Private ruling: Deceased estate
Published: August 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Is the proposal by the executors to transfer assets directly from the estate of the deceased into a pre-existing Testamentary Discretionary Trust (TDT) covered by section 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) whereby any resulting capital gain to the legal personal representative can be disregarded? | A2: Yes

Relevant facts and circumstances: Australian Executor Trustees Ltd (AET) prepared the wills for individual A and individual B. Individuals A and B were married and had identical wills. Individual A passed away in the 2008-09 financial year. Individual B passed away in the 2013-14 financial year. The executors of both estates are the children of individuals A and B (the Executors). The Executors have engaged AET to assist them in the administration of these two deceased estates. Both wills create TDTs in favour of each child. On the death of individual A, each child inherited a portion of the estate and established a TDT in each of their names. Each child is the trustee of their respective TDT and the primary beneficiary of each TDT. These TDTs are in the process of applying for tax file numbers. Individual B's will gives the Executors the discretion to distribute the assets to any other trust that includes 'all, some or any of the beneficiaries'. On the death of individual B, the children are set to inherit further assets. Rather than establishing another TDT, the children are seeking to transfer these assets direct from the estate into their already existing TDTs as created upon individual A's death. The reason for doing so is to minimise the administrative burden in running two separate TDTs which have identical terms under the Wills, identical trustees and identical beneficiaries.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Division 6AA | Income Tax Assessment Act 1936 - Section 102AC | Income Tax Assessment Act 1936 - Section 102AE | Income Tax Assessment Act 1997 - Section 128-15

Reasons for decision: Summary: Subsection 125-15(3) of the ITAA 1997 states that any capital gain or capital loss a legal personal representative makes when an asset passes to a beneficiary is disregarded. In this case, the deceased's will gives the Executors the discretion to distribute the assets to any other trust that includes 'all, some or any of the beneficiaries'. Therefore, subsection 125-15(3) of the ITAA 1997 would apply to disregard any capital gain or loss made where the assets are distributed to an existing TDT set up for the beneficiaries. Division 6AA of Part III of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person. A prescribed person is defined in subsection 102AC(1) of the ITAA 1936 to include any person, other than an excepted person (as defined in subsection 102AC(2) of the ITAA 1936), who is under 18 years of age on the last day of the income year. Section 102AG of the ITAA 1936 provides that Division 6AA will not apply to that part of a prescribed person's share of the net income of a trust estate that is attributable excepted trust income. Subparagraph 102AG 2(a)(i) provides that income of a trust estate that resulted from a will, codicil or an order of a court that varied or modified the provisions of a will or codicil is excepted income. Subsection 102AG(4) provides that an amount will not be treated as excepted trust income if it was derived by a trustee directly or indirectly as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income. This provision will not apply to income attributable to assets transferred from the deceased's estate to the existing TDT because that income would have been excepted trust income had a separate TDT been established.

2. Once assets are transferred from the deceased estate into the TDT, does subparagraph 102AG(2)(a)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to any assessable income within the TDT which is distributed to a beneficiary as excepted trust income?