Private ruling: deceased estate
Published: February 2014
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is the trust a fixed trust for the purposes of section 272-65 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes.

Relevant facts and circumstances: The deceased passed away in 2002. At the time of his passing, the deceased owned shares in private companies which were acquired before 20 September 1985. Subsequent to deceased's passing the trustee of his estate acquired units in trustee company common funds. The underlying assets of these schemes being listed Australian equities and bonds. The will provides that a testamentary trust be established (the Trust). The Trust was to vest in 2013. At this date the trustee is to also take into account amounts of capital received by the beneficiaries from an inter-vivos Family Trust. Capital distributions had been made to the beneficiaries from the Family Trust and these were recognised in calculating their residual entitlement to the Trust estate. All the beneficiaries are non-residents for Australian tax purposes. At vesting date, the trust estate owned investments in trustee company common funds and shares in Proprietary Limited Companies. The Proprietary Ltd companies have been put into liquidation and the liquidator is expected to complete the liquidations before 30 June 2014.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Section 272-65 of Schedule 2F | Income Tax Assessment Act 1997 - Section 104-75 | Income Tax Assessment Act 1997 - Section 104-215 | Income Tax Assessment Act 1997 - Section 855-10 | Income Tax Assessment Act 1997 - Section 855-15 | Income Tax Assessment Act 1997 - Section 855-20 | Income Tax Assessment Act 1997 - Section 855-40

Reasons for decision: Summary: Section 272-65 of Schedule 2F to the ITAA 1936 states that a trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. In this case, at the date of distribution, the remainder beneficiaries have fixed entitlements to all the income and capital of the trust. Therefore, the Trust is a fixed trust for the purposes of section 272-65 of Schedule 2F to the ITAA 1936. Under section 104-75(1) of the ITAA 1997, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under). Draft Taxation ruling TR 2004/D25 states: 8. The main CGT provisions to which the concept of absolute entitlement is relevant apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability): see section 106-50 and CGT event E5 in section 104-75. 9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5, neither is the CGT asset to which the relevant provisions refer. And further at paragraphs 23 and 24, 23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. 24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where: · the assets are fungible; · the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and · there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. In this case, there are more than one remainder beneficiaries that, together, have a 100% interest in the residual estate. However, as discussed above, section 104-75 of the ITAA 1997 applies separately to each beneficiary and asset of the trust. It requires that a beneficiary be absolutely entitled to the whole of a CGT asset of the trust. On vesting day, the beneficiaries' entitlements to any CGT asset were dependent on prior distributions from the Trust and a related Family Trust. At that date, none of the remainder beneficiaries were considered to be 'absolutely entitled' to any identifiable asset of the Trust. Therefore, CGT event E5 did not happen on that date and none of the beneficiaries can be assessable as a result. Absolute entitlement will happen at a later date once the trustee has determined each beneficiary's remaining entitlement, having taken into account prior distributions, and distributions have been made. Section 855-10 of the ITAA 1997 disregards any capital gain or capital loss from a CGT event made by a non-resident unless the CGT event relates to a CGT asset that is taxable Australian property. Section 855-40 of the ITAA 1997 disregards any capital gain or capital loss made in respect of a non-residents interest in a fixed trust unless the CGT event relates to a CGT asset held by the fixed trust that is taxable Australian property. Sections 855-15 and 855-20 of the ITAA 1997 define taxable Australian property. The most common items included are real property situated in Australia, mining, quarrying or prospecting rights, or assets used in carrying on a business through a permanent establishment. In this case, the CGT assets held by the trust estate include investments in trustee company common funds and shares in Proprietary Limited Companies. These assets are not considered to be taxable Australian property for the purposes of sections 855-10 and 855-40 of the ITAA 1997 and any capital gain or capital loss from a CGT event made by a non-resident in respect of the property will be disregarded.

2. Does CGT event E5 occur on vesting day to the fungible CGT assets of the trust that were acquired after the deceased's death and are the remainder beneficiaries assessable on any gain from this event? | 3. Can the gains to which the non-resident beneficiaries are presently entitled arising from CGT events occurring to assets that are not taxable Australian property be disregarded under the provisions of either sections 855-10 or 855-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?