Edited version of private advice

Authorisation Number: 1052252807039

Date of advice: 19 June 2024

Ruling

Subject: Distributions from a deceased estate

Question 1

Was that part of the distribution from the Estate that represented cash held by the deceased as at their date of death assessable to Beneficiary A under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Was that part of the distribution from the Estate that represented a death benefit from the deceased's superannuation fund assessable to Beneficiary A under subsection 99B(1) of the ITAA 1936?

Answer

No.

Question 3

Was that part of the distribution from the Estate, to the extent it represented a capital gain from the disposal of shares, included in Beneficiary A's assessable income under subsection 99B(1) of the ITAA 1936?

Answer

Yes.

Question 4

oes Division 11A of the ITAA 1936 apply to dividends and interest derived by the executor of the estate to which no beneficiary was presently entitled?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The deceased passed away on XX XXXX 20XX.

2.    The deceased was an Australian resident for tax purposes.

3.    Probate of the deceased's will was granted to one of the deceased's children as Executor on XX XXXX 20XX.

4.    The Executor is a resident of Country X for tax purposes.

5.    Control and management of the deceased estate is outside of Australia.

6.    There has not been any loans of money or property made to the estate.

7.    There has not been any special right of privilege conferred on or to the property of the estate.

8.    A superannuation death benefit was paid to the estate on XX XXXX 20XX (death benefit).

9.    There were no death benefit dependants of the deceased for tax purposes.

10.  The death benefit consisted of the following:

a.    A taxable component of $X

b.    A tax-free component of $X

11.  At the time of their death, the deceased owned Australian Real Property:

12.  At the time of their death, the deceased owned shares:

13.  The deceased's shares were disposed of by the executor during the 20XX income year.

14.  On XX XXXX 20XX, pursuant to the terms of the Will, a cash bequest of $X was paid by the Executor to Beneficiary A, a resident of Australia for tax purposes.

15.  On XX XXXX 20XX, pursuant to the terms of the Will, a cash bequest of $X was paid by the Executor to Beneficiary B, a resident of Australia for tax purposes.

16.  On XX XXXX 20XX, pursuant to the terms of the Will, cash bequests of $X were paid by the Executor to each of four separate Australian tax exempt or deductible gift recipients.

17.  Pursuant to the terms of the Will, testamentary trusts were created for a number of the children of the deceased.

18.  The proceeds from the sale of the shares and other cash funds, including the superannuation death benefit, were applied by the Executor to pay the liabilities of the deceased, estate administration costs and the cash bequests.

19.  The Will did not identify which assets should be used to make the distributions to the three testamentary trusts or beneficiaries. A clause in the Will provided a power of appropriation so that assets of the estate could be transferred to the residuary beneficiaries to satisfy their entitlement.

20.  Based on the Estate Ledger and Financial Statements, the funds available to the executor as at XX XXXX 20XX had a number of sources in Australia, including (but not limited to):

a.    cash from bank accounts

b.    proceeds from the sale of shares

c.     the superannuation death benefit

d.    various income amounts, including rental income.

21.  Cash representing the balance of the proceeds from the sale of shares, cash funds and the superannuation death benefit was settled on Beneficiary C's testamentary trust.

22.  The executor has been assessed and is liable to pay tax on a component of the superannuation death benefit.

23.  The deceased was never a citizen of Country X and is not taxable in Country X.

24.  The estate is not taxable in Country X.

25.  The shares are not taxable Australian property.

Assumptions

26.  The distribution to Beneficiary A on XX XXXX 20XX included, but was not limited to amounts attributable to:

a.    cash from bank accounts

b.    proceeds from the sale of shares

c.     superannuation death benefit - taxable and tax-free components

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1936 Subsection 101A(3)

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1936 Subsection 99B(2)

Income Tax Assessment Act 1997 Section 102-05

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Division 11A

Reasons for decision

The Law

27.  Subsection 99B(1) of the ITAA 1936 provides that if an amount, being property of a trust estate, is paid to, or applied for the benefit of a beneficiary of the trust estate who was a resident at any time during the year of income, the beneficiary's assessable income includes that amount, subject to subsection 99B(2).

28.  Subsection 99B(2) of the ITAA 1936 relevantly provides that the subsection 99B(1) amount is reduced by so much (if any) of the amount, as represents:

(a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income);

(b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income;

...

(c) an amount:

(i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97 ITAA 1936; or

(ii) in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of sections 98, 99 or 99A ITAA 1936; or

(iii) that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and is liable to pay tax under subsection 98(4) ITAA 1936;

....

29.  Corpus may be represented by whatever assets the trustee chooses to hold from time to time. In considering whether an amount paid to a beneficiary represents corpus, it is necessary to consider:

a.    the corpus that has been contributed to the trust both initially and subsequently; and

b.    changes to the nature and quantum of corpus over the life of the trust.

30.  In considering the reduction under paragraph 99B(2)(a) of the ITAA 1936, it is necessary to consider the corpus that is attributable to amounts derived by the deceased estate that would have been assessable if they had been derived by a hypothetical resident taxpayer.

31.  Taxation Determination TD 2017/24 Income tax: where an amount included in a beneficiary's assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) had its origins in a capital gain from non-taxable Australian property of a foreign trust, can the beneficiary offset capital losses or a carry-forward net capital loss ('capital loss offset') or access the CGT discount in relation to the amount? discusses the concept of a 'hypothetical taxpayer' in the context of section 99B. It states at paragraph 14:

Paragraph 99B(2)(a) refers to an amount derived by 'the trust estate', but then hypothesises a scenario in which that amount was derived by 'a taxpayer being a resident'. It is evident from this language that the hypothetical taxpayer is not the trustee of the trust, but an entirely separate, fictional entity. There is support for this approach in Howard v. Federal Commissioner of Taxation where the Full Federal Court observed that the 'hypothesis posited is that the amount received by the [Esparto] trust estate was derived by a resident taxpayer', which was relevantly different from the actual characteristics of that trust and its trustee.

32.  Division 302 of the Income Tax Assessment Act (ITAA 1997) sets out the tax treatment of superannuation death benefits (SDB). Section 302-10 of the ITAA 1997 provides:

302-10(1)

This section applies to you if:

(a) you are the trustee of a deceased estate; and

(b) you receive a *superannuation death benefit in your capacity as trustee.

....

302-10(3)

To the extent that 1 or more beneficiaries of the estate who were not *death benefits dependants of the deceased have benefited, or may be expected to benefit, from the *superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

33.  Subdivision 302-C of theITAA 1997 sets out the tax treatment of SDB that are paid to a person who was not a death benefits dependant of the deceased. Subdivision 302-C of the ITAA provides that the tax free component is not assessable income and is not exempt income (refer 302-140 of the ITAA 1997).

34.  Subsection 302-145(1) of the ITAA 1997 provides that the taxable component of the SDB, is assessable income, however, subsections 302-145(2) and (3) provide:

302-145(2) You are entitled to a tax offset that ensures that the rate of income tax on the element taxed in the fund of the lump sum does not exceed 15%.

302-145(3) You are entitled to a tax offset that ensures that the rate of income tax on the element untaxed in the fund of the lump sum does not exceed 30%.

Application to your circumstances

35.  You have stated that the distribution made to Beneficiary A to satisfy their entitlement under the will was made out of the funds available to the Executor of the estate at the time of distribution.

36.  However, you have not provided a breakdown about which elements of the trust estate the distribution was made from. The documents you have provided with your ruling application indicate that the following elements of corpus were available to the Executor at the date of the distribution:

a.    cash held by the deceased at the date of death

b.    proceeds from the sale of shares the deceased held at the date of death

c.     the death benefit amount from the deceased's superannuation.

37.  The deceased estate also included real properties, but none of these had been sold or distributed at the time the distribution was made to Beneficiary A.

38.  These reasons for decision address how section 99B of the ITAA 1936 applies to each of the above elements of corpus, assuming the distribution to Beneficiary A included amounts sourced from each of the elements of corpus. However, it does not address how much of any particular element of corpus was included in the distribution to Beneficiary A, nor does it address whether the distribution included other amounts of corpus and/or income which may be assessable under section 99B. This is because the facts provided with the ruling application do not provide enough detail for the Commissioner to answer these questions.

Cash

39.  In this case, cash held by the Executor of the estate as at the date of death of the deceased is corpus of the estate. Therefore, to the extent that the distribution to Beneficiary A was made from this source, it would notbe assessable under section 99B of the ITAA 1936.

Superannuation death benefit

40.  In this case, the SDB paid to the estate after the deceased's death is corpus of the estate and is assessable to the executor of the estate. Under section 302-10 of the ITAA 1997, as the amount was ultimately for the benefit, or expected benefit of a non-dependent beneficiary, the benefit is taken to be:

a.    paid to the trustee as if they were a non-dependent beneficiary of the deceased; and

b.    income to which no beneficiary is presently entitled,

41.  In those circumstances, the SDB amount paid to the estate is assessable to the Executor of the estate to the extent of the taxable component of SDB in accordance with section 302-145 of the ITAA 1997.

42.  Therefore, to the extent that the distribution the Executor made to Beneficiary A was from this source (the SDB), it would not be assessable under section 99B of the ITAA 1936.

Proceeds from the disposal of shares

43.  In this case, the shares the deceased held as at the date of his death represented corpus of the estate. Once the shares are disposed of by the Executor, the distribution of any sale proceeds to Beneficiary A will be assessable only to the extent they would have represented a capital gain in the hands of a resident taxpayer.

44.  Whether or not the disposal of the deceased's shares resulted in a capital gain or capital loss requires an understanding of the cost base of the respective shares as well as the capital proceeds from their disposal. We cannot make a determination about whether the disposal of the shares resulted in a capital gain or capital loss as we have not been provided with details of the deceased's cost base which the Executor would inherit under the rules in Division 128 that relate to post-CGT assets.

45.  To the extent that the disposal of the shares resulted in a capital loss, there would be no tax consequences under section 99B. However, if the disposal of the shares resulted in a capital gain, then the amount of the capital gain would be included in Beneficiary A's assessable income under section 99B of the ITAA 1936.

Liability to withholding tax

46.  The liability to withholding tax is dealt with under section 128B of Division 11A of theITAA 1936.

47.  Subsection 128B(2) of the ITAA 1936 imposes a liability to withholding tax where income is derived and consists of interest that is paid to a non-resident by:

a.    a person to whom section 128B applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country, or

b.    a person or persons who are not residents and is, or is in part, an outgoing incurred by them in carrying on business in Australia at or through a permanent establishment in Australia.

48.  However, paragraph 128B(3)(d) provides an exception for income in respect of which a trustee is liable to be assessed under section or section 99A of the ITAA 1936. A trustee will be liable to be assessed under sections 99 or 99A on amounts to which no beneficiary is presently entitled.

49.  Therefore, where a non-resident trustee derives interest to which no beneficiary is presently entitled, they will not be liable to withholding tax under section 128B of the ITAA 1936.

50.  As such, in your case, interest derived by the executor of the estate, to which no beneficiary is presently entitled, is not subject to withholding tax under Division 11A of the ITAA 1936.

AUS-Country X Tax Treaty

51.  In this case, a Country X resident was appointed executor of the deceased estate. The AUS-Country X Tax Treaty applies to the Executor as they are a Country X resident. However, the relevant Article states that even if a person is otherwise a resident of Country X, they will not be treated as a resident for the purposes of the AUS-Country X Tax Treaty in relation to income that is derived by a deceased estate that is not taxed in the Country X as the income of a resident.

52.  You have advised that the income in question has not been subject to tax in the Country X at either the trustee or beneficiary level. As such, the Executor of the deceased estate is not treated as a Country X resident for the purposes of the AUS-Country X Tax Treaty, pursuant to the relevant Article and as such it has no application to any interest derived by the estate.