Private ruling: Testamentary Trust
Published: November 2012
Ruling period: Financial year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and Answers | Will Division 128 apply to assets owned by the deceased at the date of death when those assets pass to a beneficiary of the testamentary trust? | Yes

Relevant facts and circumstances: The Deceased's Will (The Will) is yet to be probated. The executors of the Will have instructed the Deceased's solicitors to apply for probate. The Will incorporates detailed "testamentary trust" provisions, particularly in respect to the establishment, management and administration of any such trusts to be established in accordance with the terms of the Will. The Will notes the children of the deceased, as 'primary beneficiaries of a trust for one equal part' of the deceased's estate. The child of the Late is Beneficiary 1. Beneficiary 2 and Beneficiary 3 are the grandchildren of the Late, and the offspring of Beneficiary 1. Beneficiary 1 advises that they want to take up the testamentary trust provisions in the Will. Therefore, Beneficiary 1's share of the Deceased's estate will be split into "separate trusts" whereby: Beneficiary 2 would be the sole initial trustee of the first such testamentary trust (TT1), and; Beneficiary 3 would be the sole initial trustee of the second testamentary trust (TT2). Respectively, Beneficiary 1 and Beneficiary 2 would be named as the primary beneficiaries of TT1 and Beneficiary 1 and Beneficiary 3 would be named as the primary beneficiaries of TT2. In all other respects, the provisions as to the maintenance and administration of the separate testamentary trusts would be as set out in the Will, including all such provisions in respect to their trustees, primary and other beneficiaries and so on.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 128-20

Reasons for decision: Summary: Effect on Legal Personal Representative (LPR) or beneficiary If a CGT asset owned by the taxpayer just before dying: (a) devolves to the taxpayer's LPR, or (b) passes to a beneficiary in the taxpayer's estate, the LPR, or beneficiary, is taken to have acquired the asset on the day the taxpayer died. Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in the estate is disregarded (section 128-15 of the Income Tax Assessment Act 1997 ITAA 1997). Passing of an asset to a beneficiary A CGT asset passes to a beneficiary in the taxpayer's estate if the beneficiary becomes the owner of the asset: (a) under the taxpayer's will, or that will as varied by a court order (b) by operation of an intestacy law, or such a law as varied by a court order (c) because it is appropriated to the beneficiary by the taxpayer's LPR in satisfaction of a pecuniary legacy or some other interest or share in the estate, or (d) under a deed of arrangement entered into by the beneficiary to settle a claim to participate in the distribution of the taxpayer's estate where 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 the estate. It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by the LPR (section 128-20 of the ITAA 1997). A CGT asset does not pass to a beneficiary in the taxpayer's estate if the beneficiary becomes the owner of the asset because the LPR transfers it under a power of sale. Where there is more than one beneficiary who is entitled to the residue of a deceased estate, it will still be a trust to which Div 128 applies. It will therefore be excluded from the operation of CGT event E5 when a beneficiary becomes absolutely entitled to an asset of the estate. Where a will creates life and remainder interests in assets of the deceased estate, the testamentary trust comprising the two interests will commence when administration of the estate is complete. At law, a person with a fixed interest in a trust (testamentary or otherwise) has an equitable estate in the underlying property. This equitable interest in the property is capable of being assigned to another person. Similarly, a person with a remainder interest in the capital of a testamentary trust has a direct estate in the property owned by the trust. This principle shall be taken to apply to your circumstances whereby you are assigning the interest of Beneficiary 1 into two separate trusts. In Practice Statement PS LA 2003/12 and Ruling TR 2006/14 the Commissioner accepts that a testamentary trust is a trust to which Div 128 applies. The Practice Statement confirms the Commissioner's long-standing practice of applying Div 128 to defer any CGT on the distribution of an asset in a testamentary trust to a beneficiary, so that the first point at which CGT will apply is when the asset is disposed of by the beneficiary; Ruling TR 2006/14 also adopts this interpretation. As TT2 will be created to distribute the assets from a testamentary trust to their ultimate beneficiaries, being Beneficiary 1 and Beneficiary 2, the CGT on the distribution of any of the assets of The Deceased will be deferred to the two beneficiaries.

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