Private ruling: Trust income
Date of advice: 15 April 2016
Published: June 2016
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Was the residuary beneficiary presently entitled to the whole of the income of the estate for year ended 30 June 20YY and does section 97(1) of the Income Tax Assessment Act 1936 apply to the taxable income? | A1: Yes.

Relevant facts and circumstances: The deceased passed away in 20XX. Probate for the estate was granted sometime later. The deceased's will, provided for a number of legacies to be paid to individuals and charities. The residue of the estate was to be paid or transferred a tax exempt entity. At the end of the 20XX-XX financial year, the estate was not finalised and the first tax return of the estate was lodged on the basis that the residuary beneficiary was not entitled to that income by 30 June 20XX. By the end of the 20YY-YY financial year, all of the testamentary expenses and legacies were paid out by the trustee. The tax exempt entity was notified of their entitlement in accordance with section 100AA of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Section 97(1), | Income Tax Assessment Act 1936 - Section 99, | Income Tax Assessment Act 1936 - Section 99A, and | Income Tax Assessment Act 1936 - Section 100AA.

Reasons for decision: Summary: Generally, under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) a beneficiary presently entitled to a share of the income of a trust estate, who is not under a legal disability, will include their share of the net income of the trust estate in their own income tax return. Otherwise, where no beneficiary is presently entitled to some or all of the net income of the trust estate, the trustee will be assessable for the trust income under sections 99 and 99A of the ITAA 1936. A beneficiary will be presently entitled to the income of a trust estate if: • the beneficiary has an indefeasible, absolutely vested, beneficial interest in possession in trust law income; and • the beneficiary has a present legal right to demand and receive payment of the trust law income (or would but for a legal disability). The Commissioner's view on present entitlement during the stages of administration of deceased estates is found in Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates . In a deceased estate, whether a beneficiary is presently entitled to a share of the trust income depends on: • the stage reached in the administration of the deceased estate, • the terms of the deceased's will or codicil, trust law and principles enunciated and orders mad by the Courts, • whether any discretionary payments have been made to the beneficiary by the executor or trustee. Paragraph 16 of IT 2622 states that the administration of a trust 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 their death and for debts incurred in administering the estate and provided for distribution 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 these demands on the estate. 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. | Detailed Reasoning - Application to your circumstances: In your case, by 30 June 20XX all of the testamentary expenses and legacies had been paid by the trustee. Consequently, it follows that the residuary beneficiary was presently entitled to the income of the estate in the 20YY-YY financial year. Accordingly, the income will be taxable in accordance with section 97(1) of the ITAA 1936