The company has one shareholder who passed away on 4.6.2018. The shareholder was changed from the deceased to a shareholder, being one of the beneficiaries.
On the advice given, a dividend was declared 26.6.2020 and paid to the Estate 6.8.2020. At the same time, the Estate paid 30% and 40% of the dividend to 2 beneficiaries, and the three beneficiaries left the money in the Estate bank account.
The will state distributions by way of dividends or capital nature to the beneficiaries 40%, 30% and 30%. The beneficiaries decided to change the distribution percentage with a mutual agreement between them.
Is this valid, or do they need a deed of family arrangement?
Estate ITR stated no beneficiaries entitled, and the Estate paid tax. This was done for the Estate to receive concessional income tax treatment.
A further dividend was declared 1.7.2020 by the company and paid 6.10.2020 to the Estate. In the same procedure, two beneficiaries received the distribution from the Estate; the 3rd left his share in the Estate bank account.
As this is the fourth year, the Estate ITR has two beneficiaries receiving the distribution from the Estate; the 3rd beneficiary is entitled to the distribution but decided to leave his share of the distribution in the Estate’s bank account.
Does this mean he has no present entitlement? And the Estate pays the tax for him until such time he decides to take the “money”.
The Estate is going to pay tax on the 3rd share; the other beneficiaries’ distribution is included in their personal ITR.
As mentioned, the company has one shareholder (beneficiaries). When should the company transfer the shares to the Estate, maybe wind up the company?
The deceased shareholder of the company is still the owner of the shares and, in his will states – the shares to be transferred to the Estate. The director/secretary is acting in his capacity as executor (one of the beneficiaries). If the value of the shares is transferred from the company to the Estate, can the Estate pay out the capital proceeds tax-free to the beneficiaries? Provided the will does not state the beneficiaries have an absolute and indefeasible interest in the capital or income of the Estate.
What are the tax implications? I understand Deceased Estate is very complicated, and your advice would be greatly appreciated.
Answer
It is assumed this beneficiary is a person acting in their capacity as the executor of the Estate.
Regarding the advice, you were given. This can represent a payment of corpus to the beneficiaries with no tax implications as the Estate has already paid the tax.
We agree that this makes sense as for the first three tax returns the Estate lodges, the individual tax-free threshold is available, and the trust is then further taxed at individual marginal rates.
Do they need a deed of family arrangement? You may wish to get legal advice on that, but there should be no problems if a mutual agreement exists.
Purely from a taxation perspective, as long as the correct amount of tax has been paid, these private arrangements are unlikely to concern the Commissioner.
Present entitlement can arise when a valid trust distribution is made by way of a minute prior to 30 June in the relevant tax year – a present entitlement may exist when the trust has booked the distribution by way of a loan account.
We need to be clear that the company has a separate legal identity from the deceased and has its own tax issues. How do you deal with the funds in the company when making payments to the Estate?
- By way of dividend to the estate for the amounts representing retained earnings (franked or unfranked)
- Did the company owe the deceased money by way of a loan account? This is now an asset of the Estate and is a tax-effective way of getting money out of the company by repayment of the loan.
- Are any of the company shares pre- CGT (20.9.1985)? We have already mentioned the Archer Bros principle
Yes, some payments will be tax-free as income retains its character as it flows through a trust, e.g., franked dividends or capital loan repayments as above. It depends on the source of the funds and whether the trustee has already paid the tax liability.
Of course, a member’s voluntary liquidation will need to be done for this company.
We are now in the fourth year of the Estate, and below is the relevant tax table to assist you as to the most tax advantageous path to take. This will depend on the beneficiaries’ individual tax circumstances – for tax minimisation and also establish whether the company has significant pre-CGT assets and consider the possible application of the Archer Bros Principal. (Refer to tax tip #66-page 28 issue #0115)
There is an effective choice – if a valid trust distribution has been made, there can be a present entitlement. If he does not wish to take the money and pay the tax, then the trustee can pay the tax on his behalf – of course, the actual payment must be debited to his total entitlement under the will.
The following tax rates apply for deceased estates that continue to be administered beyond the third income year.
| Deceased estate taxable income (no present entitlement) | Tax rates 2020–21 and 2021–22 |
| $0 – $416 | Nil |
| $417 – $670 | 50% of the excess over $416 |
| $671 – $45,000 | $127.30 plus 19% of the excess over $670 If the deceased estate taxable income exceeds $670, the entire amount from $0 will be taxed at the rate of 19% |
| $45,001 – $120,000 | $8,550 plus 32.5 cents for each $1 over $45,000 |
| $120,001 – $180,000 | $32,925 plus 37 cents for each $1 over $120,000 |
| $180,001 and over | $55,125 plus 45 cents for each $1 over $180,000 |