Private ruling: Income tax - trusts
Date of advice: 24 January 2020
Published: March 2020
Ruling period: Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2019

Ruling: Q1: Are the beneficiaries considered to be presently entitled to their share of the net income of the trust estate under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. | Q2: Does the income derived form part of the assessable income of the Executors as Trustees of the Estate? | A2: Yes. | Q3: When the Executors dispose of the balance of the listed shares will any beneficiary be presently entitled to any capital gain of the Estate? | A3: No. | Q4: If question 3 is no, does any of the capital gain form part of the assessable income of the Executors as Trustees of the Estate? | A4: Yes. | Q5: Will the Executors transfer the balance of the Estate funds (net of any tax and expenses) to the residual beneficiary? | A5: Invalid. | Q6: Will the Commissioner exercise his discretion undersection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to assess the Estate under section 99 not 99A in respect of the income earned by the estate in the 20XX income year and apply progressive concessional rates of tax? | A6: Yes. | Q7: Is the trustee entitled to apply the 50% capital gains tax (CGT) discount to the capital gains arising from the sale of the shares? | A7: Yes.

Relevant facts and circumstances: The deceased died in early 20XX. The deceased left a portfolio of shares. The shares are post-CGT assets. The executors of the estate are the Executors. Probate was granted in mid 20XX. Prior to probate being granted, the Executors received legal letter foreshadowing a potential claim against the estate by one of the beneficiaries of the estate. Following various correspondence between the legal firms acting for the Executors and the beneficiary, a claim was lodged by the beneficiary in the Supreme Court in early 20XX. The estate administration had ceased for all of the period leading up to the lodgement of the claim. The legal claim was settled out of court and approved be the Supreme Court in late 20XX. Administration of the estate remained dormant until the settlement became effective on late 20XX. Since late 20XX, the Executors commenced the administration of the estate including realising assets and payment of legacies and various other things required under the will. As at the date of the private ruling application the estate is still being administered. The estate is up to date with all of its income tax obligations and has lodged income tax returns and paid all tax assessments for the income years ended 30 June 20XX, 30 June 20XX and 30 June 20XX. The Executors have completed the first three income years, but at no stage during this time were the Executors in a position to administer the estate due to the legal action. In relation to the income year ending 30 June 20XX the Estate: · Earnt dividend and interest income - this is during the period that the legacies were being paid by the Executors to the respective legacy beneficiaries; and · Has derived capital gains on the sale of listed shares to facilitate payment of legacies. Once all of the legacies are paid, the remaining listed shares are to be sold and the tax for the income year ending 30 June 20XX is intended to be paid by the estate and the balance (net tax) will be paid to the residuary beneficiary, namely the ABC Trust. The ABC Trust is a discretionary trust. The beneficiaries of the ABC Trust include a wide range of potential beneficiaries, including a foreign resident. The trustees of the ABC Trust will, at the appropriate time, when the residual estate is distributed to the ABC Trust, decide what, if any, of the capital and/or income of this trust is to be distributed and to what beneficiaries in their absolute discretion. It is anticipated that the administration of the estate of the deceased will be completed in the 20XX income year.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 Section 99 | Income Tax Assessment Act 1936 Section 99A | Income Tax Assessment Act 1936 Subsection 99A(2) | Income Tax Rates Act 1986 Subsection 12(6) | Income Tax Assessment Act 1997 Subdivision 115-A

Reasons for decision: Detailed Reasoning - Detailed reasoning: The taxation of income earned in a deceased estate trust will depend on whether the beneficiaries have present entitlement to the income of the trust. The beneficiaries' present entitlement hinges on two factors. Namely, whether the Trustee has made them specifically entitled to some of the income or if the deceased estate had been fully administered and the residue has been calculated. Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates sets out in paragraph 9 that: Beneficiaries cannot enjoy present entitlement to income derived by a 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 administrators ... no beneficiary is presently entitled to the income derived. This means that during the administration of the estate the beneficiary does not have a presumption of present entitlement and where no beneficiary is presently entitled to the income of a trust, the trustee is made liable for the tax payable under section 99 ITAA 36. However during the intermediate administration of a deceased estate, the administrator may make a determination that part of the net income of the trust will not be required to pay for debts. Some of the income may be paid to or for the benefit of the beneficiaries and then the beneficiaries would be presently entitled to the income to the extent of the amounts paid to them only. When the residue of the estate has been ascertained and the estate has been fully administered, residuary beneficiaries will then enjoy present entitlement to the income derived by the estate. In this case the estate has not been fully administered due to the hold up because of the claim lodged by the beneficiary against the Estate. The expenses have not yet been paid from the funds in the Estate. As the estate has not been fully administered, the beneficiaries have no present entitlement to the income of the estate. As the beneficiaries have no present entitlement in this case, the Trustee becomes liable for the income earned in the Estate. | Detailed Reasoning - Question 6: Section 99A of the ITAA 1936 will not apply to a trustee in an income year where the 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 if the Commissioner considers that it would be unreasonable to do so. Subsection 99A(2) of the ITAA 1936 reflects the policy that if it would be unreasonable for section 99A to apply to income of a deceased estate to which the beneficiaries are prevented from being presently entitled because the administration of a deceased estate has not been finalised, then section 99 applies. The rates of tax for trustees assessed under section 99 of the ITAA 1936 are found in subsection 12(6) of the Income Tax Rates Act 1986 (ITRA 1986), which directs attention to Schedule 10 of the ITRA 1986. Part 1 of Schedule 10 of the ITRA 1986 identifies two classes of trustees for the purpose of determining the rates of tax that are to apply. In the first class are trustees who are liable to be assessed under section 99 of the ITAA 1936 in respect of resident trust estates of a deceased person where the income is derived in the year of death of the deceased or in any one of the following two years. These trustees are liable to pay tax at the rates applicable to resident individuals. The second class of trustees identified in Part 1 of Schedule 10 of the ITRA 1986 comprises trustees liable to be assessed under section 99 of the ITAA 1936 in respect of income of a resident trust estate, other than the estate of a person who died fewer than three years before the end of the income year. These trustees (including the trustees of testamentary trusts) are liable to tax at the rates specified for resident individuals except that they do not benefit from the tax free threshold. There is no discretion available to the Commissioner to extend the three year period to apply the lower rates of tax or vary the rates of tax applicable under section 99 of the ITAA 1936. The trust assessment code to be assessed under section 99 of the ITAA 1936 is 15 for the estate of a person who died fewer than three years before the end of the income year and code 16 for the estate of a person who died more than three years before the end of the income year. In your circumstances it would be considered unreasonable for the income of the deceased estate to be assessed under section 99A of the ITAA 1936, therefore will be assessed under section 99 of the ITAA 1936. As per the ITRA 1986, when determining the tax rates that will apply, code 16 will apply for the estate as the deceased died more than three years before the end of the income year. There is no discretion available for the Commissioner to vary the rates of tax applicable. | Detailed Reasoning - Question 7: Under section 115-5 of the Income Tax Assessment Act 1997 you make a discount capital gain if the following requirements are satisfied: · you are an individual, a trust or a complying superannuation entity · a capital gains tax (CGT) event happens to an asset you own · the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 · you acquired the asset at least 12 months before the CGT event, and · you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year. In your case, you, as trustee of a deceased estate, will dispose of shares which the deceased owned for more than 12 months. You will also dispose of shares that you as trustee have held for 12 months. As the shares will be sold (the CGT event) after 21 September 1999 you are able to discount the capital gain made by 50%.