Is any part of the net income of the Estate included in your assessable income under section 99 or 99A of the Income Tax Assessment Act 1936 for the income year ended 30 June 2021?
No. This ruling applies for the following period : Year ending 30 June 20XX The scheme commenced on: XX July 20XX
You are the executor (Executor) of the estate (the Estate) of the Deceased. The Deceased died on XX August 20XX. Probate was granted on XX June 20XX. The assets of the Estate at the date of the Deceased's death were: the Deceased's residence cash, and shares in publicly listed companies. The Deceased's Will provided for the assets to be distributed as follows: Gift of $X per animal to whoever agreed to care for any pets the Deceased owned for the pet's lifetime. Amounts of $X each to a friend and god-child if they survived the Deceased. The remainder of the Deceased's personal items and household contents to the trustees to retain as they wish. If not retained, these items were to be passed to particular people named in the Will in equal shares. The residual of the Deceased's Estate was to be given in three equal parts to the Charity A, Charity B and Charity C. The Trustees were given a discretionary power of sale over Estate property. The Will provided that;
e) As to the rest and residue of my real and personal property (including any gifts herein that have failed) ('my Residuary estate") to my trustee on trust to divide the same into three equal parts to be held on the following trusts; (i) Charity A (ii) Charity B (iii) Charity C. You have provided us with a list of shareholdings and the number of shares held. All of the shares were acquired on or after 19 September 1985. The shares were sold on XX March 20XX. The proceeds from the sale of the shares were received by the Estate on XX March 20XX. Payments out of the proceeds of the sale of shares were made to the beneficiaries on XX June 20XX as follows: Charity A $X Charity B $X Charity C $X All the debts of the Estate had been provided for and paid prior to the distributions to the beneficiaries in the 20XX income year. The Tax Agent for the Estate lodged the Estate's tax return for the 20XX year and included the capital gain made on the disposal of the shares. They did so on the basis that the Estate itself was liable for the income derived that year, and that the beneficiaries were not presently entitled to the net income of the Estate.
One of the beneficiaries sought clarification from a Tax Consultant. The Tax Consultant conducted a review of the Estate's situation, then made contact with the Tax Agent to discuss the treatment of the capital gain, and the present entitlement of the beneficiaries. Additional distributions were made to the beneficiaries in the 20XX year. The Estate was fully administered in the income year ending 30 June 20XX.
Income Tax Assessment Act 1936 Section 95 Income Tax Assessment Act 1936 Section 97 Income Tax Assessment Act 1936 Section 99 Income Tax Assessment Act 1936 Section 99A Income Tax Assessment Act 1936 Section 100AA
The principles set out in Taxation Ruling IT 2622 Income Tax: Present Entitlement during the States of Administration of Deceased Estates (IT 2622)have been applied. In the administration and winding up of a deceased estate, the executor may need to dispose of some or all of the assets of the Estate. You as Executors of the Estate have disposed of a substantial amount of shares (liquidated them). You have paid amounts to the residual beneficiaries during the year ended 30 June 20XX as a direct result of the sale of the shares. The provisions that relate to the taxation of trust income are contained in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Capital gains and capital losses made by the Estate are aggregated to determine whether the estate has made a net capital gain or net capital loss for the year ((sections 102-5 and 102-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). A net capital gain is included in the Estate's net income (section 95 of the ITAA 1936).
Where a resident beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate, section 97 of the ITAA 1936 operates to include in the assessable income of the beneficiary, their share of the net income of the trust. Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled. Subsection 100AA(1) of the ITAA 1936 treats an exempt entity as not being presently entitled to income of a trust where it has not been notified of its present entitlement within two months of the end of the relevant income year. Where the trustee fails to give the exempt entity notice it is treated as though it is not presently entitled to the income. Instead the trustee is assessable on the amount under section 99A of the ITAA 1936. Subsection 100AA (2) of the ITAA 1936 treats the trustee as giving the exempt entity notice in writing of the present entitlement at a time to the extent that the trustee pays the exempt entity the amount of the present entitlement at that time. Present entitlement
Taxation Ruling IT 2622 provides the Commissioner's view on present entitlement during the stages of administration of deceased estates. In a deceased estate, whether a beneficiary is presently entitled to a share of the trust income depends on: The stage reached in the administration of the deceased estate; The terms of the deceased's will or codicil, trust laws and principles enunciated and orders made by the Courts; Whether any discretionary payments have been made to the beneficiary/beneficiaries by the Executor or trustee. Regarding whether or not full administration of the Estate has happened, the ATO view contained at paragraph 72 of TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) states the following: Deceased estates 72. A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is,
until the assets of the estate have been called in and the deceased's debts and liabilities have been paid, see Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692. Importantly it is the deceased's debts and liabilities that have to be paid in order to reach full administration, not those of the Estate. In your case, it does not matter whether or not the Estate has reached the point of full administration or is at the intermediate stage. This is because beneficiaries are presently entitled to any amounts that are actually paid to them by the executor. If the Estate has not been fully administered, it does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to them or on their behalf (paragraph 14 of Taxation Ruling IT 2622).
The tax return for the Estate for the 20XX year was lodged by the Estate's Tax Agent to include the capital gain made on the disposal of the shares. However, since then the Estate's Tax Agent has reviewed the situation with a Tax Consultant and identified that the Estate had made distributions representing part of the proceeds from the disposal of the shares to the residual beneficiaries, Charity A, Charity B and Charity C before 30 June 20XX. Consequently, it is considered that the beneficiaries were presently entitled to the income of the estate to the extent of the amounts actually paid to them. Therefore, subsection 100AA(1) of the ITAA 1936 does not apply, and you are not liable to be assessed on the income of the Estate under section 99 or section 99A of the ITAA 1936.