Private ruling: Capital gains tax - deceased estate - deed of family arrangement
Published: July 2013

Ruling: Q1:  | A1:  | Q2:  | A2: This ruling applies for the following period Year ended 30 June 2014 The scheme commenced on 1 July 2013

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. After 20 September 1985, your late spouse purchased a unit for $X. Your late spouse established the unit as their main residence. Your late spouse resided in the unit for a period of approximately two years. Your late spouse moved out of the unit and resided with you at your dwelling for approximately 12 months. Your late spouse rented out the unit. The executors of your late spouse's estate have chosen to continue to treat the unit as their main residence for their entire ownership period. Approximately nine years ago you and your late spouse moved into your residence at property A which is solely owned by you. You established property A as your main residence. The same year you and your late spouse married. Your late spouse died approximately four years ago. The executors of your late spouse's estate are the partners of the law firm that drew up their will. As far as you know the executors of your late spouse's estate have not filed a transmission application transferring the unit into the names of the executors. Under clause 4(a) of your late spouse's will you have a life interest in the unit. Upon your death the unit passed to your late spouse's child. The executors of your late spouse's estate now propose that the deceased's beneficiaries enter into a deed of family arrangement. It is contemplated that the net proceeds from the disposal of the unit will be divided X% to you and X% to the deceased's child and other beneficiaries. Valuations have been received and the unit's expected sale price range from $X to $X. It is likely that since the death of your late spouse's death the capital value of the unit has decreased. It is estimated that the land agents commission and transfer expenses will be between $X and $X. At present time the mortgage outstanding over the property has an outstanding balance of approximately $X. You have been advised that you will have a capital gain upon the disposal of the unit. The unit will be disposed of by the executors of your late spouse's estate. The estate has not been fully administered. You have supplied a copy of documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 115-215 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 128-20

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Deceased estate: If you acquire an asset owned by a deceased person as their legal personal representative (executor) or beneficiary, you are taken to have acquired the asset on the day the person died. | Detailed Reasoning - Life and remainder interests: 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. A deed of arrangement will be effective for the purposes of paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) 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 form part of the estate. The 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 entered their application for family provision, or an extension of time in which to make such an application. In your case, you and other beneficiaries will enter into a deed of arrangement prior to the administration of the estate. | Detailed Reasoning - Surrender of life interest: The deed of arrangement in effects replaces clause 4(a) of your late spouse's will. You are treated as if no interest in the unit has ever bequeathed to you. Therefore, no CGT event will occur when your disclaim (surrender) your life interest as you are taken never to have acquired it. | Detailed Reasoning - Disposal of unit: The executors of your late spouse's estate will dispose of the unit. Upon its disposal normal CGT rules will apply. Present entitlement of the beneficiaries Generally, beneficiaries cannot enjoy present entitlement to income derived by the estate during the administration of the estate. Income of the estate in income years before administration is income of the executors and is not income of the beneficiaries. However, the beneficiaries are presently entitled to any amounts that are actually paid to them by the executors. During the administration of a deceased estate, the point may be reached where it is apparent to the executors that part of the net income of the estate will not be required to pay or provide for debts. The executor in this situation might exercise their discretion to pay some of the income to, or on behalf of the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to them or on their behalf. The beneficiaries are liable to pay tax on the part of the estate's net income that they are presently entitled to. In your case, you will receive a distribution as per the deed of family arrangement from your late spouse's estate upon the disposal of the unit. Therefore, you will be presently entitled to the income so you will need to include this amount in your income tax return. Note: A beneficiary who is entitled to a share of a trust's net capital gain, which included a net capital gain that has been reduced by the CGT discount, is required to gross up the capital gain by multiplying that gain by two. This allows the beneficiary to apply any capital loss and then apply the CGT discount. The discount percentage is 50% for individuals.

Subject: Capital gains tax - deceased estate - deed of family arrangement: Question 1: Will you be subject to the capital gain tax (CGT) provisions upon the surrendering of your life interest? | Question 2 : Is part of the distribution you receive from the deceased estate on the disposal of the unit included in your assessable income?