Hey everyone, I need your help with the following statement: the beneficiary is deemed to be presently entitled to a share of trust income. What does the term ' deemed ' mean here? Can anyone give me an example? Thanks in advance.
Present entitlement usually requires the beneficiary to be able to legally call for the income to be paid to them. However, in some circumstances they may not be able to legally call on the payment. Most often occurs under s.95A ITAA36 e.g. the deed requires the income to be accumulated until a certain date, or else reverts to the beneficiary's estate should they die before this date. The trust makes a distribution minute declaring a vested and indefeasible interest in the income, but does not make the payment to the beneficiary. The beneficiary has a deemed present entitlement under s.95A(2). Also, where a trustee applies income to a beneficiary who is presently entitled during the year, s.95A(1) makes sure the beneficiary is still technically "presently entitled" at year's end. Cheers, Rob
Hey Rob, Thanks for your clarification! I have done some research and from my understanding, the present entitlement requires two criteria: 1. available for distribution; 2. beneficiary must have a vested and indefeasible interest in the trust income. Therefore, from your explanation, I guess it should be called 'deemed to be presently entitled' when only condition 2 is satisfied. Am I correct?
"available for distribution" is too broad a definition. The actual distribution may not be available for payment for a variety of reasons. e.g. assets are not in a liquid form at the moment, or the beneficiary arranges for the present entitlement to be reinvested in the trust. Neither prevents the legal right of the beneficiary to call upon payment at any time. You are still assessed on unpaid present entitlements in the ordinary trust law principles here. The deeming kicks in when there is a legal prevention such as a trust deed clause preventing actual payment at the moment, but it must not be defeasible such as by a contingent condition. This can be a good thing, otherwise the Commissioner might argue that no beneficiary is presently entitled and so trust income is assessed at the top marginal rate !! Cheers, Rob
Presently Entitled? Hi Everyone, I am the Exectutor to an estate account for my sister that is not yet at the age specified in the Will to receive the funds (needs to be 25). Is she still classed as Presently intitled as it is Willed to her? Or does she have to reach the specified age to be Presently Intitled? This is for taxation purposes. Thanks!
Does the will stipulate how the income from the money held of trust is to be treated? I would think that the income of the trust would be assessed in the hands of the trustee unless it is distributed. This may not be very efficient , especially while your sister is under the age of 25 as income from a testamentary trust or a will is concessionally taxed.
Thanks Terry, The money was willed to my mother, unless she had passed (which she has), where it is to be split to myself and my sister upon us reaching the age of 25. I have reached 25 and as I am the only one left on my mothers side of the family I am now the Executor of the estate and as the Exectutor I have opened a trust account in the name of the Estate for the money that is for my sister. My thinking on it was that since the funds are not defeasable (hope I have my terms right!!), then my Sister would be considered Presently Entitled, even though she must wait untill she is 25 before the funds are distributed. In my own words, no one can contest her right to the funds.. She just cant have them untill shes 25. I just want to know if the taxable income will be added to my income or hers. Does anyone have an idea of the tax rates for this kind of income? I would be interested in what we are going to have to pay on the interest of the account as I will be putting it in a term deposit account.
H Glitch, From what you have written it seems that your sister is not entitled to any interest income at present, so I think trustee will be assessed. How old is your sister? Under 18?
Thanks Terry, She is over 18. I have been looking to see how the tax is handled. I cant find too much info on it. Is it just added to my income? I know the rates are different, but I cant find anything saying what the rates are. As I am already paying a high tax rate, I want to do anything I can to reduce the amount of tax I am paying. Im also keeping in mind that I have an obligation to manage the funds with the best interests of my sister. And paying alot of tax is not to that benifit. Thanks, Dan
Dan How long has it been since the death? And what stage is the administering of the estate up to? Here is a link to the ATO which may help Managing the tax affairs of someone who has died
Thanks Terry. My Grandmother died in 2009. The Administration is complete apart from a house left to sell and that money gets split between myself and my Sister. Heres where it gets a bit more interesting... She was a NZ Resident. And according to an accountant I have had advise from, the Estate account remains an NZ entity even though it is invested in an Aus Account. This means the I have to complete a tax return in NZ and the tax payed over there becomes credits to any tax owed in Aus. So I assume the estate will have a (NZ equil) TFN in NZ. But am I right in saying you cant give an estate a TFN in Aus? the tax must be processed on a persons TFN (Mine)? That link is helpful, but raises another question, Does the 3 years start from the date the trust account is created in Aus or does it start from the date of death?
Dan A deceased estate needs its own TFN in Australia. After the estate is administered it would then become a trust if property is still being held for the beneficiaries under the will. The trust would need a separate TFN too I believe. Any income from the trust, such as interest, wouldn't be added to your own personal tax return, but would be listed in the tax return for the trust. Having the NZ aspect is going to complicate things. Hope it is not going to cost you more in tax advice then in interest! I think the 3 years means 3 years of tax returns after the death, not necessarily 3 years from the death.
OK, that makes sense. I think it should be ok, once I have completed one years tax it should be straight forward for the remaining years.. So as it stands now it would be considered a Trust in the name of the Estate, me being the Trustee completes a tax return under the Trusts TFN? I also lodge a tax form in NZ. As far as the NZ part goes, any tax payed there becomes credits to any tax payable over here. So If I need to pay $100 tax in Aus and $80 in NZ, then I pay the $80 NZ and only pay $20 here. (I'm ignoring covnersion rates).
Sorry Terry, I realised I may have confused you a bit. There are 2 separate things I mentioned above that you may have taken as the same thing. I said there is a house to be sold. That is SEPARATE from the CASH in the trust account. The cash in the trust account is all i am talking about for the moment.
I think there may be two separate 'things' here. The house side is still not administered, so this would still form part of the estate. The cash side, it seems that the cash part of the estate has been administered and been passed to the trustee to be held for your sister. So you have a deceased estate and a testamentary trust. I think each would require separate tax returns. Now, as for the trust income, your sister doesn't appear to be presently entitled because she cannot demand payment of the money. It is conditional upon her reaching 25. Once she reaches the age of 25 the trustee could still hold the money but should could demand payment and would then be presently entitled. The tax treatment of trusts comes under Divison 6 ITAA 1936 INCOME TAX ASSESSMENT ACT 1936 I think, the trustee is normally to be assessd under s99A as there is no beneficiary presently entitled. But s99A may not apply in this case because the trust property resulted from a will. In that case then s99 will apply INCOME TAX ASSESSMENT ACT 1936 - SECT 99 Certain trust income to be taxed as income of an individual And the trust will be assessed as an individual. If s99A applied the trustee would be assessed at the top tax rate. But, I am not an accountant and this is complex stuff, so I am probably wrong. Hope Rob has a look at this.
Thanks Terry, Maybe tax evasion is the answer? I will see what the accountant comes up with. I appreciate your time! Ive elarned a few things.
I am assuming the cash is now held in a testamentary trust. If as part of the terms of the deed, the income accumulated for her would pass to her estate on death prior to reaching 25 then it appears that Taylor's Case would apply generally. This is particularly what s.95A(2) was enacted for. Cheers, Rob
