Importantly, such a liability may be triggered even where the services provided by the executor only arises in respect of a single deceased estate, and that such an exposure is therefore not limited to circumstances where a legal practitioner regularly provides executorial services to clients in addition to the provision of legal services.
This is something of a hidden trap for executors especially as the Australian Taxation Office (ATO) has not published any binding public rulings confirming the assessability of executor commissions for either income tax or GST purposes.
However, much practical guidance can be extracted from a number of non-binding private rulings issued by the ATO which confirm that such commissions will invariably be treated as assessable income for income tax purposes and would also typically constitute consideration for the making of a taxable supply for GST purposes.
The separate but similar rationales as to why such amounts are assessed for income tax and GST are discussed further below…..
As a starting point it is essential to recognise that an executor’s commission may be included in assessable income as either ordinary income or statutory income for income tax purposes, depending on the circumstances.
Where a solicitor or other taxpayer regularly provides services as an executor such, an amount will be assessed as ‘ordinary income’ on the basis that it constitutes income according to ordinary concepts under section 6-5 of the Income Tax Assessment Act (1997) (the ITAA(1997)).
Such ‘ordinary income’ will include income from personal exertion as well as business income.
Paragraph 3 of Taxation Ruling IT 2639 states that ‘Income from personal exertion’ is income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour.’
Thus, whilst the provision of executor services may be ancillary to the core legal business activities carried on by a practitioner. the payment of executor commissions may nonetheless constitute ordinary income being income from personal exertion.
Crucially, long-standing case law provides that an amount will only be regarded as ‘ordinary income’ where the income earned is also expected, relied upon and has an element of periodicity, recurrence or regularity.
Accordingly, where a solicitor or other person regularly provides executorial services, the commissions earned may form an expected part of the ordinary income they periodically derive and rely upon which would be assessable under section 6-5 on the basis that it constitutes income from personal exertion.
By contrast where a solicitor or other person provides a one-off service as an executor for a particular deceased estate, such an amount would not constitute ‘ordinary income’ as such an amount would not be periodically expected or relied upon by such a person.
Where an amount is not included in ordinary income it may nonetheless be alternatively assessed as statutory income under section 6-10 of the ITAA (1997).
Statutory income for these purposes includes, amongst other things, an amount of income assessed under section 15-2of the ITAA (1997).
Section 15-2 provides that the assessable income of a taxpayer includes the value to a taxpayer of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to the taxpayer in respect of, for, or in relation directly or indirectly to any employment or services rendered by the taxpayer.
In this context it is important to note that the courts have consistently held that such amounts of statutory income could potentially apply to the provision of services outside an employment relationship (such as in the Full Federal Court in FCT v Cooke and Sherdan (1980) ATC 4140)).
Accordingly, it is the ATO’s established view that a one-off commission received by an executor will be regarded as being an assessable benefit provided in respect of the services performed by the executor regarding the estate of the deceased.
Moreover, the Commissioner of Taxation has applied section 15-2 on the basis that it can apply to any person acting in the capacity of executor and is not limited to a legal or accounting practitioner providing professional services in that capacity.
For example, in the non-binding Private Ruling PBR 1051189532257 the executor commission payable to the estate of a family friend who had acted as executor was held to be assessable under section 15-2 even where the payment had been described as an ex-gratia payment when it was in substance an executor’s commission.
Goods & Services Tax
The supply of executorial services would also typically meet the threshold requirements of being a taxable supply for GST purposes although in practice many executors may be practically relieved from the obligation of withholding GST from such payments as they are not registered or required to be registered for GST purposes.
It should be noted that the provision of services as an executor is a taxable supply as it not regarded as being either a GST free or input taxed supply.
Generally, the provision of services by an executor would constitute a taxable supply as defined under section 9-5 of the A New Tax System (Goods and Services Tax) Act (1999) (the GST Act(1999)) where that supply is made for consideration in respect of services directly connected with an Australian resident deceased estate.
It is a key feature of section 9-5 of the GST Act (1999) that such a supply must also be made in the course or furtherance of an enterprise that is carried on by the taxpayer.
The term ‘enterprise’ is defined in section 9-20 of the GST Act (1999) to include, amongst other things, an activity or series of activities done in the form of a business or an adventure or concern in the nature of trade.
Paragraph 234 of Miscellaneous Taxation Ruling MT 2006/1 further provides that an adventure or concern in the nature of trade may essentially take the form of an isolated or one-off transaction.
Accordingly, it would appear that an executor will be regarded as carrying on an enterprise under section 9-20 even where their appointment as an executor is an isolated transaction.
For example, in non-binding public ruling PPR 1012201810746 a commission received by the taxpayer for acting as an executor was held to be a taxable supply arising from a one-off activity even though the taxpayer was only otherwise registered for GST purposes because that person carried on a farming business.
Accordingly, it is the ATO’s view that an entity which is registered for GST purposes will treat an executor commission as being a taxable supply even where that is not the core business of the relevant taxpayer.
Required to be registered
Accordingly, it is critical to determine whether such an entity is registered or required to be registered for GST purposes being another prerequisite which must be met in order for there to be a taxable supply.
This condition will be satisfied if the entity is already registered for GST purposes.
However, if the relevant entity is not already registered for GST it is necessary to determine whether that entity will be required to be registered for GST.
Section 23-5 of the GST Act (1999) provides that a taxpayer is only required to register for GST purposes if that entity is carrying on an enterprise and their annual turnover meets or exceeds the prevailing GST registration turnover threshold which is currently $75,000 for entities other than non-profit entities.
A taxpayer’s annual turnover effectively meets the above registration turnover threshold under section188-10(1) of the GST Act (1999) when the taxpayer’s current annual turnover or projected annual turnover meets or exceeds the above $75,000 threshold.
A taxpayer’s current annual turnover is essentially the sum of the values of all the supplies that the taxpayer has made, or is likely to make, during the current month and the preceding 11 months.
Conversely, a taxpayer’s projected annual turnover is fundamentally the sum of the values of all the supplies that the taxpayer has made, or is likely to make, during the current month and then in the next 11 months.
In calculating both amounts, all input taxed supplies or supplies that are not connected with carrying on an enterprise are excluded from the calculation of annual turnover.
Thus, where a taxpayer’s current or projected annual turnover does not meet or exceed the above $75,000 GST registration turnover threshold, the executor will not be regarded as making a taxable supply on the basis that it is not required to be registered for GST purposes.
Care should be taken in each case as to whether an entity is required to be registered which is a question of fact in each case.
BNR Partners would be pleased to provide advice to executors who wish to clarify whether they have a GST liability on any commission they receive.
Two executors of an estate are to receive an executorial commission of $25,000 each.
One executor is an employee civil engineer and does not carry on any business activities, whilst the other executor is a sole practitioner solicitor carrying on a legal practice who also periodically provides executorial services who is otherwise registered for GST in respect of his legal practice.
The commission received by the civil engineer would be regarded as a benefit provided for rendering a service as an executor under section 15-2 of the ITAA (1997).
However, as the only other income she derives is salary income, she will not be required to register for GST as the commission received is below the $75,000 GST registration threshold. Accordingly, the commission she receives will not be subject to GST.
On the other hand, the $25,000 commission received by the solicitor would be assessed as ordinary income undersection 6-5 of the ITAA (1997) as such executorial services are provided periodically.
Moreover, as the solicitor will derive the executor commission whilst also carrying on his legal practice the commission will be subject to GST as the sole practitioner is registered for GST.
Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.
This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning. Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.