ATO ID 2003/779: CGT: majority underlying ownership and deceased estate - continuity of interest during the period of administration
Date of decision: 27 June 2003
Year of income: Year ended 30 June 2003
Business line: Small Business/Individual Taxpayers

Issue
Can the beneficiary of the deceased estate be treated as having a beneficial interest in the assets of the trust before the estate has been fully administered, in order to enable the deemed continuity of underlying interests provisions in subsections 149-30(3) and 149-30(4) of the Income Tax Assessment Act 1997 (ITAA 1997) to have effect?

Decision
Yes. Unless the beneficiary of the deceased estate is treated as if they had a beneficial interest in the assets of the trust before the estate has been fully administered, subsections 149-30(3) and 149-30(4) of the ITAA 1997 can never achieve their purpose.

Facts
A deceased estate holds almost all of the equity in a non-public entity as a result of the death of the majority equity owner. The equity was a pre-CGT asset of the deceased. A testamentary trust has been established in accordance with the will, for the benefit of a member of the family of the deceased. Under the trust, the family member has a life interest in the assets of the estate, after which they will pass to a remainder beneficiary, who is also a family member. The non-public entity owns assets that it acquired before 20 September 1985.

Reasons for decision
Summary: The provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset (unless the entity is a public entity listed in section 149-50 of the ITAA 1997). Under subsection 149-30(1) of the ITAA 1997 the asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them. There is a period prior to the completion of the administration of the estate, during which beneficiaries are not considered to be presently entitled to the income of a deceased estate. Income of a deceased estate derived prior to the completion of the administration of the estate, is treated as the income of the legal personal representative (LPR) and is not income of the beneficiaries (paragraph 9 of Taxation Ruling IT 2622). Subsection 149-30(1) of the ITAA 1997 requires that the same majority underlying interests have been maintained at all times. If there is no person who holds beneficial interests in the assets of the estate during the period of administration, the continuity required by subsection 149-30(1) would be broken and the pre-CGT assets of the estate would lose their pre-CGT status. Subsection 128-15(2) of the ITAA 1997 provides that an LPR, or beneficiary, is taken to have acquired the asset(s) of a deceased person's estate on the day of death. That is, once the beneficiary takes ownership of assets of the estate, the beneficiary is taken, for CGT purposes, to have owned them since the deceased person died. It would be consistent with this provision if the beneficiary were also taken to have had beneficial interests in the assets since the date of death for purposes of Division 149 of the ITAA 1997. To give subsections 149-30(3) and 149-30(4) of the ITAA 1997 their intended effect, it is necessary to apply subsection 149-30(1) of the ITAA 1997 as if the beneficiary had beneficial interests in the assets of the estate from the date of the deceased person's death until the time the estate had been fully administered. Subsections 149-30(3) and 149-30(4) could never achieve their purpose if the period of administration were treated as a period when no one had any beneficial interests. Consequently, the beneficiary of a deceased estate must be treated as having a beneficial interest in the assets of the trust before the estate has been fully administered, in order to enable subsections 149-30(3) and 149-30(4) of the ITAA 1997 to have effect.

Legislative references: Income Tax Assessment Act 1997 Division 149 Subdivision 149-B subsection 128-15(2) subsection 149-30(1) subsection 149-30(3) subsection 149-30(4) section 149-50
Related public rulings and determinations: Taxation Ruling IT 2622
Related ATO interpretative decisions: ATO ID 2003/777 | ATO ID 2003/778
Subject references: Capital gains tax CGT assets CGT deceased estates Executors Legal personal representatives Ownership, interests, control & rights Pre-CGT assets Underlying ownership & interests