Private ruling: CGT - remainder interests
Published: November 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will capital gains tax (CGT) event E5 occur in relation to you becoming absolutely entitled to assets held by the deceased prior to their death? | A1: No | Q2: Will CGT event E5 occur in relation to you becoming absolutely entitled to assets acquired by the trustees subsequent to the deceased's death? | A2: Yes | Q3: Is any capital gain you make from CGT event E5 disregarded? | A3: Yes | Q4: In relation to assets that were held by the deceased prior to their death, is your acquisition date for CGT purposes the date of the deceased's death? | A4: Yes | Q5: In relation to assets that were acquired by the trustees subsequent to the deceased's death, is your acquisition date for CGT purposes the date that CGT event E5 occurred. | A5: Yes

Relevant facts and circumstances: The deceased passed away prior to 20 September 1985. The deceased's will provided for successive life interests in the assets of their estate. The deceased's will provided that you would receive a remainder interest in assets of their estate. One of the life interest owners passed away during the 2012-13 income year ending their life interest in the deceased's estate. Proceeds of assets belonging to the deceased have been used by the trustees of the deceased's estate to acquire further assets subsequent to his/her death. These assets have been acquired both before and after 20 September 1985. You received advice from the trustees of the deceased's estate advising that there is a net capital gain from the 2012-13 income year. This gain relates to you having become absolutely entitled to assets of the estate. The gain does not relate to the disposal of assets by the trustees.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-20 | Income Tax Assessment Act 1997 Subsection 128-15(2) | Income Tax Assessment Act 1997 Section 109-5

Reasons for decision: Detailed Reasoning - CGT event E5: CGT event E5 occurs when a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. However, subsection 104-75(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides an exception that CGT event E5 will not occur to unit trusts or 'a trust to which Division 128 applies'. Where this exception applies Taxation Ruling TR 2006/14 provides that it is not necessary to consider whether any other CGT event occurred. Division 128 of the ITAA 1997 applies to the passing of an asset from a deceased individual's legal personal representative to a beneficiary in their estate (provided the asset was owned by the deceased individual at the time of their death). Accordingly, 'a trust to which Division 128 applies' requires more than the identification of the trust as a deceased estate. The Commissioner considers that the words 'a trust to which Division 128 applies' should be interpreted as a deceased estate to the extent that it is a trust over an asset originally owned by a deceased individual and which may pass to the beneficiary in accordance with section 128-20 of the ITAA 1997 (TR 2006/14). We consider that an asset can 'pass' to a beneficiary within the meaning of section 128-20 of the ITAA 1997 prior to legal transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee (Taxation Determination TD 2004/3). For the purposes of applying Division 128 of the ITAA 1997, trustees of testamentary trusts same are treated in the same way as a legal personal representative (Practice Statement Law Administration PS LA 2003/12) | Detailed Reasoning - Assets held by the deceased prior to their death: In this case, when the deceased died, their assets were held under a testamentary trust subject to a number of successive life interests. As you held a remainder interest, you became absolutely entitled to assets of the testamentary trust following the death of a life interest owner. To the extent that the assets of the testamentary trust are assets which were owned by the deceased just prior to their death, when you became absolutely entitled to these assets they are taken to have 'passed' to you in accordance with section 128-20 of the ITAA 1997. Accordingly, to the extent that the assets of the testamentary trust are assets which were owned by the deceased just prior to their death, the testamentary trust is a trust to which Division 128 of the ITAA 1997 applies and CGT event E5 will not occur. In accordance with TR 2006/14, it is not necessary to consider whether any other CGT event occurred. | Detailed Reasoning - Assets acquired by the trustees subsequent to the deceased's death: Subsequent to the deceased's death, the trustees have acquired various assets using the proceeds of other assets held by the deceased. Division 128 of the ITAA 1997 only applies to assets that were owned by the deceased prior to their death. Accordingly CGT event E5 will occur to the extent that the assets to which you have become absolutely entitled to are those assets that have been acquired by the trustees subsequent to the deceased's death. However, subsection 104-75(6) of the ITAA 1997 provides that a beneficiary can disregard any capital gain they make from CGT event E5 where they acquired their interest in the trust for no expenditure. As your interests in the testamentary trust were acquired under the deceased's will and for no expenditure, you can disregard any capital gain you make as a result of CGT event E5 occurring following the life interest owner's death. Note: The trustees may also make a capital gain from CGT event E5. | Detailed Reasoning - Acquisition date: In relation to assets that were owned by the deceased prior to their death, subsection 128-15(2) of the ITAA 1997 provides that you will be taken to have acquired those assets on the date of the deceased's death. This is as a result of the assets passing to you in accordance with section 128-20 of the ITAA 1997. Accordingly, any assets you have acquired that were owned by the deceased prior to their death will retain their pre-CGT status. As discussed above, Division 128 of the ITAA 1997 does not apply to the assets that have been acquired by the trustees subsequent to the deceased's death. Accordingly, the acquisition date for these assets will not be the date of the deceased's death. The rules for when you acquire an asset for CGT purposes as a result of a CGT event are contained in section 109-5 of the ITAA 1997. Where you acquire an asset as a result of CGT event E5, the acquisition date is the day you become absolutely entitled to that asset. You became absolutely entitled to assets following the death of a life interest owner. Accordingly, in relation to those assets that were acquired by the trustees subsequent to the deceased's death, your acquisition date will be the date of the life interest owner's death.