Private ruling: Capital Gains Tax - Deceased Estate - Deed of Arrangement - Life and Remainder Interests
Published: June 2015
Ruling period: Year ended 30 June 20YY.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Will CGT event C2 happen when you execute the deed of arrangement that renounces your life interest in the estate of the deceased? | A1: Yes. | Q2: Will you make a capital loss when you receive an amount of cash from the trustees as a result of CGT event C2 happening? | A2: Yes

Relevant facts and circumstances: Your late sibling (deceased) died a few years ago. Their last will and testament (will) was executed some time prior to their death. The deceased's will, named two people as executors and trustees (trustees) of their deceased estate (estate). The trustees obtained a grant of probate of the will. The deceased's parent is deceased. This person was also your parent. The will devised and bequeathed the assets of the deceased estate once administration was completed (residuary estate) to the trustees for them to hold on trust in a testamentary trust; because the will created a life interest for you and your parent (now deceased) and a remainder interest to a charity. Given that your parent is deceased, the residuary estate is currently held on trust as follows: 1. To pay such of the income in any given financial year as the trustees determine in their absolute and unfettered discretion to you; 2. The balance of any unallocated income in any given financial year to be distributed to the charity; 3. To pay you an amount not exceeding a certain percentage of the value of the capital of the residuary estate in any given financial year as the trustees determine in their absolute and unfettered discretion; and 4. Upon your death, the trustees to stand possessed of the balance of the residuary estate upon trust for the charity for the sole purposes of a certain project of the charity, with the receipt of the treasurer or proper officer of the charity being sufficient discharge of the trustees. Presently the residuary estate does not hold any CGT assets, only cash remaining for distribution. The Trustees, you and the charity propose to execute a Deed of Arrangement (deed) under which all parties to the deed will agree to bring the testamentary trust to an end and distribute the residuary estate (cash) as follows: 1. the Trustees will pay you a sum of money within fourteen days of the date of the deed in consideration for you renouncing/ending your rights and entitlements (life interest) under the terms of the will; and 2. the Trustees will pay to the charity after retaining such reasonable amount as may be required to meet any liabilities of the Estate, the balance of the residuary estate within fourteen days of the date of the deed; and then pay any remaining balance of the estate once its further and final administration is concluded in full and final satisfaction of the charity's rights and entitlements (remainder interest) under the will. Recently your life interest in the Estate of the deceased was valued at a certain amount. The following documents are to be read with and form part of the scheme for the purposes of this private binding ruling: • Draft Deed of Arrangement between the trustees, you and the charity prepared by a legal firm; • Assessment of Value of your Interest created by the Estate of the deceased prepared by a Chartered and Forensic Accountants; • The last will and testament of the deceased signed and dated by them.

Relevant legislative provisions: Income Tax Assessment Act, 1997 Section 104-25, | Income Tax Assessment Act, 1997 Section 108-5, | Income Tax Assessment Act, 1997 Section 110-25 and | Income Tax Assessment Act, 1997 Section 112-20.

Reasons for decision: Summary: CGT event C2 will happen when you execute the deed of arrangement that renounces your life interest in the estate of the deceased. | Detailed Reasoning - Detailed reasoning: The principles set out in Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/14) have been applied. You as a life interest owner and the charity as a remainder interest owner propose to execute a deed of arrangement with the trustees to bring the testamentary trust to an end; and by doing so you will renounce/extinguish your life interest for a payment of a certain amount from the trustees. The charity, similarly by executing the deed is choosing to end their remainder interest. Your CGT asset is your life interest, the right to receive income and capital from the testamentary trust. Your life interest is a legal or equitable right that is not property, and is a CGT asset for the purposes of CGT event C2, section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 104-25 of the ITAA 1997 states that CGT event C2 happens if your ownership of an intangible asset ends by the asset: a) being redeemed or cancelled; or b) being released, discharged or satisfied; c) expiring; or d) being abandoned, surrendered or forfeited. The event will happen when you enter into the deed of arrangement that results in the asset ending paragraph 104-25(2)(a) of the ITAA 1997. As you are not transferring your life interest to the charity, CGT event A1 does not happen. There is no change of ownership of the life interest. By executing the deed of arrangement your life interest would be extinguished by the signing of the deed. | Summary: You will make a capital loss when you receive an amount of money from the trustees as a result of CGT event C2 happening. | Detailed Reasoning - Detailed reasoning: A capital loss is made from CGT event C2 happening if the capital proceeds from the ending of the asset are less than the asset's reduced cost base, subsection 104-25(3) of the ITAA 1997. You will receive an amount of money (capital proceeds) under the deed of arrangement in satisfaction for the ending of your life interest. This amount closely reflects the market value of your life interest as at the recent valuation date; therefore it is considered an arm's length transaction and no CGT substitution rules will apply to the capital proceeds. You acquired your life interest in the testamentary trust for no consideration. Therefore section 112-20 of the ITAA 1997 provides that the first element of the cost base or reduced cost base of your life interest is the market value at the time it was acquired. You acquired your life interest in the testamentary trust when the administration of the deceased estate was finalised. Your cost base will also include any legal expenses associated with executing the deed of arrangement to end the life interest. Given that the market value of your life interest at any given time requires consideration of your life expectancy, it follows that the market value diminishes as you age. It can therefore be said with certainty that the market value of your life interest as at the date when the administration of the deceased estate was finalised was higher than its valuation as the recent valuation date and when the deed of arrangement is executed. This means that your reduced cost base will be higher than your capital proceeds. You will make a capital loss.