Private ruling: CGT - deceased estate
Published: March 2013
Ruling period: 1 July 2012 to 30 June 2015

Ruling: Question and Answer | Can the trustee disregard a capital gain or loss when the property in the deceased estate passes to the beneficiaries? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The deceased passed away. The assets of the estate comprises of property only; main residence with land and other blocks of land. All properties had been acquired by the deceased prior to 20 September 1985. Under the will of the deceased, the estate was to be left in trust of the spouse for their lifetime, and upon their death the estate was to be divided equally between the two beneficiaries as tenants in common in equal shares. Probate of the Will was subsequently granted and a testamentary trust established. The spouse occupied the house until death and did not own any other main residence in substitution. The spouse passed away. The two beneficiaries were residing in the main residence at the time of the deceased's death. One of the beneficiaries moved out of the family home in order to attend college and has not occupied the residence since that time. The other beneficiary continued to occupy the house as their main residence and still lives there. The two beneficiaries do not wish to sell the properties but it is not possible to split the titles evenly between them. The beneficiaries have entered into a deed of family arrangement (but which is not pursuant to a claim under the Testators Family Maintenance Act) in order for the assets of the estate/testamentary trust to be distributed as follows; · Beneficiary who has continually occupied the house as their main residence is to take the house block and main residence. · Other beneficiary is to take the blocks of land. Both beneficiaries acknowledge and agree in the deed of arrangement that the transfers are of unequal value but there is no cash adjustment or claim to equalise the division.

Relevant legislative provisions: Income Taxation Assessment Act 1997 section 128-15 | Income Taxation Assessment Act 1997 subsection 128-20(1)(d) | Income Taxation Assessment Act 1997 subsection 104-85(1) | Income Taxation Assessment Act 1997 subsection 104-85(2) | Income Taxation Assessment Act 1997 subsection 104-85(4) | Income Taxation Assessment Act 1997 subsection 104-85(6)(a)

Reasons for decision: Summary: Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) operates when a capital gains tax (CGT) asset owned by a person just before death passes to the deceased's legal personal representative (trustee) or to a beneficiary in the deceased's estate (section 128-15 of the ITAA 1997). Subsection 128-20(1)(d) of the ITAA 1997 provides that: A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: ... (d) under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and (ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate. Paragraph 222 of Taxation Ruling TR 2006/14 Income: Capital Gains Tax: consequences of creating life and remainder interests in property and of later events affecting those interests specifies that for a deed of arrangement to be effective for the purposes of subsection 128-20(1)(d) of the ITAA 1997 it must be entered into prior to the administration of the estate being completed. Subsection 104-85(1) of the ITAA 1997 provides that Capital Gains Tax (CGT) event E7 happens: ...if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. Subsection 104-85(2) of the ITAA 1997 states that the time of the CGT event E7 is when the disposal occurs. Under subsection 104-85(4) of the ITAA 1997 a capital gain or capital loss the Trustee makes is disregarded if the asset was acquired before 20 September 1985. Under subsection 104-85(6)(a) of the ITAA 1997 a capital gain or capital loss the beneficiary makes is disregarded if the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure. | Detailed Reasoning - Application to your circumstances: Under the Will of the deceased, the estate was to be left in trust of the spouse, for their lifetime, and upon their death the estate was to be divided equally between the two beneficiaries as tenants in common in equal shares. Accordingly the assets of the deceased, house and land, were held in trust for the beneficiaries and consequently, the administration of the estate is considered incomplete. Accordingly the assets cannot be regarded as having passed to any of the beneficiaries during this period of administration. The beneficiaries, upon the passing of the spouse, and prior to the administration of the estate being completed, entered into a deed of arrangement. Therefore, for the purposes of section 128-20 of the ITAAA 1997, the assets of the estate are considered to pass to the beneficiaries under a deed of arrangement as per subsection 128-20(1)(d) of ITAA 1997. The trustee of a testamentary trust is treated in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3). As Division 128 applies to the trust there is no CGT event E7 and no capital gain to the trust or the remainder beneficiaries.