Private ruling: CGT – deceased estate – present entitlement and section 99
Date of advice: 29 May 2019
Published: July 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the Trustee be assessed on the capital gain made from the disposal of the property? | A1: Yes | Q2: Will the Commissioner exercise the discretion not to apply the provisions of section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and assess the trust estate under section 99 of the ITAA 1936? | A2: Yes

Relevant facts and circumstances: The deceased died on XX June 19XX. Probate was granted on XX July 19XX appointing C as Executor. The deceased’s will made bequests totalling $X to specific beneficiaries with the residue of the estate to be divided amongst specific family members who survived them and attained XX years of age. The deceased’s estate includes a property (the property) which was the deceased’s main residence at the time of death. The property was delayed from being sold as the deceased’s child continued to reside in the property after the deceased’s death. The property was sold on XX June 20XX with settlement occurring on XX September 20XX. The Estate obtained a private ruling (reference number 1051472980232, issued on XX January 20XX) in which the Commissioner did not allow the Estate to disregard the capital gain made from the disposal of the property under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997). On 30 June 2018, the Estate had not made distributions to the beneficiaries.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 subsection 99A(2)

Reasons for decision: Summary: Taxation Ruling IT 2622 provides the Commissioner's view on assessability of income of a deceased estate and present entitlement during the stages of administration of deceased estates. Beneficiaries cannot enjoy present entitlement to income derived by the 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 administrator and is not income of the beneficiaries. 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. For income tax purposes, whether any beneficiary is presently entitled to a share of the income of the trust estate is determined on the last day of the financial year (paragraph 19 of IT 2622). In this case, the property was sold on the last day of the financial year, 30 June 20XX with settlement occurring in the following financial year. At 30 June 20XX, the estate had not been fully administered as the residue could not be ascertained, therefore there were no beneficiaries presently entitled to a share of the income of the estate on the last day of the financial year. As the estate has not been fully administered and there are no beneficiaries presently entitled to the income of the estate, the trustee will be assessed on the income of the estate, including the capital gain made from the disposal of the property. Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A. Section 99A applies in relation to all trusts unless: ● the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii) ● the trust is bankrupt estate; paragraphs 99A(2)(b) and (c) ● the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) and the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances. Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2) states that the discretion may be exercised where a trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A to apply. If no part of the net income is distributed to beneficiaries, and section 99A is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual. In your case, it would be reasonable for the Commissioner to exercise the discretion not to assess the trust under section 99A of the ITAA 1936, choosing instead to assess the trust under section 99 of the ITAA 1936.