Excusing estates from income tax filing obligations

You may be aware that section 43B of the Tax Administration Act 1994, can be used by trustees of a non-active trust, to obtain an income tax filing exemption, similar in the way in which non-active companies can obtain the same.

It is not unreasonable to think of the estate of the deceased which is under the control of executors and administrators as being similar to a trust, and consequently should be entitled to the section 43B exemption. However, at common law this is not the case, and the Commissioner has now issued Operational Statement OS 21/03 to clarify when she considers that the executors/administrators of an estate have transitioned from holding the property in the estate “in the right of the deceased” to now holding that property “on trust”.

Some of the confusion, actually I expect it’s the core reason, is created by the fact that an estate file an IR6 income tax return, which you will all be aware is the income tax return for a trust. However, this is purely for administrative convenience, and not because the Commissioner considered an estate was automatically a trust. So, when exactly would an estate become entitled to the section 43B filing exemption? Well initially the executors/administrators have duties to collect the deceased’s property, to use it to meet any expenses, debts and legacies, and then to distribute what is left according to the directions in a will or the law of intestacy. A trust will only arise when executors/administrators have completed their duties to the point that they stand ready to “distribute” the remaining property – aka the “assent” phase. If at this point, rather than distributing the remainder assets to other trustees, the executor/administrator continue to hold the assets in a trustee capacity and no longer in the capacity as executor/administrator, then a trust has now arisen for the purpose of section 43B. Note that when this occurs, the estate does not need to apply for a new IRD number to recognise that it has now transitioned to being a trust.

This article from the 'A Week in Review' newsletter was originally published Monday 30th August 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me [email protected].?

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