A starting point is to refer to IT 2622 “Income tax: present entitlement during the stages of administration of deceased estates”. This helps determine who is responsible for paying income tax for a financial year, i.e. the executor or a beneficiary, and is a good guide for determining whether a beneficiary is presently entitled to the income from the estate.
Where no beneficiary is presently entitled to the income from an estate, the estate income is taxed in the hands of who is assessed under sec 99 ITAA 1936. These tax rates are the same as the general individual rates for the first three years after the death of the deceased (i.e. including the current tax-free threshold of $18,200). After the first three years, the tax rates differ, with one difference being the tax-free threshold reduces to $416. (Note that PBR 1051376714267 states, “The general practice is to assess the income of a deceased estate trust under section 99 of the ITAA 1936 unless there is tax avoidance involved. Subsection 99A(2) outlines the situations when the commissioner may apply his discretion for section 99A not to apply, which includes trust estates resulting from a will, codicil, etcetera.”)
If a beneficiary is presently entitled to the income of a deceased estate and that beneficiary is a non resident, the executor will be liable to pay the income tax on the beneficiary’s share of that trust income (sec 98(3)). This will not include the Medicare levy. There is no tax-free threshold in this case, with a tax rate of 32.5% for income up to $90,001 as the first bracket of the marginal tax rates applicable. This is not a final tax because sec 98A “non-resident beneficiaries assessable in respect of certain income” also needs to be taken into account. Generally, where the executor is assessed and liable to pay tax under sec 98(3), the assessable amount will need to be included in the presently entitled beneficiary’s income tax return with the tax paid by the executor deducted from the income tax assessed to the beneficiary, with any excess trustee paid tax refundable.
Some points to note where the estate income includes capital gains:
- Sec 115-220 ITAA 1997 and sec 115-225 should be reviewed to ensure the correct amount of tax is paid by the executor under sec 98(3) on any capital gains. In effect the CGT discount is reversed in determining the amount of net income on which the executor is assessed.
- Sec 115-110 ITAA 1997 “Foreign or temporary residents — individuals with trust gains” and sec 115-115 “Foreign or temporary residents — percentage for individuals” should be taken into account to determine the CGT discount percentage, if any, that may be available to the nonresident beneficiary. The object of sec 115- 110 ITAA 1997 is to adjust the discount percentage so as to deny a discount for a capital gain to the extent the gain arose whilst being a non-resident during the period after 8 May 2012. Sec 115-115 provides the rules for reducing the discount percentage.
- As non-residents are only subject to CGT on gains from taxable Australian property, sec 855-40 ITAA 1997 should also be reviewed as a non-resident who holds an interest in an Australian fixed trust (the terms of the will would need to be reviewed for a deceased estate to determine if this is the case) can disregard the capital gain made by the trust on the disposal of non taxable Australian property. ATO ID 2007/60 and PBR 1051377013358 could be referred to for further guidance on this.
Note, where a post CGT asset that was owned by an Australian resident at the date of their death passes directly to a non-resident beneficiary, CGT event K3 is taken to have happened if the asset in the hands of the beneficiary is not taxable Australian property. The time of this CGT event is just before the taxpayer’s death, and therefore the capital gain is included in the final income tax return of the deceased.
Note as well that when dealing with non resident tax situations, the relevant double tax agreement should be reviewed.