Private ruling: Deceased estate - administration of estate - present entitlement
Date of advice: 2 November 2016
Published: January 2017
Ruling period: For year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: To the extent that the two distributions made to beneficiaries in the 20XX-YY income year include income, were the beneficiaries presently entitled to that income? | A1: Yes | Q2: Is the income year in which an Estate is fully administered and the income year in which administration of the estate is completed the same year for interpreting IT 2622? | A2: Yes | Q3: Is the 20XX-YY income year, the income year in which the Estate is fully administered and the income year in which administration of the estate is completed for the purposes of IT 2622? | A3: Yes | Q4: In relation to the amount held in the two bank accounts at 30 June 20YY, were the beneficiaries presently entitled to such of that amount as comprised income? | A4: Yes | Q5: Can an apportionment of income be made between the executor and the beneficiaries in the year which the estate is fully administered, where the executor and beneficiaries are able to demonstrate, through the striking of accounts at the completion of administration, the actual amounts of income derived in the periods before and after the day on which the estate was fully administered? | A5: Yes | Q6: Is the correct position that while executors have the right to determine the characterisation of the amount distributed to beneficiaries, they can only do so by reference to the characterisation of amounts actually received? | A6: Yes | Q7: If not, what is the basis of determining what part of the two distributions and the amount held in the bank accounts at 30 June 20YY constitutes income and are there any factors relevant to that determination such as those mentioned under 9 “Arguments and references”? | A7: Not applicable | Q8: In order for there to be an apportionment of the net income as contemplated by paragraph 22 of IT 2622, are all the beneficiaries required to agree to the apportionment? | A8: Yes | Q9: Does the exchange of contracts for the Property before, rather than after, the grant of probate affect the manner in which the capital gain is treated? | A9: No | Q10: In relation to determining the cost base of shares being sold, is the ATO's position on the use of average cost method as set out on the ATO website at -Identifying when shares or units were acquired? | A10: Yes

Relevant facts and circumstances: Probate was obtained in relation to this estate. The beneficiaries of the Will are the children who are all older than 18 years. The Will provides that they gives their estate to their children to pay all debts, legacies, funeral and testamentary expenses and any death, estate or succession duties and to hold the balance remaining on trust equally for their children. The estate included properties which have all been disposed of. The estate also included shares and cash. The estate has the records for the share acquisitions which date from as early as 19WW and the acquisitions are primarily the result of dividend reinvestment plans. Rent, dividends, interest and the proceeds of the sale of the properties and some shares have been received by the estate during the 20XX-YY income year. There were no debts at date of death and funeral and testamentary expenses were paid before the grant of probate. No one contested the Will. There were no legacies. Distributions of the majority of the estate and income have been made. There are some shares and cash that remain in the estate for distribution.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Section 97 Anti-avoidance rules | No

Reasons for decision: Summary: IT 2622 states at paragraph 14 that: During the intermediate stage of administration of a deceased estate (as described in paragraph 6 above), 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 of the 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 or actually paid on their behalf. The fact that the estate has not yet 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. You have stated that an amount of income has been paid to the beneficiaries; therefore they would be presently entitled to this income. In IT 2622 the income year in which the estate is fully administered and the income year in which administration of the estate is completed have the same meaning. IT 2622 at paragraph 16 states: The administration of the estate does not have to reach the stage where the estate is wound up for the 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 the debts incurred in administering the estate (e.g. funeral expenses) and provided for distributions of specific assets or legacies, it will be possible to ascertain the residue with certainty, even though the executor may not have actually made all the transfers necessary to satisfy the demands of the estate. You have stated that: There were no debts at the date of death and funeral and testamentary expenses were paid before grant of probate. No one contested the Will. There were no legacies. The majority of the estate has been distributed. You are at a stage where you have met all the requirements of paragraph 16 above and are in the process of distributing the residue of the estate. Therefore it would be considered that the estate is fully administered at 30 June 20YY. The net income of the trust estate and whether any beneficiary is presently entitled to a share of the income of the estate are determined on the last day of the financial year. Because the estate is fully administered at this time the beneficiaries would be presently entitled to such of the amount held in the bank accounts that comprise income. Also in determining the total income of the trust at 30 June 20YY, you would have to determine what portion of the distributions you have made are income and capital and keep the necessary records of this so that you have the records for trust tax purposes and so that you can notify the beneficiaries. The apportionment of income can be made between the executor and the beneficiaries in the year which the estate is fully administered, where the executor and beneficiaries are able to demonstrate, through the striking of accounts at the completion of administration, the actual amounts of income derived in the periods before and after the day on which the estate was fully administered. At 30 June 20YY the executor/trustee will have to determine the amount of income derived by the trust for the income year and determine what amounts have been paid to the beneficiaries and record these amounts in the accounts. IT 2622 at paragraph 21 states: It has also been a long standing practice of this Office, however, to accept an apportionment in the income year in which the estate is fully administered. Where the executors and beneficiaries are able to demonstrate, through the striking of accounts at the completion of administration, the actual amounts of income derived in the periods before and after the day on which the estate was fully administered an apportionment may be made as follows: Income derived in the period between the beginning of the income year and the day administration was completed. Assessed in the hands of the executors or administrators under section 99 of the Act. Income derived in the period between the day administration was completed and the end of income year. Assessed in the hands of the beneficiaries presently entitled to the income in the manner required by section 97 or 98 of the Act. As part of the striking of the accounts, this will contain detailed records of when tax events have occurred to indicate when income was derived and it will show amounts of capital and income that is available for distribution to beneficiaries. Detailed records of the characterisation of the amounts being distributed are required (trustees decision) to determine present entitlement if required and on what amounts of income the individual beneficiaries will be assessable, as opposed to the distribution of capital. Not applicable. Refer to answer to question 5. IT 2622 states that: There must be evidence of the income derived during these periods and apportionment of the net income of the trust estate in this manner must be requested by the taxpayers concerned, i.e., the executor or administrator and the beneficiaries. The Office would not accept an apportionment of the income derived by the estate for the whole income year concerned into the two periods merely on a time basis. One exception to this alternative course of apportionment is that, if an executor or administrator does in fact pay part of the income of the estate to a beneficiary before the estate is fully administered (i.e. during the first periods mentioned in paragraph 21 above), the beneficiary would be assessed on the basis that he or she was presently entitled to that income. This also accords with paragraph 14 above. Therefore all the executors and beneficiaries would be required to request the apportionment. The exchange of contracts for the sale of the property before, rather than after, the grant of probate does not affect the manner in which the capital gain is treated. A CGT event has occurred and the normal rules will apply. When a person dies, any assets or liabilities that are owned by that person form their estate. The assets and liabilities of the person are collectively called the deceased estate. Any income generated from those assets is also part of the deceased estate. The deceased estate is considered to be held in trust from the date of death of the person until the transfer of the property and assets to the beneficiaries. The 'trustee' is the legal personal representative of the deceased - either the executor under the Will or an appointed administrator if there is no Will. The legal personal representative has entered into the contracts for the sale of the property and the capital gains tax rules will apply to them and any capital gain will form part of the income of the deceased estate. The ATO's position on the use of average cost method is set out on the website. In limited circumstances, we will also accept an average cost method to determine the cost of the shares disposed of. You can only use this average cost method when: ● The shares are in the same company ● The shares are acquired on the same day ● The shares have identical rights and obligations ● You are not required to use market value for cost base purposes. The average cost method would not appear to be applicable to your situation. You have stated that the Estate has the records for the share acquisitions which date from as early as 19WW and the acquisitions are primarily the result of dividend reinvestment plans. Therefore you should be able to identify the particular shares you have disposed of, or the Commissioner will accept your selection of the identity of shares disposed of. Alternatively, you may wish to use a 'first in, first out' basis where you treat the first shares you bought as being the first you disposed of.