Private ruling: Assessment of interest paid to legatees
Published: June 2012
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Is the interest paid to legatees during the year ended 30 June 201X to be treated as a distribution of capital of the trust and not be assessable in the hands of the legatees? | A1: No. | Q2: Are the legatees presently entitled on so much of their 30 June 201X income entitlement due to them based on the statutory interest component due on the unpaid legacies as per the NSW Probation and Administration Act 1898 and which was paid out of income derived by the Estate during that year of income? | A2: Yes.

Relevant facts and circumstances: You are the trustee of the estate. Administration of the will has been lengthy due to a dispute regarding entitlements. You as the trustee paid tax on the Income derived during the years of the delay. Litigation regarding the entitlements of the will commenced in the early part of this century and decision was handed down three years later. Under the will some of the beneficiaries were entitled to be paid specified amounts of money (legacies). Where the payment of the legacies is delayed beyond one year, the legatee is entitled to be paid interest. During the year ended 30 June 201X, the legatees were paid their interest together with interest. During the year ended 30 June 201X, the administration of the estate reached a stage where the income derived in that year was taxable in the hands of the beneficiaries. Under the New South Wales Probate and Administration Act 1898, if a legacy is not paid within a year, interest is payable. In the year ended 30 June 201X interest was paid as interest on unpaid legacies. The source of the funds used to pay interest on the unpaid legacies was either trust capital, income taxed in previous years in the hands of the trustee and trust income derived during the year ended 30 June 2010. The 2010 component of the legatees present entitlement for 201X trust income is $XX,XXX and has not previously been taxed in your hands. The balance which was paid as interest on unpaid legacies has been accounted for and taxed. The remaining 201X trust income has been assessed to the other beneficiaries in accordance with their entitlement under the Court order. You have provided a copy of the following documentation to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling. The Last will of the deceased

Relevant legislative provisions: Income Tax Assessment Act 1997, Section 6-5, | Income Tax Assessment Act 1936 , Section 97 and | Probate and Administration Act 1898 (NSW) Section 84A.

Reasons for decision: Summary: The interest paid to the legatees during the year ended 30 June 201X will be not be treated as a distribution of capital of the trust. | Detailed Reasoning - Detailed reasoning: Under the Section 84A of the New South Wales Probate and Administration Act (NSW Act) where interest is payable on any legacy or an any arrears of an annuity in accordance with the will or instrument pursuant to which the legacy or annuity is payable or with any enactment or rule of law, that interest shall, unless the will or instrument otherwise provides, or the Court otherwise orders, be payable at the relevant rate as may be prescribed in a regulation made under section 153 of the NSW Act. Such an amount is payable in this case. Sub section 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Taxation Ruling 95/35 deals with the taxation treatment of compensation receipts. In paragraph 26 of TR 95/35, the receipt of interest as part of the compensation payment is considered to be assessable income of the taxpayer under the general income provisions. In Whitaker Vs The Federal Commissioner of Taxation (96 ATC 4823) Justice Hill in addressing the issue of interest added to a judgement ,ruled that interest added under judgment is income regardless of whether the claim otherwise being made is of a capital or revenue nature. Whitaker's case also saw interest as being considered to be paid as part of a global amount for judgment awarded for pain and suffering. The interest was not calculated based on a sum ascertained before the judgement. The receipt of pre-judgement interest in a commercial situation was also discussed in Whitaker's case and distinguished the lump sum compensation payments that are for personal injury: In the full court Black CJ stated (at 335) In other contexts the characterisation of an amount ordered to be paid as "interest' as compensation for the loss or detriment suffered by a person being kept out of his or her money would point to an amount receivable as income rather than capital... And further (at 335) I would ad that the position here differs greatly from the commercial situation in which interest is payable as the price of being kept out of a specific or calculable sum… In your case, the interest was paid to the due to the delay in the administration of the Estate and is considered to be compensation for the legatee's loss caused by being unable to access their entitlements during the delay, the payment is considered to be interest income. As the interest received by the legatees is considered to be income, it is assessable under Section 6-5 of the Income Tax Assessment Act 1997 . | Summary: The legatees are presently entitled on their year ended 30 June 201X income. | Detailed Reasoning - Detailed reasoning: In a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate for the purposes of Division 6 of Part III of The Income Tax Assessment Act 1936 depends on: (a) The stage reached in the administration of the deceased estate. (b) The terms of the deceased's will or codicil, trust law and principles enunciated and others made by the Courts. (C) Whether any discretionary payments have been made to the beneficiary by the executor or trustee. 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 intermediate stage 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 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 of 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. The administration of the 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 distributions of specific assets or legacies, it will be possible to ascertain the residue with certainty. As the administration of the estate has been completed or reached a stage where it is apparent to the executor that part of the net income will not be required to pay or provide for debts, the legatees are presently entitled on their year ended 30 June 201X income.

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