Private ruling: Deceased estate - taxation of capital gain distributed to beneficiaries
Date of advice: 7 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the executor of the Estate be subject to taxation under either section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of a capital gain derived by the Estate in the event that the residual assets are sold to third parties, with the net proceeds distributed to charitable organisations in equal shares? | A1: No.

Relevant facts and circumstances: The deceased passed away sometime after 20 September 1985 and left a substantial portfolio of assets including cash, shares and real property. The deceased was a resident of Australia for taxation purposes. The deceased's will provides that after making some specific bequests to a third party, the residual Estate is to be held on trust for a number of charitable organisations in equal shares. The charitable organisations are also deductible gift recipients (DGR's). The specific bequests have been made to the third party. A small quantum of the shares have been sold by the executor of the Estate for working capital purposes. Probate has been applied for and granted by the Court. The executor of the Estate made an interim distribution to the charitable organisations. The executor of the Estate is seeking to finalise the administration of the Estate through the disposal of the residual assets, followed by the distribution of the net proceeds from the realisation of the assets to the charitable organisations in equal shares. You anticipate that all of the residual assets of the Estate will be sold and that the proceeds will be distributed to the charitable organisations in the same income year. The charitable organisations are beneficiaries that will be presently entitled to the income of the estate once the residual assets are sold and the proceeds distributed. For the purposes of this private ruling, the shares and real property which are currently held by the executor of the Estate and which are the subject of this private ruling are referred to collectively as the "residual assets".

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6, | Income Tax Assessment Act 1936 Section 97, | Income Tax Assessment Act 1936 Section 99 and | Income Tax Assessment Act 1936 Section 99A.

Reasons for decision: Summary: The provisions that relate to the taxation of trust income are contained in Division 6 of Part III of the ITAA 1936. Where a resident beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate, section 97 of the ITAA 1936 operates to include in the assessable income of the beneficiary, their share of the net income of the trust. Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled. | Detailed Reasoning - Present entitlement: There is no definition of present entitlement in the ITAA 1936. It is therefore necessary to rely on the meaning which has been given to the term by the courts. Present entitlement is discussed in length in FC of T v. Whiting (1943) 68 CLR 199; 7 ATD 179 and Taylor Trust, Trustees of v. FC of T (1970) 119 CLR 444; 70 ATC 4026. The following is a summary of the main principles emerging from these cases. In order for a beneficiary to be presently entitled to trust income, the following two conditions must be satisfied: • The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent. This means that the beneficiary must have the right to demand immediate payment (or would have had the right to demand payment had they not been under a legal disability). • The income must be legally available for distribution to the beneficiary. In the case of a deceased estate, the beneficiaries will not be presently entitled to income until it is possible to ascertain the residue with certainty (after provision for debts, legacies, etc.). Taxation Ruling IT 2622 provides the Commissioner's view on 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 laws and principles enunciated and orders made by the Courts; • Whether any discretionary payments have been made to the beneficiary/beneficiaries by the Executor or trustee. Paragraph 14 of IT 2622 provides that during the intermediate stage of administration of a deceased estate, 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 and the executor may in fact pay some of the income to or on behalf of the beneficiaries. The ruling provides that in this situation, the beneficiaries will be presently entitled to the income to the extent of the amounts actually paid to them. In situations where the administration of a deceased estate is completed during the course of an income year, it is the longstanding practice of the Tax Office to assess beneficiaries who are not under a legal disability on their share of the net income from the estate for that year to which they are presently entitled. | Detailed Reasoning - Application to your circumstances: In your situation, you will distribute the proceeds from the sale of the residual assets to the charitable organisations who are presently entitled to the income of the estate. Therefore the Estate will not be subjected to income tax under either section 99 or 99A of the ITAA 1936.