Private ruling: Deed of family arrangement to vary a trust
Published: December 2014
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the proposed Deed of Family Arrangement constitute, when duly exercised by the parties, a deed of arrangement under and for the purposes of paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the Estate? | A1: Yes | Q2: If the proposed Deed of Family Arrangement is executed and carried into effect according to its tenor, will the ownership of the assets of the Estate which are transferred under it, pass to the beneficiaries under and in accordance with Division 128 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The deceased died in the late 2000's, some 6 months later Grant of Probate was given. The Estate is comprised of assets including, real estate, investments, share and managed fund investments, and chattel items The parties to the deed acknowledge that if any additional property of the Estate is identified by the Executor after the Deed, the Executor will file and amending Short Form Affidavit with the Court detailing that property. The Will makes the following provisions after the payment of liabilities and Estate administration expenses; a) The Executor must hold the residuary on trust for the life tenants during their joint lives, and then for the survivor of them until their death; and then b) For other beneficiaries as tenants in common in remainder; provided that c) If either of the other beneficiaries is not alive of the death of the surviving life tenant, then, as to the share of the deceased, for their children in equal shares in contingent remainder. At the date of the Deed, the life tenants; a) Have not taken, received or requested any income or benefit from the Estate as life tenants or otherwise; b) Are each severally in possession of chattels forming part of the Estate for the Executor as bailees under a bailment arrangement, to which the remainder men have consented; and c) Have applied to the Supreme Court seeking that additional provision be made for them from the Estate (the applications). The applications; a) Were filed and served within the time limit required by the Act b) Are validly made by persons entitled to claim c) Have been progressed through the preliminary stages of the Court process, and d) Have not been determined by the Supreme Court Following the deceased's death, the life tenants and the remainder men have participated in negotiations with the intention of; a) Resolving the applications without those claims having to be decided by the Supreme Court b) Agreeing on the distribution of the Estate between them ,and c) Avoiding the risk of family disharmony between them, and the cost, risk and delay of estate litigation The parties have agreed to provide for the payment of costs, allocation of Estate income, and other matters by this Deed with the intention that all issues and questions and claims relation to the Estate are fully resolved, and that the distribution of the Estate can occur now. The Executor has agreed to enter into this Deed and to administer and distribute the Estate in accordance with its terms. The life tenants and remainder men have agreed to settle all of their claims to participate in the distribution of the Estate on the terms set out below; 1.1 The life tenants and remainder men confirm that the Recitals are true and correct and form part of this Deed. To the best of its knowledge, information and belief, and based on facts and documents available to them at the date of this Deed, the Executor confirms that the Recitals are true and correct and form part of this Deed. 1.2 Each of the life tenants and remainder men (together hereinafter referred to as the beneficiaries) enter into this Deed to settle their several claims to participate in the distribution of the Estate. 1.3 In consideration of the provision made for each of the beneficiaries under the terms of this Deed each of the beneficiaries severally waives any and all other claims which the beneficiary has or may have to any asset forming part of the Estate, and without loss of generality; c) Life tenant 1 disclaims their life state, and agrees to accept, instead of their life estate, the provision made for them, and d) Life tenant 2 disclaims their life state, and agrees to accept, instead of their life estate, the provision made for them, and e) Remainder man 1 agrees to accept, instead of their remainder interest vested upon the The transfer of the asset/s of the Estate to particular beneficiaries • Payment amounts to be made to each beneficiary • The percentage share of the residue of the estate to which each beneficiary is set to receive • Rules applying to the division and distribution of the Estate assets. • Release and disclaimer of claims and discontinuance of the applications.

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

Reasons for decision: Summary: Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the effect of death for capital gains tax purposes. Subsection 128-20(1) of the ITAA 1997 states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: a) under your will, or that will as varied by a court order; or b) by operation of an intestacy law, or such a law as varied by a court order; or c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or 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 Taxation Ruling TR 2006/14 discusses the capital gains tax consequences of creating life and remainder interests and later events affecting those interests. TR 2006/14 at paragraphs 33 to 36 states; Beneficiaries in a deceased estate who have been granted life and remainder interests may be dissatisfied with the provision that the deceased person made for them under their will. The beneficiaries may enter into a deed of arrangement under which they agree to share the deceased's assets rather than their life and remainder interest. Assets may pass to them as a beneficiary in the estate under paragraph 128-20(1)(d). If this occurs, there will be no consequences for the life and remainder interests as the intended owners of those interests are treated as if they had not been bequeathed them. A deed of arrangement will be effective for the purposes of paragraph 128-20(1)(d) provided that it is entered into: · to settle a claim to participate in the estate; and · any consideration given by the beneficiary consisted only of the variation or waiver of a claim to an asset or assets that formed part of the estate. For the purposes of paragraph 128-20(1)(d) a deed of arrangement must be entered into prior to the administration of the estate being completed unless the beneficiary can demonstrate that a court would, at the time the deed was entered into, have entertained their application for family provision, or an extension of time in which to make such an application… | Detailed Reasoning - Application to your circumstances: The proposed Deed of Family Arrangement provides for the beneficiaries of the will of the deceased to disclaim their life tenancy and remainder interests in return for settling a claim to participate in the Estate. No consideration is being given by the beneficiaries as part of the settlement other than a variation or waiver of a claim to the assets that form part of the Estate. Further, the Estate is yet to be fully administered. Accordingly, if the proposed arrangement, being an effective Deed of Family Arrangement, is entered into as provided, it will mean that the trust property will be considered to pass to the beneficiaries in terms of paragraph 128-20(1)(d) of the ITAA 1997 and therefore there will be no CGT consequences for the relevant parties at that time.

Authorisation Number: 1012744925724: a) disclaimer of the life estates under sub-clauses 1.3(a) and (b), the provision made for them, and | b) Remainder man 2, agrees to accept, instead of their remainder interest vested upon the disclaimer of the life estates under sub-clauses 1.3(a) and (b), the provision made for them. | • Payment of the beneficiaries legal costs and tax advice in relation to this matter