Private ruling: Capital gains tax - deceased estate
Published: April 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2013

Ruling: Q1: Does a capital gains tax (CGT) liability arise where the assets of the deceased estate are distributed to a tax exempt beneficiary? | A1: Yes | Q2: If so, is the cost base of the post-CGT assets distributed, the deceased's cost base? | A2: Yes | Q3: If so, what is the cost base of the pre-CGT assets which are distributed? | A3: Not applicable | Q4: Will the tax exempt beneficiary who will inherit the assets incur a capital gain on any subsequent disposal of the asset? | A4: Decline to rule | Q5: Are there any other matters which the ATO deems appropriate upon which to provide a ruling? | A5: Decline to rule

Relevant facts and circumstances: The trustee of the deceased person's estate was granted probate during the 2011-12 financial year. The terms of the will contain a large legacy which is to be left to a tax-exempt entity. It is proposed that instead of distributing cash to this beneficiary, a parcel of shares will instead be transferred to the beneficiary to satisfy the bequest. The large majority of the shares were acquired after 20 September 1985.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 104-215 | Taxation Administration Act 1953 Schedule 1 Section 359-5

Reasons for decision: Summary: The cost base of any assets acquired after 20 September 1985 is the deceased person's original cost base. Subsection 104-215(5) of the ITAA 1997 states that the capital gain or loss is disregarded if the asset was acquired prior to 20 September 1985. The Commissioner cannot rule on how an arrangement will affect a third party who is not the subject of the ruling. Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that a ruling will be made on how a relevant provision applies to you in relation to a specified scheme. As this question does not refer to a specified scheme the Commissioner is unable to rule on this question.

Section 128-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that when a person dies, a capital gain or capital loss from a CGT event happening to a CGT asset the person owned just before death is disregarded. | However, there are exceptions to this rule. The provisions in Division 128 of the ITAA 1997 do not apply if a CGT asset passes to a beneficiary who is an exempt entity (ie. an entity whose income is exempt from income tax). In these circumstances, section 104-215 of the ITAA 1997 applies and CGT event K3 happens. | Subsection 104-215(3) states that the CGT event is taken to have occurred immediately prior to death. The tax-exempt beneficiary is taken to have acquired the asset when the taxpayer died (subsection 109-5(2) of the ITAA 1997). | Subsection 104-215(4) of ITAA 1997 states that a capital gain arises to the deceased taxpayer if the market value of the asset on the date of death is more than the asset's cost base. Subsection 104-215(4) of the ITAA 1997 states that a capital loss arises to the deceased taxpayer if the market value of the asset on the day of death is less than the asset's reduced cost base. | The capital gain is reported in the deceased person's "date of death" return as the CGT event is taken to have occurred just prior to their death.