Private ruling: Deceased estate income - present entitlement
Date of advice: 12 September 2016
Published: November 2016
Ruling period: Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are the testamentary trusts that were established under the Will presently entitled to the income derived in the deceased estate in the year ended 30 June 20ZZ? | A1: Yes | Q2: Does the deceased estate have accumulated income to which a beneficiary is not presently entitled in the year ended 30 June 20ZZ? | A2: No

Relevant facts and circumstances: Probate for the deceased was granted in the 20XX/YY income year. The deceased was survived by a number of children, with some being minors. In the 20XX/YY deceased estate income tax return the taxable income was assessed on the basis that no beneficiary was presently entitled to the income. In the 20YY/ZZ income year the Executors published with the Court a Notice of Intended Distribution of the Estate. There were several family provision claims against the estate. The family provision action has resulted in a substantial delay in the administration of the estate and making decisions in relation to the superannuation death benefit. Before the end of June 20ZZ Court Consent Orders were made outlining the percentage share of the estate to be allocated to each of the testamentary trusts to be set up according to the conditions in the Will. On 30 June 20ZZ the executors of the estate held a meeting and resolved to distribute the income to the beneficiaries in accordance with the court orders and conditions of the Will.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95. | Income Tax Assessment Act 1936 Subsection 95(1). | Income Tax Assessment Act 1936 Section 97. | Income Tax Assessment Act 1936 Section 98. | Income Tax Assessment Act 1936 Section 99.

Reasons for decision: Detailed Reasoning - Assessability of Income of a Deceased Estate: Division 6 of the Income Tax Assessment Act 1936 (ITAA) requires the ascertainment of the "net income" of the trust estate as defined in subsection 95(1) of the Act. Effectively, the "net income" of a trust estate is defined in section 95(1) as the total assessable income of the trust derived during the income year, calculated as if the trustee were a resident taxpayer, less the allowable deductions. A capital gain is also included in the net income of a trust. The net income of the trust is then assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability. Taxation Ruling IT 2622 illustrates the stages of administration of the estate of a deceased person as follows: • Date of Death • Period of Administration • Stages of Administration 1. Burial of deceased 2. Executor appointed 3. Probate applied for and granted by court. 4. Assets vest in executor who pays debts and testamentary expenses • Initial stage - net income applied to reduce debts • Intermediate stage - part income not required to pay debts may be paid to beneficiaries • Final stage - debts paid or provided for in full and net income is available for distribution • Administration of estate is complete Paragraph 16 and 19 of IT 2622 respectively state that: 16. The administration of a trust estate does not have to reach the stage where the estate is wound up for beneficiaries to enjoy present entitlement to the income of the estate. Once the executor has provided for all debts incurred by the deceased before his or her death and for debts incurred in administering the estate and provided for distribution of specific assets or legacies, it will be possible to ascertain the residue with certainty, even though the executor may not have actually made all the transfers necessary to satisfy these demands on the estate. 19. The "net income of the trust estate" and whether any beneficiary is presently entitled to a share of income of the estate are determined on the last day of the financial year. As Chief Justice Barwick said in Union Fidelity Trustee Co. of Australia v F.C. of T. v. (1969) 119 CLR 177 at 182; 69 ATC 4084 at 4087; 1 ATR 200 at 202: "The time as at which to determine the assessable income of a taxpayer is in general the concluding day of the taxation year. There is no provision which takes the calculation under s. 95 in that respect out of the general scheme of the Act." This approach is also supported by the decision in F.C. of T. v. Galland 86 ATC 4885; (1986) 18 ATR 33. During the intermediate stages of administration of a deceased estate 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. In your case, probate was granted in the 20XX/YY income year and the executors had published a Notice of Intended Distribution of the Estate early in the 20YY/ZZ income year. At this point in time it could be argued that that you were reaching the latter stages of administration within the terms of IT 2622. There was then a number of family provision claims made upon the estate that prevented the finalisation of the administration of the estate. These family provision claims were dealt with through mediation and the courts. The Court Orders were handed down before the end of the 20YY/ZZ income year setting out how the testamentary trusts were to be set up and the percentage share that each was entitled to. The executors of the estate held a meeting on 30 June 20ZZ and resolved to distribute income and capital to the testamentary trusts created under the Will in accordance with the Court Orders and Clause 16(1)(b) of the Will. As set out in IT 2622, present entitlement is determined on the last day of the financial year. The executors have resolved to distribute the income for the 20YY/ZZ income year to the testamentary trusts established by the court order. It is considered that due to the stage of administration of the deceased estate, the court orders, the powers the executors have under the Will and the fact that the executors have made a written resolution to distribute the income in the 20YY/ZZ income year to the beneficiaries on 30 June 20ZZ, that the beneficiaries will be presently entitled to the income in the 20YY/ZZ income year.