Private ruling: Deceased estate - Commissioner's discretion and tax rates
Published: October 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner exercise his discretion to assess the Trustee on the income of the estate under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Do the same concessional rates of tax apply under section 99 of the ITAA 1936 where the estate continues beyond its third year of administration? | A2: No

Relevant facts and circumstances: The deceased passed away on during the 200X financial year. The original will was contested by two of the beneficiaries. The parties were directed to mediation however after a lengthy period no agreement could be reached. The matter was then listed for hearing before the courts however an agreement was reached before the matter was heard. Probate was granted during the relevant financial year. The affairs of the deceased estate trust will therefore not be finalised within three years of the deceased's date of death.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 99 | Income Tax Assessment Act 1936 Section 99A | Income Tax Rates Act 1986 Subsection 12(6) | Income Tax Rates Act 1986 Schedule 10

Reasons for decision: Summary: Generally, if no beneficiary of a trust estate is presently entitled to the net income of the estate, the trustee is assessed under section 99A of the ITAA 1936. However under subsection 99A(2) of the ITAA 1936, the Commissioner may exercise his discretion if he is of the opinion that it would be unreasonable for section 99A to apply. If this is the case, the trustee will be assessed under section 99 of the ITAA 1936. Section 99A of the ITAA 1936 does not apply in the following circumstances: · the trust resulted from a will; · the trust is a bankrupt estate; or · the trust is a trust that consists of property referred to in paragraph 102AG(2)(c) of the ITAA 1936; and the Commissioner forms the opinion that it would be unreasonable to apply section 99A of the ITAA 1936 in such circumstances. Subsection 99A(3) of the ITAA 1936 outlines the matters the Commissioner will consider before applying this discretion. The relevant matters include the circumstances in which property was acquired by the trust estate and such other matters as the Commissioner thinks fit. In your case, the deceased passed away during the 200X financial year. The original will was contested by two of the beneficiaries. The parties were directed to mediation however after a lengthy period no agreement could be reached. The matter was then listed for hearing before the courts however an agreement was reached before the matter was heard. Probate was granted during the relevant financial year however the affairs of the estate will not be completed within three years of the deceased's death. In considering the facts of this case, the Commissioner is of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the trust estate. The Commissioner will exercise his discretion that section 99A of the ITAA 1936 does not apply. The rates of tax payable by the trustee are determined by the Income Tax Rates Act 1986 (ITRA 1986). Subsection 12(6) of the ITRA 1986 provides that the rates of tax payable by a trustee under section 98 or 99 of the ITAA 1936 are set out in Schedule 10 of the ITRA 1986. Subsection 12(6) and Schedule 10 of the ITRA 1986 set down the rates of tax payable by a trustee under section 99 of the ITAA 1936. The rate of tax payable depends on the time that has elapsed since the death of the deceased. Where a person died less than three years before the end of the appropriate financial year, Schedule 10 of the ITRA 1986 limits the rate of tax to the rate applicable to the taxable income of a resident taxpayer as set out in Schedule 7 of the ITRA 1986. This rate includes nil income tax on the first $18,200 of taxable income. Under Clause 2 of Part 1 of Schedule 10 of the ITRA 1986, a trustee assessed under section 99 of ITAA 1936 in respect of a person who dies more than three years before the end of the year of income is not entitled to the full tax free threshold. The rates of tax payable under Clause 2 of Part I of Schedule 10 of the ITRA 1986 are outlined in Part I of Schedule 7 and subsections 14 (1) and (2) of the ITRA 1986. After the three-year anniversary of the person's death the $18,200 tax free threshold no longer applies. Therefore, although the Commissioner will exercise his discretion to assess the income of the estate under section 99 of the ITAA 1936, because the deceased estate trust has entered its fourth year of income different concessional tax rates apply. The applicable tax rates payable by the trustee for the relevant financial years are listed below: Share of net income (column 1) (Column 1) Tax on column 1 % on excess (marginal rate) $416 Nil 50 $594 $89 19 $37,000 $7,030 32.5 $80,000 $21,005 37 $180,000 $58,005 45