Private ruling: Deceased estate and testamentary trust - CGT
Date of advice: 23 February 2022
Published: May 2022
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the assets pass under Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) if the assets of the estate of the deceased are transferred to the existing testamentary trusts? | A1: Yes. This private ruling applies for the following period: Period ending 30 June 20XX Period ending 30 June 20XX

Relevant facts and circumstances: Individual A passed away a testamentary trust was established for each of their children under the will. Individual B passed away at a later date and their will directed that a testamentary trust be established for each of their children. Individual C and D are principal beneficiaries of the late Individual B's will. A clause in the will of Individual B gives discretionary powers to not use a testamentary trust. Both Individual C and D have executed documentation to consent to the above clause being used to distribute their entitlements under Individual B's will to the existing testamentary trusts.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subsection 128-15(3)

Reasons for decision: Summary: An entity may make a capital gain or a capital loss when a CGT event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when the ownership in a CGT asset is transferred to another entity. Section 128-15 of the ITAA 1997 sets out what happens to a CGT asset that a deceased taxpayer owned just before their death that devolves to their legal personal representative or passes to a beneficiary in their estate. Subsection 128-15(3) of the ITAA 1997 states any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded. Law Administration Practice Statement 2003/12 (PS LA 2003/12) deals with the capital gains treatment of the trustee of a testamentary trust. It provides: 1) This practice statement confirms the Commissioner's longstanding administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative for the purposes of Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3). 2) Broadly stated, the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies). 3) The cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased's legal personal representative. Example 2 in PS LA 2003/12 considers the CGT consequences of transferring assets from a testamentary trust to another trust: Mr Smith died in 2001. At that time, he owned a variety of assets acquired after 19 September 1985. His will provides that the assets are to be held by the trustee of a trust created under his will. The trustee can distribute those assets at his absolute discretion among a wide range of objects including trustees of various trusts. In 2012, the trustee of the testamentary trust validly transferred some of the assets to Mr Smith's children and some to the trustee of another trust. The Commissioner accepts that the transfers did not result in a CGT event happening to the trustee of the testamentary trust if the beneficiaries agree that their acquisition cost for the assets is equal to the trustee's cost base. In 2014, the trustee of the beneficiary trust (itself a discretionary trust) transfers one of the assets to one of its beneficiaries. CGT event A1 happens at the time of the transfer. In this case, when Individual A passed away a testamentary trust was established for each of their children under the will. Then Individual B passed away and their will mirrored their late spouse's and also called for a testamentary trust for each child. The trustee of the deceased estate intends to transfer the assets from Individual B's estate directly to the testamentary trusts that were established under Individual A's will. In accordance with PS LA 2003/12 we consider that this transfer will not result in a CGT event happening to the trustee of the deceased estate as the assets will pass to the testamentary trusts under Division 128 of the ITAA 1997.