Private ruling: Deceased estate
Date of advice: 24 January 2019
Published: May 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Were each of the beneficiaries who received a XX% share of the residue of the estate presently entitled to a XX% share of the income of the deceased estate in the year ended 30 June 20XX? | A1: Yes.

Relevant facts and circumstances: The deceased’s Will was contested by one of the beneficiaries, Z. The claim was settled. Under the Settlement Deed the executor had to pay the settlement sum from the assets of the estate. Settlement was due within three calendar months from the date the Supreme Court approved the release. On XX/XX/20XX, the balance of the settlement sum was paid out as per the Settlement Deed. Under the Settlement Deed, Z released the estate from all claims Z may have had against it. Administration of the estate was completed during the year ended 30 June 20XX. Under clause X(x) of the Will, the residue of the estate was to be distributed to X number of beneficiaries including Z. As Z had been paid the settlement sum and had released the estate from all claims Z had against it, the residue of the estate was distributed in equal shares to the remaining beneficiaries during the year ended 30 June 20XX.

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

Reasons for decision: Summary: Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) requires the ascertainment of the ‘net income’ of the trust estate as defined in subsection 95(1) of the ITAA 1936. Effectively, the ‘net income’ of a trust estate is defined in subsection 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. That is, the net income of the trust is the trust’s taxable income. Where beneficiaries, not under a legal disability, are presently entitled to all the income of a trust for an income year, the beneficiaries are assessed on the trust’s taxable income (section 97 of the ITAA 1997). The High Court in Cmr of Taxation v. Bamford (2010) 240 CLR 481 held that the proportionate approach is to be used to determine what share of a trust’s taxable income is to be included in a beneficiary’s assessable income. Under the proportionate approach, the share of the trust’s ‘distributable income’ that a beneficiary is presently entitled to is determined, then that same proportion is applied to the trust’s taxable income to arrive at the share of the trust’s taxable income that is to be included in the beneficiary’s assessable income. A trust’s ‘distributable income’ is the income of the trust for trust law purposes. Therefore, a trust’s distributable income can be different to its taxable income. For example, unless a trust deed specifically defines ‘income’ and ‘capital’, these terms take their ordinary meaning so in that case a capital gain would not be included in the distributable income of the trust even though it is included in the trust’s taxable income. In the present case, the estate was fully administered during the year ended 30 June 20XX with the residue of the estate being distributed in equal shares to X number of beneficiaries. The residue of the estate includes the estate’s income for the year ended 30 June 20XX. Therefore, the beneficiaries who each received a XX% share of the residue of the estate were each presently entitled to XX% of the distributable income of the estate during the year ended 30 June 20XX. Applying the proportionate approach, XX% of the trust’s taxable income for the year ended 30 June 20XX is included in the assessable income of each of the beneficiaries who received a XX% share of the residue of the estate.