ITAA 1936 the Commissioner is required to have regard to the matter subsections 99A(3) and (3A) of the ITAA 1936 as follows:

99A(3) In forming an opinion for the purposes of subsection (2):

(a)  the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;

(b)  if a person who has, at any time, directly or indirectly:

(i)   transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii)   conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised;

has not, at any time, directly or indirectly:

(iii)   transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv)   conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c)  the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.

99A(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Application to your situation

The Trustee has and will retain net income in respect of the income years throughout the ruling period. This net income will fall to be assessed to the Trustee under section 99A of the ITAA 1936 in respect of each year unless the Commissioner exercises the discretion.

We have taken the following into consideration when determining whether the Commissioner's discretion would be exercised:

•         The Estate is a deceased estate that resulted from the Will of the Deceased which satisfies the requirement of paragraph 99A(2)(a).

•         the Estate is still in the 'period of administration' (per Taxation Ruling IT 2622) such that no beneficiary has been made presently entitled to the income of the Estate.

•         The Estate has not been fully administered at this point due to its unusually complex nature, with the gathering of the Deceased's assets in various countries having to be completed which have been delayed due to the jurisdiction requirements.

•         No property has been, or will be, acquired by or intentionally lent to the Estate. No property was acquired by the Deceased prior to their passing for any purposes other than the enjoyment of the Deceased during their lifetime. There are no special rights or privileges attached to any property of the Estate.

•         It is accepted that:

o   The Trustee has not, and will not, use their powers under the Will to avoid tax

o   The Trustee is the executor of a deceased estate, and has exercised their powers under the Will in a conventional manner (and not as a tax-avoidance device); and

o   The Estate is a deceased estate wherein the assets of the Deceased are being administered in a conventional manner.

Having regard to the above matters, and the legislated purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of each of the income years throughout the ruling period.

Therefore, the Commissioner's discretion will be exercised for the income years included in the ruling period.