Edited version of private advice

Authorisation Number: 1052319860174

Date of advice: 18 November 2024

Ruling

Subject: Trust income

Question 1

Will the legacy beneficiaries in the will of the deceased be presently entitled to income of the trust for the income tax year ended 30 June 20XX for the purposes of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will the residual beneficiaries in the will of the deceased be presently entitled to income of the trust for the income tax year ended 30 June 20XX for the purposes of Division 6 of the ITAA 1936?

Answer

Yes.

Question 3

Will any part of the net income of the estate of the deceased be included in the assessable income of the trustee of the estate of the deceased in accordance with section 99 of the ITAA 1936?

Answer

Yes.

Question 4

Will any part of the net income of the estate of the deceased be included in the assessable income of the trustee of the estate of the deceased in accordance with section 99A of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on DD MM YYYY. The deceased had left a will dated DD MM YYYY that nominated their children as beneficiaries and their grandchildren should their children predecease them leaving resulting grandchildren. Any grandchild who would receive a benefit under the will would receive lesser or what their parent would have received or $XX per clause X of the will. For the purposes of this ruling the grandchildren are identified as the legacy beneficiaries and the children are the residual beneficiaries. None of the beneficiaries are under a legal disability and one of the legacy beneficiaries is a non-resident.

Probate for the estate of the deceased was granted on DD MM YYYY. All assets were realised by the executor of the estate between DD MM YYYY and DD MM YYYY.

The assets held by the deceased included cash, a primary residence, a refundable accommodation deposit, a loan to a residual beneficiary and a share portfolio.

Income of the trust between the date of death and the granting of probate included bank account interest and dividends and distributions from the share portfolio.

Income of the trust between the granting of probate and DD MM YYYY also included bank account interest, dividends and distributions from the share portfolio along with the gain on the sale of the share portfolio and interest on the refundable accommodation deposit. The gain on the sale of the assets has been included in the income of the trust.

The funeral costs, tax instalments and other known debts of the deceased were paid prior to DD MM YYYY.

In DD MM YYYY, each of the beneficiaries executed a deed of release and indemnity to indemnify the executor prior to receiving distributions from the estate. On DD MM YYYY payments of $XX to each of the legacy beneficiaries were made per subclause X of the will.

On DD MM YYYY payments of $X were made to five of the residual beneficiaries with the sixth residual beneficiary receiving $X as interim distributions.

At the date of death, the deceased's assets were valued at approximately $X. The estate held total assets and income of approximately $X at the beginning of DD MM YYYY, prior to any distributions being made.

No further distributions have been made from the estate.

The estate continues to receive interest on the bank accounts subsequent to the distributions in DD MM YYYY and DD MM YYYY.

As at DD MM YYYY, the estate is not fully administered as taxation and other costs along with distribution matters have not been finalised. The estate will continue to incur accounting and legal fees until the taxation and distribution issues are settled.

The residue of the estate cannot be ascertained at this point and the residual beneficiaries are not presently entitled to the balance of the estate assets at this time and are not entitled to demand immediate payment of any income of the estate.

Assumptions

The executor of the estate intended to make the distribution to the legacy beneficiaries out of the corpus of the estate of the deceased.

The executor of the estate intended to make the distribution to the residual beneficiaries out of a combination of corpus and income of the estate of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Question 1

Will the legacy beneficiaries in the will of the deceased be presently entitled to income of the trust for the income tax year ended 30 June 20XX for the purposes of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Detailed reasoning

Present entitlement is not a defined term in the ITAA 1936 and as such takes its meaning from common law. The High Court of Australia has provided in FC of T v Whiting (1943) 68 CLR 199 (Whiting's Case) a definition of present entitlement. The High Court held that a residual beneficiary of a deceased estate cannot be presently entitled to the income of the trust estate until the estate has been fully administered. The High Court explained how 'presently entitled' in Division 6 should be construed in the context of a deceased estate:

"With great respect, it appears to us that these provisions must be construed in the light of the general principles of law applicable to the administration of estates by executors and trustees at law and in equity. The crucial question is at what moment of time, having regard to these general principles and to the provisions of the trust instrument, can it be said that a beneficiary has become presently entitled to a share in the income of a trust estate. A beneficiary under a will may become entitled to a share of such income as an annuitant, legatee, or a residual beneficiary. His right to share in such income would be determined by the trusts in the will, these trusts being administered in accordance with such rules of equitable administration (where applicable) as those laid down in such cases as Allhusen v Whittell (above), and Howe v Lord Dartmouth, (1802) 7 Ves. 137, 32 ER 56."

In addition to the above 'present entitlement' was further considered by the High Court in Taylor & Anor. v. Federal Commissioner of Taxation (1970) 119 CLR 444 where Kito J provided:

"In my opinion the correct conclusion in the present case is that the son was ''presently entitled'' to the relevant income because (1) it was legally available for distribution, (2) as to the whole of it he had an absolutely vested beneficial interest in possession, and (3) but for his legal disability from giving a discharge he would have succeeded in an action to recover it from the trustees."

The main principles that emerged from these cases are:

•         The income must be legally available for distribution to the beneficiary. It does not matter whether the amount of income has been precisely ascertained.

•         The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent; the beneficiary must have the right to demand immediate payment (or would have had the right to demand payment had they not been under a legal disability).

In the present case it cannot be said that the amounts the beneficiaries are entitled to are legally available until the final stages of the estate where debts are paid and provided for in full. The beneficial interest of the legacy and residual beneficiaries is not indefeasible or absolutely vested as there are remaining obligations to be paid out of the income of the estate before the relevant beneficiaries become presently entitled.

Taxation Ruling IT 2622 provides guidance on the present entitlement of beneficiaries who receive a distribution from a deceased estate before the final stage where debts are paid and provided for in full. Paragraph 9 provides:

"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 and is not income of the beneficiaries. During the initial stage of the administration (as described in paragraph 6 above) no beneficiary is presently entitled to the income derived."

In most situations and the present case both the legacy and residual beneficiaries will not be presently entitled to the income of the estate of the deceased. During intermediate stages of the administration of the deceased estate the executor has granted a bequest of $X to the relevant grandchildren. The bequest was intended by the executor and the residual beneficiaries to be a 'tax-free' distribution and as such there is the intention to pay these amounts out of the corpus of the deceased estate rather than the income generated after the date of death. The Commissioner is satisfied that these amounts would have been paid from the corpus of the trust based on the lower value and intention of the beneficiaries and trustee.

Taxation Ruling IT 2622 provides guidance on payments to beneficiaries during the intermediate stage of a deceased estate. Paragraph 14 provides:

"During the intermediate stage of administration of a deceased estate (as described in paragraph 6 above), the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries."

Where a beneficiary receives a distribution that is made of income following the date of death of the deceased, they are said to be presently entitled to that income at the point of distribution even if that is before the final stages of administration. In the present case the legacy beneficiaries have received a distribution before the final stages of administration. However, the distribution provided to the legacy beneficiaries is that of corpus of the estate rather than income and therefore there is no present entitlement to income of the deceased estate at the point in time that the legacy beneficiaries receive their distribution. Therefore, the legacy beneficiaries will not be presently entitled to the income of the deceased estate.

Question 2

Will the residual beneficiaries in the will of the deceased be presently entitled to income of the trust for the income tax year ended 30 June 20XX for the purposes of Division 6 of the ITAA 1936?

Answer

Yes.

Detailed reasoning

As indicated for the reasoning in question 1, IT 2622 paragraph 14, provides that where a beneficiary received a distribution before the final stages of administration of a deceased estate they are said to be presently entitled to the income at the time of receipt.

In the present case payments to the residual beneficiaries were made on DD MM YYYY and the executor had indicated that the distributions were to be inclusive of income of the estate and capital. In making this distribution out of a combined income and capital amount the executor relied on the powers conferred upon then by sub-clause X and X of the will of the deceased.

Section 97 of the ITAA 1936 provides:

(1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia

Where the residual beneficiaries are not under any legal disability and are presently entitled to the income of the estate in accordance with the distribution made on DD MM YYYY they will be personally assessable on the income of the deceased estate so much so that their distribution represents income and not corpus of the estate.

The residual beneficiaries received a distribution before the final stages of the administration of the estate and are presently entitled to the portion of that distribution that represents income of the estate per IT 2622. Section 97 of the ITAA 1936 will operate to include those amounts as assessable income in their individual tax returns.

Question 3

Will any part of the net income of the estate of the deceased be included in the assessable income of the trustee of the estate of the deceased in accordance with section 99 of the ITAA 1936?

Answer

Yes.

Detailed reasoning

Section 99 of the ITAA 1936 provides:

(1) This section applies in relation to a trust estate in relation to a year of income only if section 99A does not apply in relation to that trust estate in relation to that year of income.

(2) Where there is no part of the net income of a resident trust estate:

(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

(c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.

The Commissioner will separately provide his Discretion in an alternate product but for the purposes of this ruling section 99A of the ITAA 1936 will not apply to any income of the estate of the deceased.

The executor of the estate has made interim distributions to the residual beneficiaries prior to the final stages of the administration of the estate. The distributions made to the beneficiaries represent a portion of income of the estate and will be subject to section 97 of the ITAA 1936.

For the undistributed portion of the estate, to the extent that the amount represents income of the estate, this will be assessed to the trustee and shall be liable to pay tax on the net income of the estate as if it were the income of an individual who was a resident and not subject to any deduction. The remaining portion of the estate is corpus of the estate and does not represent income that has accrued since the date of death of the deceased.

Question 4

Will any part of the net income of the estate of the deceased be included in the assessable income of the trustee of the estate of the deceased in accordance with section 99A of the ITAA 1936?

Answer

No.

Detailed reasoning

The Commissioner will separately provide his Discretion in an alternate product but for the purposes of this ruling section 99A of the ITAA 1936 will not apply to any income of the estate of the deceased.