Issue
Do the residuary beneficiaries of a deceased estate have fixed entitlements to all of the income and capital of the estate, for the purpose of determining whether the trust constituted by the estate is a fixed trust under section 272-65 of Schedule 2F to the Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The terms of the Will governing the disposition of the property in the deceased estate confer fixed entitlements to all of the income and capital of the estate upon the residuary beneficiaries.
Facts
The Will of a testator governs the disposition of the property in their estate.
The Will does not expressly create a testamentary trust.
Under the Will, a bequest was made to an individual. This bequest has been satisfied, and the individual has no other interest in the estate.
The residue of the estate is equally divided between a class of persons. Part of the property that is subject to this residuary clause is still under the legal control of the executors of the estate, as authorised by the Will.
Tax losses have been incurred by the estate.
A Family Trust Election has not been made in respect of the trust constituted by the estate.
Reasons for Decision
A 'fixed trust' is defined in section 272-65 of Schedule 2F to the ITAA 1936. That definition provides that: A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.
Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in a trust: 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.
The term 'vested and indefeasible' is not defined in the taxation legislation. However, the ordinary meaning of the term 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.
The residuary beneficiaries have a vested interest in the income and capital of the estate. They each have a present right to future enjoyment of their equal share of the income and capital.
The interest of the residuary beneficiaries in the income and capital of the estate is indefeasible. 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 individual to whom the bequest was made has no other interest in the estate, as their bequest has been satisfied. This bequest does not affect the determination of whether the trust constituted by the estate is a fixed trust. The interests of the residuary beneficiaries are the only interests that are relevant.
As all of the residuary beneficiaries have a vested and indefeasible interest in a share of the income and capital of the estate, 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 persons 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.