Private ruling: Capital gains tax on deceased estate distribution
Date of advice: 15 June 2018
Published: August 2018
Ruling period: Financial year ended 30 June 2017 | Financial year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the residuary beneficiaries of the deceased estate liable for their share of a capital gain realised on the disposal of the CGT assets held by the estate based on being presently entitled? | A1: Yes

Relevant facts and circumstances: The deceased passed away on DDMMYY. Probate was granted on late- 2016. There are residuary beneficiaries named in the Will. The Will was disputed and the dispute was settled with a sum of money awarded the contester and the residue going to the named residuary beneficiaries. The executors have called in liquid assets and sold real property consisting of the deceased’s main residence (which was exempt from CGT) and vacant land (which has no CGT exemption). The sale of the land has realised a net capital gain. The only acts left to be completed by the administrator in relation to the Estate are: ● the lodgement of the final tax return and ● the distribution of the net income to the residuary beneficiaries. Neither of the beneficiaries are under a legal disability.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1997 Section 115

Reasons for decision: Summary: Section 97 of the Income Tax Assessment Act 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate. The term ‘present entitlement’ is not defined in the ITAA 1936. It is therefore necessary to rely on the meaning which has been given to the term by the Courts. The leading case on present entitlement under a trust arising during the administration of an estate is the decision of the High Court in FC of T v Whiting (1943) 68 CLR 199 ( Whiting’s Case) . The High Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the trust estate until the estate has been fully administered. In Whiting’s Case the High Court found that in order for a beneficiary to be ‘presently entitled’ to the income of a trust estate, the beneficiary must be able to demand immediate payment of such income from the trustee. The High Court decided that the beneficiaries of a deceased estate have no right to demand payment of any part of the estate until such time as the estate has been fully administered. An estate will be fully administered when all of the assets and liabilities have been ascertained and payment or provision for payment of liabilities has been made. Until such time, the residue cannot be ascertained and there is no present entitlement to income. Taxation Ruling IT 2622 discusses the tax office view of present entitlement during the stages of administration of deceased estates. It explains beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. However, it also explains where the administration of a deceased estate is completed during the course of an income year, the beneficiaries (who are not under any legal disability) will be presently entitled during that income year and should bear tax on their shares of the net income of the trust estate for that income year. In this case, the administration of the deceased estate is currently ready for completion, i.e., complete. The properties have been sold and the net income of the estate if available for distribution. It follows the beneficiaries of the deceased estate will be presently entitled beneficiaries for the year ended 30 June 2018.